Please answer the following questions after reading Lectures 3,4 and 5: 1. Please list, describe and explain each one of the five major types of taxes as discussed in Lectures 3,4, and 5: What is the FIT? What is the FICA tax? What is the State Income tax? What is the sales tax? What are the various types of "special taxes and fees" that a family may pay? 2. How does each type of tax contribute to the U.S. economy? 3.. Please rank each type of tax from #1, 'contributes the most' to our economy, to #5, 'contributes the least' to our economy, and please defend your ranking system. 4. What are three harmful effects of the combined tax on the typical U.S. worker's next $1,000 pay raise? 5. What would you do to make the current system of taxation more fair? Why? Please discuss at least one SPECIFIC proposal that would improve the current tax system, in your opinion. TAXES! When it comes to how the American household is taxed, every family is different. We will start with a model suggesting that the average U.S. household earns a gross income (before taxes) of about $61,000 (before March 2020). In Santa Clara County, the estimates for median gross income vary from about $103,000 to $107,000 (before March 2020). Clearly, every family in America makes either more than $61,000 or less than $61,000. We will look at various families---and their income levels--- when we discuss the Consumption Function a little later in the course. This hypothetical family will be subject to various federal, state, and local taxes, some of which they may be aware of others, perhaps not. It will make a huge difference if this household earns a wage. We are going to create a model where this typical family will pay about $21,000 in taxes over the course of the year---about 34% of their overall income. One economist estimated that "tax freedom day" may fall on April 9 or April 10the average family, in theory, works all of Jan, Feb, March and ten days in to April----just to pay all of their taxes for the calendar year. There is this old joke: if the American household had to write a check for $21,000 at the end of the year, to pay all their taxes, half of them COULD NOT, and the other half WOULD NOT! If this family had to pay monthly payments of about $1700 a month to pay their taxes, this would be THE SINGLE LARGEST CHECK THEY WOULD WRITE THAT MONTH (we must remember that the average rent in the U.S. is about $1400 or $1500 per month) IT IS MORE COMPLICATED THAN THIS, but we will present the major taxes that the American household pays as THE FIVE MAJOR TAXES": The 5 major taxes that this family will pay include: #1. THE FEDERAL INCOME TAX (FIT). Before March 2020, roughly 40% of all Americans did not pay this tax owing to the fact that they were low income, or raising children, or both. The FIT is perhaps the most famous' or 'high profile tax, as it is modified every few years, especially when a new president is elected. In fact, in 2018, Trump and the Republicans in Congress were able to change the brackets in the FIT, lowering them, particularly for the richest 1% of all Americans, effective for tax year 2019. The FIT is called a "PROGRESSIVE'tax the tax rate rises as income rises. This concept may be compared to a "flat" tax---let's say that the FIT was a flat tax. In order to bring in roughly the same amount of money, a flat tax may be set at about 8% or 9%---this would mean that poor families would pay a lot MORE in FIT, and rich families would pay a lot LESS in FIT. Most Americans would view this as unfair---if they thought about it. One may say that the idea of a progressive tax is a manifestation of popular will. We vote for our representatives, and they vote for this tax. The problem with a "progressive" tax is that we have to learn the VARIOUS TAX RATES, but we also have to learn AT WHAT LEVEL OF INCOME EACH RATE APPLES, OR KICKS IN" after the $12,000 standard deduction is applied, a single taxpayer will pay: a 10% tax on dollars 0 to $9,700, then a 12% tax on dollars $9,700 to $40,000 or so, then a BIG JUMP: a 22% tax on dollars $40,000 to $84,000 or so, then a 24% tax on dollars $84,000 to $161,000 or so, then a 32% tax on dollars $161,000 to $204,000 then a 35% tax on dollars $204,000 to $510,000, then a 37% tax on everything over $510,000. The top bracket used to be 37%---long ago, it was 50%. Long LONG ago, it was 70% and even 90% during World War 2. Please remember, this is the TOP BRACKET. A typical worker in our area earning $60,000 will have her income taxed at various rates as she moves through the brackets. The OVERALL TAX --- FIT --- on her $60,000 might be about 7 or 8%, but THE TAX ON ANY PAY RAISE may be 22%, as the "raise money"-the incremental GAIN in income, will travel entirely in the 22% bracket. More on this later. For married couples, the qualifying income for each bracket is double, with a few exceptions. Many families can get tax credits, or breaks, for raising children --- but the children age out" and the parents no longer earn that tax break. Given that many of us started working at age 15, and, let's say I die at age 75, I will be filing a tax return for 60 long years. The child credit" may be good for about 20 years--- less than half of my life as a taxpayer. I do not believe that most Americans are aware that the FIT is progressive-my sister didn't. Why would they? YOU know it, as there is a question on it later..... thirty years ago, most people would do their own taxes". Most of the time, we now pay strangers to perform this stressful task: we may hire a CPA or an enrolled agent, or we may use a popular software program like Turbotax, which allows us to plug in numbers, and answer some questions, and the program 'spits out" the amount of tax that we owe. We need not be cognizant of the progressive nature of the tax. Indeed, I compiled the tax rates above by consulting the www.irs.gov website. The information is available, but the awareness level may not be great. Most Americans view this topic as both boring and depressing. Yet it is so very important! Next up we have #2. THE FICA TAX, also known as the social security tax', also known as the "payroll' tax. It can be "REGRESSIVE in nature, as it takes 15.3% of a person's wages... up to a point. The FICA tax is a tax on WAGES ONLY, THUS MAKING THE WAGE BY FAR THE MOST HEAVILY TAXED TYPE OF INCOME IN AMERICA. The FICA tax (social security and medicare) APPEARS to come in at 7.65%, yet it is really a 15.3% tax on a worker's wage, starting at $0 up to about $137,500. Then, incredibly, at an income level of roughly $137,500 the TAX RATE DROPS TO (the medicare portion only) 2.9%!!! IT IS A REGRESSIVE TAX! The tax rate DROPS as income rises-- for those relatively few individual workers who earn over $137,500 in wages at their jobs.... A highly paid worker who earns $143,000 in wages will see her NET pay rise right about December 10 as she "moves" from the 15.3% bracket to the 2.9% bracket---for the last few weeks of the year! Then, on Jan 1, the tax rate goes back up to 15.3%! Incredible! And very difficult to justify in terms of faimess. We will look later at a proposal to keep the 15.3% rate at all income levels. The employer, in theory, "matches" the employee's contribution of 7.65% with another" 7.65%. In reality, it is more accurate to say that the employee pays "both parts of the tax. Studies show that 8 out of 10 workers pay more in FICA taxes than they pay in FIT. Please remember, a worker making $60,000 in wages in America will pay about 8% of that $60,000 in FIT---maybe about $4,800 or so, depending on other factors------but she will pay the full 15.3% of that $60,000 ----about $9,000 ---in FICA taxes, ONCE YOU COUNT 'THE EMPLOYER'S CONTRIBUTION'. This worker ENDS UP in the 22% FIT bracket, but most of her income is 'traveling through' brackets of 0% and 10% and 12%. This is why the FICA tax is sometimes called the silent killer"- --the FIT is much more high profile. #3: THE STATE INCOME TAX (SIT) The state of California imposes an income tax on its residents, which, like the FIT, is "PROgressive": after the standard deduction of about $4,400 for a single person (double for a married couple) the SIT imposes a tax of 1% on dollars 0 to about $9,000, 2% on $9,000 to about $21,000,4% on dollars $21,000 to about $33,000,6% on $33,000 to about $46,000,8% on $46,000 to about $58,000, 9.3% - that's right --- 9.3%---on dollars $58,000 to $295,000 - an incredibly WIDE BRACKET--- 10.3% on $295K to $355K, 11.3% on $355K to $591K, and 12.3% on income over $591,000. As you can see, the state legislature and the governor gave a lot of thought to each bracket in theory. Thus, a woman earning $60,000 in our state may pay about 3 or 4% OVERALL SIT on her income, perhaps about $2,400 or so for the year, yet she may end up in the 8% SIT bracket. WE MUST BE DONE, RIGHT? I work all day, stagger to my car in the parking lot, these three thugs are waiting for me ---FIT, FICA, and SIT and they'relieve me' of over 20% of my paycheck so far.... And I start my car, and my car won't start, and I need a new car---well.. new TO ME-- and I step on a used car lot, negotiate a price of $10,000 for a four year old car, and I write a check for $10,000.... And the nice man tells me NO--- sir, you forget the sales tax... and license (DMV fees) so... MAJOR TAX #4: THE SALES TAX: the sales tax on this car will be a bit over $900 --- it varies a bit from town to town, but the sales tax will come in at about 9.5%. This tax is a tax we ACTUALLY GET TO VOTE ON.. sometimes.... That is, whether to raise it..(never to lower it) This tax applies to many products that we may buy at the mall in the old days), or ON LINE-Amazon fought for years with our state over the collection of this tax. Restaurant meals are taxed, but not most grocery store food. In our state, the sales tax does not apply to services. SOME states impose a sales tax on services, some have no sales tax at all. Why have a sales tax? California enjoys the largest system of higher education in the nation the community college system, which has over 100 colleges, the CSU system and the UC system. Also, sales taxes help fund our vast through 12 system. 40 million people need a lot of services: roads, the criminal justice system, police, firefighters, emergency medical care (Valley Med Center is a BIG part of our county budget) and MANY other products and services. TAX #5: SPECIAL TAXES AND FEES! AS IF TAXES #1 THROUGH #4 WEREN'T ENOUGH..... our politicians have carved out EXTRA SPECIAL TAXES AND FEES on certain items: gasoline, alcohol, tobacco---in fact, we have a special government agency devoted entirely to regulating the production, distribution, and sale of tobacco, alcohol, and firearms---they are called the ATF: tobacco, alcohol, and firearms and explosives) they mean what they say, I suppose! The department of ATF was created owing to the fact, in part, that the tax on these items varies from state to state, thus, these items can and do get smuggled' across state lines...the taxes and fees on a $18 bottle of gin or vodka may be up to 40% of the retail price one of the highest taxes, if not THE highest tax, on a product that you or I may buy at a store. We raised the tax on a pack of cigarette by $2 per pack in our state several months ago, from about $.76 a pack to about $2.76 a pack. A high tax is imposed also on vaping products, and pot, though MUCH of the sales and purchases of these products is conducted on the black market'--extralegally---and thus, no sales tax is collected on THOSE transactions... The tax on a gallon of gasoline-both federal and state---approaches a dollar per gallon. So----- visualize some old guy driving his 1977 Cadillac (9 miles per gallon) down the road, smoking and drinking alcohol while cruising.... WE DON'T LIKE HIM! WE ARE GOING TO TAX HIM HEAVILY ON HIS GAS GUZZLING CAR, HIS CIGAR, HIS BOOZE! Some of these taxes are called "sin" taxes the idea being that this person will get sick sooner, and consume medical care resources more than you and I... so... let's TAX HIM! We do not make alcohol illegal-we tried that 100 years ago Prohibition failed ---yet we tax it very heavily... beer and wine are also highly taxed, though not as much as 86 proof alcohol, which is odd..... There are fees placed on car registration ever year. A rich person buying a $70,000 car- model year 2020 --- will pay well over $1,000 per year just to register his car. You or I may pay $200 or $300 or $400 each year to register our 4 or 5 or 6 year old car, which we may have paid $25,000 for, new..... Years ago, we had a special election to toss out Gray Davis from the governor's office, partly because he presided over a tripling of the yearly automobile registration fees. WE SEE THESE FEES, AS WE HAVE TO WRITE A SPECIAL CHECK FOR THEM. IMAGINE IF WE ALL HAD TO WRITE A CHECK FOR $21,000 (or more) each year to pay all of our taxes! Would there be a taxpayer's revolt? Possibly..... I wouldn't want to find out....Most people pay these automobile registration fees so that the cops do not stop them on the road for expired tags (in normal times). The largest 'special' tax is the property tax, which was given a lot of attention around April 10 as many homeowners asked for an extension-more time to pay their taxes owing to the recession and the pandemic this year. The interesting thing about this tax is that TWO FAMILIES LIVING IN IDENTICAL HOMES, NEXT TO ONE ANOTHER, MAY PAY RADICALLY DIFFERENT PROPERTY TAXES! Let's say I am a little old man living in a house in San Jose. I moved in in 1980. A young couple moves in next door, in Feb 2020. Both housed were built in 1950. Neither has had any major work done to it. The young couple paid $900,000 for their house in Feb, 2020. The yearly property tax they must pay will be about $9,000 a year, every year, forever---actually, a bit more than 1% of the assessed value. I'll play the role of the little old man. I bought my house in 1980 for about $140,000. My property tax may only rise about 2% per year, thanks to Prop 13, which passed a few years before 1980---homeowners in our state were fed up with yearly hikes in their property tax. So I start out paying about $1,400 a year in property tax, in our state, and it doubles in about 36 years. My property tax is a little over $2800 a year - less than half-less than ONE THIRD of my new neighbors! THEY WILL BE UPSET-if they knew. It is a matter of public record, but ... this stuff is pretty dry.... Well, the young man in the $900,000 house FINDS OUT...and storms over to MY house and complains about the differential....LITTLE OLD MAN, WHY DO YOU PAY SO LITTLE IN YEARLY PROPERTY TAX????" And I ask him do you want to trade?"... and he asks "trade houses? Well..... Okay..." and I reply "no--- trade bodies. You can be me, and I'll be you. I am 74 years old. I'll be dead in ten years. Want to trade??" and he runs away, because I'm nuts.... But the point is, an old person DOES NOT WANT TO HEAR about any of this. Let's say I hang on for 25 more years, finally die in 2045.... And a new couple buys MY house for $1.7 million in 2045...and they must pay a bit over $17,000 per year, every year, in property tax.... and they seethe at the old farts next door to THEM! Moral of the story: everyone dies. Sooner or later. Everyone dies. Then that house will sell, and it will be reappraised---reevaluated, if you will--for purposes of taxation. Is this fair? You have to form your own opinion on the matter. There is another issue: do TENANTS pay the property tax on the property - homes, condos, apartments -- they rent from their LANDLORDS? Landlords rent housing units to tenants FOR A PROFIT. Let's create a model where a tenant pays $2,800 per month to rent an apartment unit from a landlord. Economic theory suggests that the landlord will cover all of her costs, plus a "normal" profit, by charging the tenant a price of $2,800 per month. Otherwise, she would not enter into the landlord business' in the first place. Imagine the landlord receives her property tax bill for the following year--- it is 2% higher, plus more, with fess and assessments. She is 'reminded that it is time to raise the rent on the apartment. Now, it does not work that way in reality, of course, but you get the idea. The tenant- landlord relationship is very interesting. A new study suggests that up to ONE THIRD of all tenants in America either COULD not pay, or WOULD not pay, their rent on time for the month ending March 31, 2020. Never is it more obvious that tenants and landlords are engaged in a 'symbiotic relationship: they need each other. When the tenants loses her job, as over 20 million Americans did in the four weeks from March 10 to April 10, 2020, that tenant IS NOT GOING TO PAY RENT TO THE LANDLORD---in many cases. It is almost not relevant that the tenant "owes" the landlord that money. In many cases, that landlord is not going to see that money. BEFORE THE PANDEMIC, about 40% of all Americans had less than $400 in liquid funds to pay for an emergency such as a car repair bill. Landlords are NOT guaranteed that their tenants will pay their rent on time, every time, 12 months in a row. It is unlikely that there will be a massive bailout for landlords in 2020. Now, landlords tend to be older and wealthier than most tenants, and some landlords are corporations that may not seem too sympathetic', so to speak, but this development may have a chilling effect' on NEW landlords entering the rental housing market in the future. The government is directly involved in the rental housing market in only about 10% of all transactions- most of the time, a tenant negotiates a rental agreement on her own' with the landlord. THE PROPERTY TAX TENDS TO BE PAID ON TIME BY THE PROPERTY OWNERS, or the tenants in a tenant-landlord relationship. The tax authorities KNOW WHERE YOU LIVE! Next, we have to examine which types of income get taxed by which tax...that is, which types of taxes apply to each type of income? HOW EACH TYPE OF TAX APPLIES TO EACH TYPE OF INCOME: So far, we have established the five "major" types of income (there are others), and the five "major" types of taxes (there are others). How is each type of income taxed? The wage is taxed by all five major types of taxes, as long as the job is 'above-ground --- an 'underground economy job, generating a wage, may only be subject to sales and special taxes. My friend Dave worked as a bouncer in a bar when I was your age. I'd pick him up at 2am - at the end of his shift -- for some breakfast, and I saw his boss pay him with four twenty dollar bills (A LOT OF MONEY BACK THEN) and Dave paid no FIT, no FICA, and no SIT on that $80 in take-home pay. The sales tax on the breakfast --- HE WAS BUYING! --- and the gas tax, and DMV fees on his car were in fact paid, out of that $80 per night in wages. Normally, a worker will pay A) the FIT, B) the FICA tax, C) the SIT, D) the sales tax and E) special taxes and fees, out of her or his wage income. Of course, taxes D and E are paid AS THE HOUSEHOLD SPENDS THE MONEY--- they are not income-based taxes. They do not care what the source of income is. Many people believe that ALL taxes should be some form of Dor E. You have to form your own opinion on this matter. It sure would be simpler to learn! Interest and dividend) income is usually taxed FIT, SIT, sales and special. There is no FICA tax on interest income, as FICA applies to WAGES ONLY. Capital gain income is taxed at a lower rate for FIT--- it is incredibly difficult for a person to calculate the FIT on capital gain income usually a person hires a pro or uses software to figure it out, but generally, the FIT on capital gain income is either 15% or 20%, depending on a variety of factors. There is usually little or no FIT on the capital gain 'earned' upon the sale of a house, if it was your primary residence. If you need more details, I urge you to do more research on the matter! Since well over two-thirds of capital gain income goes to families who make over $250,000 in total income, MOST of these capital gain' dollars WOULD HAVE BEEN TAXED AT 35% or 37% FIT --- THIS IS A HUGE TAX BREAK FOR THE RICHEST 1% OF ALL U.S. HOUSEHOLDS. Many people in our country believe that this is UNFAIR. You have to form your own opinion on the matter. The normal SIT rates apply to capital gain income. This means that our state's tax revenue swings wildly from year to year, depending on the stock market. Our state stands to bring in MUCH LESS REVENUE in 2020 as compared to 2019 owing to MANY factors, including the huge drop in wage income this year, but also due to the fact that households will not be reporting any---or hardly any--- capital gain income for tax year 2020. As of April 2020, the stock market is "down for the year". Who knows? Maybe it will "bounce back" in the last quarter of the year! Sales taxes and special taxes apply to capital gain income If the family members go out and SPEND THE MONEY. Inheritance income is not taxed FIT or SIT on the first $24 million or so for a couple, and there is no FIT on the first 12 million or so for an individual. There is no SIT on inheritance income, and the FIT rate of 40% kicks in after the first 12 million or so on the individual and the first 24 million or so on the couple. Thus, well over 95% of all families do not owe any FIT or SIT on money that they inherit. Sales and special taxes will apply to inherited money IF the person goes out and SPENDS some of that money on a car, meal at a restaurant, or most online purchases. Again, the FICA tax applies to wages only, and thus do not apply to inheritance income. "Private sector pensions and various government (G) payments" vary, in terms of which taxes apply, and I can give you some highlights: a pension from Ford Motor Company will usually be taxed A, C, D and E, just like a state, or federal, or city, or county worker's pension benefits. The social security benefit check, averaging about $1500 a month, will be taxed more lightly': if I make under about $30,000 per year TOTAL, then that $1500 a month benefit will have no FIT or SIT taken out (there is no FICA tax on this benefit). Obviously, the federal and state governments decided "oh this person is old, and low income---let's not tax them FIT or SIT on THAT $1500" which is interesting. If I make between about $30,000 and about $50,000, then ONLY ONE HALF of that $1500 a month will be taxed FIT and SIT---which is also interesting. Please remember, this person is most likely old, and retiredno longer earning a wage income. $40,000 a year is not a lot of money to live on - in San Jose or in North Carolina -----but what if this older, retired person is living in a house in San Jose THAT IS PAID OFF? Recall that little old man who bought his house in 1980? He paid it off in 2010, if he had a normal 30 year mortgage. He may be making only $40,000 in yearly income, yet, he often has assets in excess of S1 million. Would you call him a millionaire? I would. He could sell his house - and 'cash out' in 90 days in normal times). Should he get this kind of 'tax break' on his social security benefit? We will discuss this again later. This older person will be charged the full sales tax, and pay the full special taxes and fees" on restaurant meals, online purchases, and car registration fees. He will get a big break on property taxes, as we have discussed earlier. Once again, there are many more details involved in "tax incidence'--that is, how taxes apply to various types of income. Wages are by far the most heavily taxed type of income, whereas inheritance income is the least heavily taxed type of income. All this is a matter of the federal, state, and city and county tax legislation that has been passed over the last several decades. Hard to believe that way back in 1912, there was no FIT and no FICA. Of course, back then, there was no social security, no Medicare, no Medicaid. Next, we need to look at the tax 'incidence', or "bite" on a typical U.S. household's next $1,000 pay raise, or bonus, or extra income from overtime, or additional $1,000 from a 'side- gig'-- an extra job. Let's put this person in this situation: she is single, no children, earning $61,000 per year. She earns a $1,000 pay raise, thus, her income is moving' by +$1,000, from $61,000 to $62,000. She may end up paying about 50% in overall, combined taxes on the $1,000 gain in income AND IT MAY CHANGE HER BEHAVIOR IN WAYS THAT HURT OUR ECONOMY (in theory). Now, the brackets will vary depending on the situation. A worker could find herself in lower brackets, or in higher brackets. Here goes: her $1,000 may be taxed 22% FIT, as she is rich enough to have 'entered the 22% FIT bracket. PLEASE REMEMBER THAT HER OVERALL FIT MAY BE ABOUT 8% for the entire year, but THE FIT ON THIS RAISE may be 22%. The FICA tax that she must pay LOOKS LIKE IT IS 7.65%---but it is actually 15.3% - - HER share, AND HER EMPLOYER'S SHARE. It is a fiction that she does not pay 'both halves'-- she pays both parts of this tax! The SIT on her raise could be 6% or 8% or 9.3% depending on several factors. Let's put it at 8%. Okay: BEFORE SHE EVEN SEES HER PAYCHECK, 45.3% of this pay raise of $1,000 - that is, about $453 ---should have been deducted from her gross pay by her employer---HER EMPLOYER COLLECTS MANY OF THE TAXES FOR THE VARIOUS LEVELS OF GOVERNMENT---mainly federal, but also state. Now, if she is self-employed' ---let's say she is a hair stylist --she may have to WRITE A CHECK to these various governmental entities ----often four times a year---to pay these taxes. In theory, she would be MUCH MORE AWARE of these taxes that you and I (well, we are aware of them NOW, obviously-we are studying them!). So, in theory, she "sees" about $547 'after taxes' --- about $10 a week. DON'T SPEND IT ALL IN ONE PLACE! She may not even notice it, but in theory, she may celebrate' her big raise that was a joke) by increasing her spending levels. EVEN IF SHE DOES NOT, inflation of 3% (historical average) will eat away" at this pay raise. Over the course of a year, the $3,000 she spends every month on the "basket" of products and services in Jan 2019 will rise to cost about $3,090 by Jan 2020 for the same basket of products and services-----0----THE PAY RAISE IS NOT EVEN A PAY RAISE---over the course of a year. Please note that this pay raise is less than 2%---if it is the only raise she gets this year. Yet, BEFORE INFLATION HAS HAD A CHANCE TO EAT AWAY AT THE RAISE, it is a true pay raise. What will she do with the extra money? If she goes out and buys "extra" products and services, quite often they will be online purchases, restaurant meals (takeout is counted), consumer electronics--- things that are subject to the sales tax. Let's say she spends an 'extra" $400 on these items. The sales tax incidence will be almost 10% of this $400 in extra spending, or about $40. Now, this last one is depressing: over the course of the next 12 months, 'special taxes and fees' are bound to go up---with or without her pay raise. Gas taxes may rise they have, in fact. DMV fees may rise they have, in fact. Our state has raised BOTH in the past several months. Over the next 12 months, this person will pay more in property taxes. If she owns a condo, the property tax may rise from $3,000 last year to $3,060 next year. If she pays rent to a landlord, it is QUITE LIKELY her landlord will raise her rent at some point in any 12 month time period. Not always, but usually, especially if she lives in a popular metro are like Seattle or Austin or the Bay Area (in normal times). This rise in special taxes and fees is not causally linked to her pay raise---they do not happen OWING TO her pay raise- -but they happen over the same 12 month period. It is appropriate to "take" the rise in these taxes and fees "out" of her pay raise. If we do that, then we end up with OVER ONE HALF OF HER $1,000 PAY RAISE GOING OUT IN TAXES and fees. Now, if she is a part-time worker, she may be in the 12% FIT bracket and maybe the 6% SIT bracket, then it may not be so bad maybe "only" 40% or so of her pay raise is taxed. I will argue to you that THIS IS TOO HIGH--- THE COMBINED OVERALL TAX BURDEN, OR TAX INCIDENCE, ON THE AVERAGE AMERICAN WORKER'S NEXT PAY RAISE IS TOO HIGH. Okay. Maybe you agree, maybe you do not. What are some of the arguments in favor of this position, which I believe in passionately? If we 'lower" this tax burden on the American worker, in theory we would have to make up the money lost' and raise the tax burden on another group perhaps the richest 1% of all households. Is that a good idea? How would it work, exactly? We have established how a 'typical' worker in the U.S. may experience, or suffer, a combined, overall tax on her next $1,000 pay raise of roughly 50%, or $500, or more, given how the five major taxes apply to, or "bite", or "hit" the pay raise. What effect may this have on worker productivity and incentives? Let's imagine that a person is working a job in a situation where workers have some rights, and she is asked to work overtime, at a pay rate of time-and-a-half". In theory, she must weigh the pros and cons: the 'pro', of course, is the extra money to be earned. The downside is the 'giving up' of leisure time (which may not be so leisurely). I worked Saturdays almost all my adult life, teaching Econ classes at USF and Golden Gate U. I also taught test preparation classes for the SAT, LSAT, and CBEST. I never minded working six days a week---if I got two days off AFTER the six days on. Life does not work like that! There are only 7 days a week! What posed a challenge for me was the idea that I had only ONE DAY OFF---one day off is not a day off-it must be spent buying groceries, doing laundry, dealing with the cable company, the bank, a host of other chores... 5 days on, 2 days off gives a person a chance, in theory, to truly RELAX for one of those days. Thus, this worker may think long and hard before agreeing to the REQUEST that she work overtime --- OT--- by her employer. Let's say that she says yes, expecting a payday of $200 EXTRA--- in ADDITION to her regular salary. She is not thinking about the taxes on the $200. The day comes when she receives the paycheck (in the old days your boss would hand you a piece of paper that YOU had to take to the bank to wait in line and deposit)---and the OT check is cut separately, and she expects to see $200 with her name on it. Or maybe $160. Or $140. NOT $99! She sees this paycheck, for $99 after all relevant taxes are taken out, and she is in shock. She calls Bob in payroll: "there must be some mistake! I expected more! I gave up my Saturday!"... and Bob informs her that no mistake was made, the employer withheld the amount in taxes that she probably owes more or less---to the various governmental entities that tax her. She reevaluates this entire "overtime" concept---for her, the 'extra' work is NOT WORTH the 'extra' money. So... from that moment forward, she refuses voluntary OT. This scenario plays out over and over, one worker at a time.... Until... some time in the past 40 years or so, the employer must turn to MANDATORY OT. He cannot get 7 volunteers to work this Saturday (let's say it is a Monday to Friday job), so, instead of ASKING 7 workers "would you please work OT for me this Saturday? Please?)... he now TELLS his workers 'YOU ARE WORKING FOR ME THIS SATURDAY... OR YOU'RE FIRED" The entire workplace atmosphere changes. Now, if the job has these rules at the outset, then my story breaks down. Yet, let's say that in workplace after workplace, this transformation happens. Worker productivity suffers. Turnover rates increase. Morale suffers. The workers are unhappy, and so are the managers. Managers are people too. A 50% (or higher) TAX ON OVERTIME PAY DECREASES THE WORKER'S MOTIVATION TO WORK OVERTIME! (Now, I realize that some of these taxes are sales and special, and do not come out of the OT check directly, but I think I have made the point). Job after job switches from 'voluntary' OT to MANDATORY OT. Okay, so what? It is very rare for workers to go on strike in America--but it happens. In one of the most memorable strikes in recent times, nurses went on strike against Stanford Hospital ---for several weeks. When I first came down to Santa Clara County, I worked for this lawyer who was REALLY old--- I MEAN REALLY OLD. I was worried he'd drop dead in front of me. He never shut up about graduating from Stanford, and he never shut up about Stanford Hospital. He practically LIVED there. He wouldn't leave the Palo Alto city limits JUST IN CASE he had to go to Stanford Hospital. It was the greatest. No other hospital would do. I got it. So when nurses went on strike against Stanford Hospital, it really made an impression on me. THEY HAD TO MOVE PATIENTS OUT OF THE HOSPITAL AND INTO ANOTHER NEARBY HOSPITAL! Imagine sitting in a hospital bed, and they move you.... Down the hall.... Down the elevator.... Out into the parking lot... WHERE ARE WE GOING? DISNEYLAND??? NOT a good look. What were the nurses striking over? Working conditions... nurse to patient staffing ratios... and.... MANDATORY OVERTIME! THEY WERE SICK OF IT! They said so on the local news! (It was a BIG story) The nurses who would comment on the news stated "we show up for our shift at 8am, and expect to leave by 6pm. One hour later, two hours later, we are still on our feet at work AND PATIENT SAFETY IS THREATENED". Imagine laying in a hospital bed, and a nurse walks in, and SHE LOOKS WORSE THAN YOU DO! AND YOU ARE THE PATIENT! She conveys to you that she's been on her feet for 12 hours.... And... all of a sudden, maybe you do not want that shot she is preparing for you! One study concluded that at least 100,000 people die in a hospital NOT FROM THE ILLNESS THEY WALKED IN WITH, but rather, owing to 'medical error". Bottom line: STAY OUT OF THE HOSPITAL! The same complaint occurred during the strike by the air traffic controllers in 1981. In BOTH cases, as a society, we want these workers alert, not tired, not drunk or stoned (and we may give random drug tests to these workers to ensure their status in this regard). Mandatory OT is to be avoided at all costs. It has evolved and become more popular owing in part to the VERY HIGH marginal tax on the American worker's incremental gain in income---for example, an overtime check. I am not saying that NO ONE will ever work overtime. I am saying that in the last 40 years, voluntary overtime has decreased, and mandatory overtime policies are more prevalent in the American work place. Here is another example, and it is anecdotal---anecdotes are stories, and they can be true. Let's say you are a worker in a group of ten workers. You are the star. No one says so, but you are the star and everyone knows it. You have been there the longest, you know the ropes', and you are the most capable worker. This does not make you a better human being, necessarily, but when the supervisor job becomes open, you will be asked if you want the promotion. It would be an outrage if you were NOT asked. You also have this habit of arriving to work early. You want to beat the traffic, and settle in slowly, check email, go to the bathroom. You notice that the supervisor is there before you arrive at 7am, and she is there after you leave at 5 or even 6pm. As the star worker, you have very little interaction with the supervisor. She always seems busy putting out fires' - dealing with the other nine workers. Not your problem. The other workers, in a way, make you look good by comparison. Sometimes some of them show up late, take lunch breaks that are too long---all of it none of your concern. You are well liked by the other workers. You are asked if you want the promotion to supervisor. It comes with a $5,000 pay raise. The tax 'incidence', or "bite' on this $5,000 pay raise may approach, or even exceed, 50% or $2,500. This would leave, in theory, about $2,500 'after taxes'. $2,500 more is still $2,500 more, obviously, and it does not seem likely that anyone would pass up this promotion plus a raise---yet, what does the new job entail? Let's say the worker is promised that the new job will involve 'extra hours of work!--- at the start, yet it turns out to be a long term situation. $2,500 after taxes works out to about $200 per month, or about $45 per week. If the new job carries with it two hours or work 'extra' each day, or ten hours per week, then this $45, divided by 10 hours, works out to about $4.50 per hour--- less than the federal minimum wage of $7.25 an hour, not to mention the $15 per hour minimum wage that prevails in the Bay Area. In theory, this star worker, this person perfectly suited for the job, may turn it down. The employer will find someone else, but this person will not be as good. Productivity for the entire group will suffer. A friend of mine turned down a summer teaching job the money was not "worth it" after taxes were to be taken out. The administration did not, or could not, find another worker. The class was not offered, and students were not given the opportunity to get three units closer to their goal. The building just sat there for the summer, unused. Long ago, a worker did not DARE turn down a promotion plus a raise. Times are changing, however. Workers have less "loyalty to their employer, compared to 30 years ago, and the feeling is mutual. More on this later. Let's say the star worker DOES take the new job. The new job is that of a supervisor. This star worker is now being evaluated on the work of OTHERS---all of a sudden, this worker-now the supervisor-- must worry about the workers below her arriving late to work, taking breaks that are too long', not doing their jobs properly issues that were not part of the old job. If this new supervisor cannot even fathom why a worker would arrive late, as she never arrives late, then the star worker, now supervisor, must worry about HER job security. I have met a few people who have been offered promotions, taken them, then begged for their old jobs back. IT IS NOT THE FAULT OF THE ORGANIZATION that they cannot offer more money as an inducement: the tax system in a sense 'ties the hands of the employer. A $5,000 pay raise is "only" $2,500 ---after taxes. A $200 OT check is 'only' $99.- after taxes. Another problem lies in the underground economy or "UE". The UE is often mistaken for being dominated by illegal drug sales. They are part of it, obviously, but more often than not, UE activity involves a seller selling an otherwise legal product or service ---sold by a small business owner-where the transaction is not reported for tax purposes. An owner of an ADU-accessory dwelling unit-may rent out the unit to a friend or relative and not report the rental income. A hair stylist may earn $70,000 per year but report only $60,000 for the purposes of taxation. Let us examine the costs and benefits of this illegal behavior. The cost of under reporting' income, I suppose, is the risk of getting caught. The I.R.S. now audits less than 1 in 200 tax returns in any given year-in 1970 it was 1 in 40. This means that you or I stand a better than 50-50 chance of NEVER getting audited not even once in our entire lives. The risk of getting caught has never been lower. The reward? In theory, if a small business owner earns $70,000 but reports only $60,000, to the tax authorities, and she is single with no children, the tax on the "hidden' $10,000 would have been 22% FIT, plus 15.3% FICA tax, plus perhaps 8% SIT---almost 50% of $10,000, or almost $5,000 that she gets to keep for herself. She still pays 'her fair share of the sales tax, and special taxes and fees. OWING TO OUR TAX SYSTEM, THE REWARD FOR CHEATING ON ONE'S TAXES IS TOO GREAT. Long ago, let's say about 1 million people would do this each year. Then it grew to 3 million, then 5, then 7, then 9, then 11 million.... (no one knows the exact scale of this activity)---AT SOME POINT, it turns into REAL MONEY! The IRS estimates that the total amount of money 'OWED BUT NOT PAID" in taxes by the "UE" EASILY EXCEEDS $400 BILLION EACH YEAR. Last year our government took in about $3,400 Billion in tax revenue, and it spent about $4,400 Billion in spending. (These numbers will be RADICALLY DIFFERENT THIS YEAR --- more on this later). The deficit of $1,000 billion last year would have been cut- perhaps in half-if the "UE" paid "its fair share" of taxes. Now, there is no way that we, as a society, will ever collect ALL of the tax money owed by the UE but not paid- - or even half. Yet, without a doubt, the very high marginal tax on the next raise---and on the LAST $10,000 a small business owner may earn---DEFINITELY CONTRIBUTES TO THE PROBLEM of the UE-that is, the human beings in the UE- not paying the full amount that they owe each year in taxes, mainly FIT and FICA, but also SIT---and our state could REALLY use the money right now! Next, we will examine the idea that the high tax rate on a worker's next pay raise has helped contribute to the drop in the national savings rate