Understanding a Progressive Tax Code

FeaturedImageAs confusion over tax rates and the fiscal cliff dominates the conversation in Washington, it is becoming apparent people do not understand how a progressive tax code works. . A progressive tax code increases a person’s tax rate as their income increases unlike more regressive taxes, which set a uniform rate regardless of income. The federal income tax, being the most progressive tax, has 5 different brackets or tiers. As an individual earns more, that income is taxed at a higher rate with rates set at 10%, 25%, 28%, 33%, 35%. The top rate of 35%, which gets all the attention, is only paid on income over $200,000 for an individual or over $250,000 for a couple.

Now, if a person makes $251,000 a year, all that income is not then taxed at 35%. Only $1,000 (the amount over $250,000) is taxed at 35%. Everybody, from business owners to the working poor, pays the same amount in taxes on the same amount of income. Whether it’s a CEO who makes a million dollars a year or a factory workers who makes $50,000 a year, both pay the same tax rate on the first $50,000 they earn. The difference is the CEO goes on to make much more, and that money, and only that money, is taxed at a higher rate.

Understanding people will not all of a sudden be forced to pay exorbitantly more in taxes because they make more money has important implications for a lot of the arguments thrown around in tax rate discussions.

It seriously weakens the argument that raising taxes will disincentivize people to make more money – the “why work harder if Uncle Sam is just gonna take my money” people.  This argument falsely assumes if you make too much money then you will be bumped up into the next tax bracket and therefore have a greater tax burden. As noted before, it is only those dollars above the set limits that are taxed at the higher rate; it’s only the dollars greater than $250,000 that are taxed at 35%.

This also has important implications for the debate over whether or not to let the Bush tax cuts expire. The Bush tax cuts were across the board cuts for every income bracket. If they do expire the 10%, 25%, 28%, 33%, and 35% rates will increase to 15%, 28%, 31%, 36%, and 39.6% respectively. It is unlikely we will see all these rates go up, but what is likely to happen is the top two rates will go up (33% to 36% and 35% to 39.6%).  This has prompted rage from the Republican Party, and is the basis for the claim that the President is engaging in class warfare.  The richest Americans will pay higher taxes on some of their income, but as Ezra Klein has pointed out, “It’s an under appreciated fact that extending the Bush tax cuts on income up to $250,000 cuts taxes for rich people, too.”

Republicans also defend low rates on the top 2 percent of people by deeming it as an attack on small businesses citing those that file their earnings as personal income.  Small businesses, ones that pay their taxes on an individual basis and make more than $250,000 would see a higher tax burden if those top rates expired. But, those businesses still receive a tax cut on their income up to $250,000. And 97 percent of small businesses do not fall into this upper echelon.

So as the parties continue to wage debates over tax rates and the Bush tax cuts remember the importance of a progressive tax code in all these discussions.


Constitutional – Part 2

Remember in late March when political pundits, writers, and journalists, from across the ideological spectrum, lambasted Solicitor General, Don Verrilli, for what was thought at the time, an inadequate and weak defense of the Affordable Care Act.  Recordings from the hearing gave much political fodder, as Verrilli stumbled through his defense and gave a few lack luster answers to questions from the conservative Justices.  Grainy audio of the defense was even used in an ad attacking the Affordable Care Act. Well, after the events of this morning, Verrilli has been vindicated.

As I’m sure you’re aware, the Supreme Court made a 5-4 decision upholding the Constitutionality of the Affordable Care Act. Surprisingly, the swing vote came from, normally conservative, Chief Justice Roberts.

Now, back in March, when Verrilli was getting heat for his performance, critics attacked his use of the Commerce Clause to defend the individual mandate – that got all the headline news.  What got little coverage was the fact that this was not the only defense used by Verrilli to justify the individual mandate.

He also argued the penalty imposed by the Affordable Care Act for not purchasing healthcare was essentially a tax, which the United States government absolutely has the power to levy. This defense proved convincing enough for Chief Justice Roberts, and is the reason he decided to side with the 4 more liberal Justices on the issue. Basically, the government cannot force anyone to buy health insurance, but it can tax people who choose not to.

It should be noted that justifying the individual mandate using the Commerce Clause was deemed unconstitutional; this time Justice Roberts agreed with the 4 conservative judges.

Another issue resolved from the ruling deals with the expansion of Medicaid. Under the Affordable Care Act, Medicaid was expanded to cover more low-income Americans. This is going to be accomplished by increasing federal expenditures to the states’ Medicaid funds. (Medicaid is already state-run insurance funded by the federal government) The issue with the expansion of Medicaid was what to do with the states that did not want the money. Justices Ginsburg and Sotomayor held that it was Constitutional to strip states, which did not want the expansion, of all of their Medicaid funding. However, the other Justices felt this was an overreach in Congress’s power. What they settled on was states who did not want the expansion would be left alone. But states that did agree to the expansion must follow all the rules and regulations that come with the extra funding.

Overall, the vast majority of the law was deemed Constitutional with the one caveat about the Medicaid expansion. The ruling was a big win for Obama and the Democrats, but hopefully in the future this ruling will be seen as a win for everybody.


It appears as though the individual mandate has survived. The SCOTUS blog has reported that the ACA is constitutional with Justice Roberts voting left.

While we wait for more information and details to come, I think this is a shining example of how the Unites States political system is supposed to work.  So much of the news this week was about how the Supreme Court has become politicized. It is refreshing to see something not fall on political lines. It is refreshing to see lawmakers do the right thing.

Let’s not forget, beyond all the heated political rhetoric that went along with the ACA, the law itself was not about politics. The heart of the law was to ensure the millions of uninsured Americans in this country have access to affordable health care. Thankfully we are now one step closer to achieving this goal.

More to come later.

What George Washington and Barack Obama have in Common

So what do these men have in common? Well, they are power-hungry communists hell-bent on achieving a complete government takeover. Wait. Hold on. That doesn’t sound right. I must be watching too much Fox News. What they both have in common is that they both put into law individual mandates. Or according to Fox News, power-hungry communists hell-bent on achieving a complete government takeover.

President Washington signed into law the Militia Act of 1792, which mandated all “able-bodied” males own a “good musket or firelock.”  So over two centuries, before President Obama decided to take over control of the government and destroy the Constitution with his health care bill, which requires an individual mandate, our first President had already beaten him to the punch.

I bring this up because next week the Supreme Court will decide on the Constitutionality of the Affordable Care Act, which in reality is, as Biden would say, “a big f***ing deal.” Health care is arguably the single biggest issue America faces (next to birth control and porn of course).  Health care affects every single person, the costs are skyrocketing, the programs already in place are running out of money and the future state of health care in this county is shaky at best. With that said, I hope partisan issues do not determine the outcome of this case. Supreme Court Justices serve life terms precisely to avoid partisan politics.

Now, I’m not here to say because Washington had a mandate that was Constitutional therefore the health care act is Constitutional.  However, they are very similar and our court system is based on precedent.  I just hope the extreme growing divide in our political parties does not bear the most weight on this decision.  Health care is too big of an issue to cater to political parties.

Is Money Speech?

If you have followed this election cycle then you know it is difficult to go a few days without hearing “Super PAC” this or “Super PAC” that.  I have written before about the devastating effects of the Citizens United ruling and resulting creation of these super PACs, but there is  legal reasoning as to why super PACs should be legal.  In the court’s view persons, including corporations and unions, should be able to contribute unlimited amounts of money to super PACs.  The court decided by limiting this right, a “person’s” free speech would be infringed.  So this begs the question: Is money speech?

(Before I begin I want to make clear this is not a discussion about whether or not a corporation is a person.  Although I do not believe a corporation should be entitled to the rights and responsibilities of people –  that is a different Supreme Court ruling. )

Before we can begin a discussion of whether or not limiting campaign contributions is an infringement on the First Amendment, we have to break down the First Amendment to the Constitution.  The First Amendment allows for the freedom of speech.  If we make that leap, and say that “money” equals “speech”, freedom does not necessarily mean unlimited freedom (i.e., unlimited money or campaign contributions).  First Amendment rights have historically been limited in many ways: we cannot shout fire in a crowded theatre nor can we say “bomb” on an airplane. Basically the courts have decided that if speech acts as a moral hazard to society then that particular speech is not protected by the First Amendment.

In other words, you cannot merely throw out the term “First Amendment” and logically conclude that every form of speech (or money) is magically swept under its magic cape.  If we agree that there are limitations on the First Amendment (which, once again, the US Supreme Court has withheld and imposed many times over the past two centuries) there is a strong legal argument against the Citizens United ruling.  By allowing corporations, unions and individuals to spend unlimited amounts of money for political purposes then we no longer have a democracy where each person has an equal voice and an equal say.  Instead we have a system where the rich have a disproportional amount of the political sway in Washington and on K Street while the average American is left virtually voiceless

If spending money to influence elections is deemed equivalent to “speech” and therefore entitled to unbridled protection under the First Amendment, an argument can be made that this type of unencumbered spending (speech), does present a moral hazard.  The Citizens United ruling has given a disproportionate voice to wealthiest Americans when it comes to influencing elections.  The rich have been getting richer and middle and lower class citizens have seen stagnate wages. Since the 1980s the top one percent has seen their income rise by 273 percent compared to around 45 percent growth in the middle class. Further, those middle and lower class individuals have not been given a fighting chance to become wealthier because America’s social mobility (the ability to go from poor to rich) is the worst among developed countries –see here.   So with the Citizens United ruling we now have a system where the already powerful now have more power and it is unlikely they will lose any of it.

Is it any wonder Washington caters to big business and special interest groups? Our politicians put these entities before the normal person.  I feel a system that allows for entities to give unlimited amounts of money to Washington while the normal person cannot even conceive of donating that amount of money is an unfair system. It is a moral hazard.  Just like you can’t shout fire in a movie theatre or say bomb on an airplane; corporations, unions and individuals should not be allowed to give unlimited sums of money towards political purposes.