Confusion on Federal Income Taxes

Over the past week or two we have heard a lot about federal income taxes in the news. A Presidential contender has been criticized for he and his wife paying federal income taxes at only a 14% rate. However, the amount of taxes he and his wife paid in two years was about $7 million or $3.5 million per year.

During the President's State of the Union speech last evening, Warren Buffett's secretary was given a place of honor to sit with the first lady. The basis of honor, as indicated by the President in his speech, was that she paid more taxes than Warren Buffett. We will give the President an allowance for perhaps having made an honest mistake. What he likely wanted to say was that Warren Buffett's secretary paid her federal income tax at a higher rate than Warren Buffett.

However, this clearly demonstrates the whole problem of federal income tax discussion. It is silly to talk about federal income tax rates. We have some trillions of dollars in the federal budget deficit and in the federal debt. Notice that these measurements are in dollars, not in rates. When I buy a sack of potatoes or fill my tank with gasoline, I pay in dollars, not in rates. So, when we talk about tax payments or receipts, let's talk about real money, which is dollars. Some persons like to to talk about rates, because it intentionally confuses the situation and makes it easier to establish class distinction based on economics.

Just for kicks, I looked up the income tax rate for a husband and wife making an Adjusted Gross Income of $250,000 per year. Adjusted Gross Income is that amount of income which remains after taking deductions for charity, etc. and personal exemptions. The federal income tax would be $50,000 or a 20% rate. If you like to look at the total income, let's say that the couple donated $50,000 to charity, which would have made $300,000 in total income. Paying $50,000 in federal income tax gives a rate of 17%; not very far off from the 14% paid by the Presidential contender and his wife. But that doesn't say anything. A couple paying $3.5 million per year in federal income tax is certainly doing a lot more to support their government than a couple paying $50,000 per year.

Lets quit fooling around with techniques to make numbers look like what we want them to be. The truth on federal income taxes is in real dollars, not rates.