For the most part, the world of personal finance is calm and collected. There’s not a lot of bickering. Writers (and readers) agree on most concepts and most solutions. And when we do disagree, it’s generally because we’re coming from different places.
Take getting out of debt, for instance. This is one of those topics where people do disagree — but they disagree politely.
Hardcore numbers nerds insist that if you’re in debt, you ought to repay high-interest obligations first. The math says this is the smartest path. Other folks, including me, argue that other approaches are valid. You might pay off debts with emotional baggage first. And many people would benefit from repaying debt from smallest balance to highest balance — the Dave Ramsey approach — rather than focusing on interest rates.
That said, some money topics can be very, very contentious.
Any time I write about money and relationships (especially divorce), I know the debate will get lively. Should you rent a home or should you buy? That question gets people fired up too. What’s the definition of retirement? Should you give up your car and find another way to get around?
But out of all the topics I’ve ever covered at Get Rich Slowly, perhaps the most incendiary has been taxes. People have a lot of deeply-held beliefs about taxes, and they don’t appreciate when they read info that contradicts these beliefs. Chaos ensues.
When I do write about taxes — which isn’t often — I try to stick to facts and steer clear of opinions. Examples:
The U.S. tax burden is relatively low when compared to other countries.
The U.S. tax burden is relatively low when compared to U.S. tax burdens in the past.
A large number of Americans (roughly one-third) pay no federal income tax at all.
Despite fiery rhetoric, no one political party is better with taxing and spending than the other. The only period during the past fifty years in which the U.S. government had a budget surplus was 1998-2001 under President Bill Clinton and a Republican-controlled Congress.
Even when I state these facts, there are people who disagree with me. They don’t agree that these are facts. Or they don’t agree these facts are relevant.
Here’s another fact that can stir the pot: The United States has a regressive tax system. That is, low-income earners pay a larger share of their income to taxes than high-income earners do. I’m not here to comment on whether or not this is a good thing or a bad thing, but it’s a fact.
Yesterday, I read an article that complained the wealthy are taxed too much. (I wish I could find the article again but I can’t. It was an aside in some other piece, and I can’t figure out which one.) The author made an argument along these lines: “The top five percent of income earners pay half of all taxes in the U.S.” (My numbers aren’t quite right there because I can’t find the source, so don’t focus on them. But you get the gist of the author’s argument.)
While this statement is true, I feel that it’s meaningless in isolation. What percentage of income do these top earners make? I’d bet big money that their share of the income pie is much larger than their share of the tax pie.
Effective Tax Burden
To me, what matters most is each individual’s effective tax burden. Your effective tax burden is usually defined as your total tax paid as a percentage of your income. If you take every tax you pay — federal income tax, state income tax, property tax, sales tax, and so on — then divide this total by how much you’ve earned, what is that percentage?
This morning, while curating links for Apex Money — my second personal-finance site, which is devoted to sharing top money stories from around the web — I found an interesting infographic from Visual Capitalist. (VC is a great site, by the way. Love it.) They’ve created a graphic that visualizes effective tax rates by state. Here’s a summary graph (not the main visualization):
As you can see, on average the top 1% of income earners in the U.S. has an effective tax rate of 7.4%. The middle 60% of U.S. workers has an effective tax rate of around 10%. And the bottom 20% of income earners (which Visual Capitalist incorrectly labels “poorest Americans” — wealth and income are not the same thing) has an effective tax rate of 11.4%.
Tangent: This conflation of wealth with income continues to grate on my nerves. I’ll grant that there’s probably a correlation between the two, but they are not the same thing. For the past few years, I’ve had a low income. I’m in the bottom 20% of income earners. But I am not poor. I have a net worth of $1.5 million. And I know plenty of people — hello, brother! — with high incomes and low net worths.
Is this system fair? Should people with high incomes pay more? Are we talking about numbers that are so close together that it doesn’t matter? I don’t know and, truthfully, I don’t care. I’m concerned with personal finance not politics. But I do care about facts. And civility.
The problem with discussions about taxation is that each side talks about a different number. When Republicans say high-income earners pay more, they’re talking about raw numbers. And they’re correct. When Democrats say low-income earners pay more, they’re talking about taxes as a percentage of income. They’re also correct. But this is like comparing apples to oranges.
Under the Digital Accountability and Transparency Act of 2014, the U.S. Department of the Treasury was required to establish a website — USASpending.gov — to provide the American public with info on how the federal government spends its money. While the usability of the site could use some work, it does provide a lot of information, and I’m sure it’ll become one of my go-to tools when writing about taxes. (I intend to update a couple of my older articles this year.)
The USA Spending site has a Data Lab that’s currently in public beta-testing. This subsite provides even more ways to explore how the government spends your money. (I also found another simple budget-visualization tool from Brad Flyon at Learn Forever Learn.)
Okay, that’s all I have for today. Let the bickering begin!