Monday, September 6, 2010

Keeping It Real: Obama's $250,000 Fallacy

You've Been Robbed

Legalized Robbery

Collecting more taxes than is absolutely necessary is legalized robbery. ~ Calvin Coolidge

- By: Larry Walker -

The question of the day: Why is making $250,000 a year suddenly considered wealthy? The Obamas made $5.5 million last year. Is that wealthy?

Contrary to popular belief, $250,000 in 2010 had the same buying power as $20,722 in 1926. Annual inflation over this period was 3.01%. An income of $250,000, adjusted for inflation, would have placed a taxpayer in an 11% tax bracket in 1926. In order to have been considered in the top tax bracket back then, in today's dollars, would have required taxable income in excess of $1,206,419. The 1926 tax tables are shown below along with equivalent 2010 dollar amounts:

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So in inflation adjusted dollars, people like the Obamas would have been considered wealthy in the 1920's and should rightfully be in the top tax bracket today. On the other hand, folks making $50,000 to $250,000 today, would have been barely considered middle class back in 1926.

The Revenue Act of 1921 contained additional tax brackets above the $100,000 level to tax the super rich. They were as follows: $100,000 @ 56%, $150,000 @ 57%, $200,000 @ 58%, $300,000 @ 71%, $500,000 @ 72%, $1,000,000 @ 73%. Translating this into 2010 dollars would yield the following amounts, respectively: $1,113,139 @ 56%, $1,669,709 @ 57%, $2,226,278 @ 58%, $3,339,418 @ 71%, $5,565,696 @ 72%, and $11,131,392 @ 73%.

President Calvin Coolidge, under the Mellon Tax Bill, slashed top rates from 73% in 1921, down to 25% in 1926. The new top bracket was 25% for anyone making over $100,000 ($1,206,419 in 2010 dollars). So under the Revenue Act of 1921, the Obamas would have been forking over 72% of their income to Uncle Sam, but only 25% under Coolidge. What a relief that would have been. The "Roaring Twenties" had arrived, catapulting multitudes into the middle class.

Now let's bring it up to today. How did the lower tax brackets of 1926 grow from being between 1.4% and 14%, all the way to today's level of 10% to 33%? And let's not forget about the 7.65% (15.3% for the self-employed) that we all get soaked for in Social Security and Medicare taxes. Under the Social Security Act of 1935, the FICA tax was set at 1% of the first $1,400 in wages. It's interesting to note that $1,400 in 1935 is the equivalent of $22,562 today, and yet the rate today (exclusive of Medicare tax) is 6.2% (12.4% for the self-employed) of the first $106,800 in wages. It's called legalized robbery.

When voters finally drop this left, right bickering and start looking at the facts they are going to wake up one day and realize that we've all been bamboozled. We've been getting robbed for so long that we don't even know the difference. The following table compares today's tax rates with 1926 rates for comparable incomes.

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In reviewing our current tax tables, it is apparent that a couple making $250,000 in 2010 would have been taxed at a rate of 11% in 1926, and yet the rate is now 33%. Also, those in the top tax bracket, those making over $373,650, would have had tax rates between 14% (at the low end), and 25% for the super rich, and yet the rate is now 35%. Then along comes Obama proffering to raise the top rate up to 39.6%. The problem is that the whole tax system is out of whack.

Under Obama's 'made up' theory, a couple making $250,000 should be taxed at the same rate as a couple making $5.5 million or more. Is that fair? Should a couple who makes $250,000 be taxed at the same rate as a couple making $11 million or more? Who's kidding who?

Annual income, as defined in current tax tables, needs to be appropriately adjusted for inflation. Tax rates, on the other hand, should be adjusted back towards the historical lows, not adjusted for inflation (as eventually they would exceed 100%). There is not one section of the Internal Revenue Code that has been consistently adjusted for inflation, neither the standard deduction, nor personal exemptions have kept pace. Tax brackets have been lowered and raised seemingly based on the whims of politicians, and not based on historical inflation adjusted incomes, and that's wrong. It's just plain wrong.

It's time to stop playing games with the American people, and time to start governing honestly. I'm sick and tired of rich Washington politicians, like the Obamas, trying to pretend that they're on the same level as everyone else. The Obamas are millionaires and should pay accordingly. But let's be fair about it, making $250,000 a year in 2010 is not rich, it wasn't considered rich in 1926, and it's not rich today.

What we need is real tax reform, not more of the same. If you're not part of the solution, you're part of the problem, and unfortunately, Obama is part of the problem.

Sources:

http://www.dollartimes.com/calculators/inflation.htm

http://en.wikipedia.org/wiki/Revenue_Act_of_1926

http://en.wikipedia.org/wiki/Revenue_Act_of_1921

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