Monday, April 11, 2011

Paul Ryan's Tax Cuts

Matt Taibbi offers this insight into Paul Ryan's proposed budget decreases.  Of course, this is largely just political posturing, as it has zero chance of making it out of the Senate.  I am not that interested in the same old Republican grand standing about ending entitlement programs, but I am interested in his proposal to lower the highest tax bracket to 25%.  The government might actually do this.

This would be the lowest highest tax rate since 1916.  It would also be a regressive tax.  This is because, the current 25% tax bracket is for individual making between $34K-$84K.  Taxpayers in this tax bracket also pay payroll tax (social security, medicare, medicaid, unemployment taxes), which is 7.25% on the employee side.  However, payroll taxes are phased out at $86K.  Right now, we almost have a flat tax, where the 25% tax bracket actually pays 32% of their real income in taxes (not counting the employer side of the payroll tax), and the highest tax bracket pays 35% income tax, but no payroll tax.  As it stands right now, including the payroll tax, all taxpayers who make over $34K a year pay about 35% in taxes.

If we collapsed the tax brackets to where the highest tax is 25%, and that bracket starts at $34K a year, we would have a system where wage earners earning below $86K would actually pay a higher rate than those earning above $86K.  No wonder the Republicans love Rep. Ryan's plan so much.

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