FairTax, doom, and net-net

Russell Turpin deafbox at hotmail.com
Fri Apr 11 14:39:01 PDT 2003

Adam Beberg:
>The lowest you can get is 7.65% FICA + 15% Fed = 22.65%.

You're missing two facts. (a) The 15% bracket doesn't
start with the first dollar earned. It starts only
AFTER exemptions, the head of household deduction,
and personal deductions (standard or itemized).
(b) FICA applies only to salary, not to interest,
dividends, and other unearned income. A retired man
living on interest from CDs and social security with
a grandson who is a student living in his house
could have an income in the low 20s yet an effective
tax rate in the single digits. He spends most of his
income. What will he think about a tax reform that
swaps his single-digit income tax for a 23% sales
tax, and that also lowers interest rates (according
to its proponents), thus cutting his income?

Maybe I should explain the terms I'm using. One's
marginal tax rate is the tax paid on the next dollar
of earnings. So if one is in the 15% bracket, it is
the 22.65% that Beberg calculated above. One's
effective tax rate is simply total tax paid divided
by gross income. It is usually lower than the
marginal rate. (Not always: there's a step back
when you max out your FICA/self-employment tax.) In
any case, no one in the 15% bracket has an effective
tax rate as high as 22.65%, unless they have somehow
triggered the AMT.

For 2002, I was in the upper brackets. And I paid
self-employment tax instead of FICA, which is 13%
rather than 7.65%. Yet my effective tax rate was
25%. If your effective tax rate is over 30%, I
think you need a better tax accountant.

BTW, all this complexity is one of the reasons I
think the income tax is so pernicious.

>You are keeping your savings in Euros right?

Some of it. My crystal ball remains cloudy. Until
it becomes suddenly lucid, I diversify.

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