I just finished my encounter with everyone’s favorite yearly rite of passage: filing my taxes. And this is the first year where I actually had to pay money instead of get a big fat check from Ol’ Uncle Sam. I’ve noted in the past that I have always been ready and willing to pay more in taxes (something which sounds bizarre, I know), and now that I actually am, am I satisfied? Did I feel like I’d done my civic duty and joined the ranks of the contributing members of society?
Not really, but maybe not for the reasons you might think.
Denisa and I owed taxes this year primarily because we both made more money. (Duh.) While on the surface that makes sense, when I looked at some of the potential effects of this, it doesn’t. See, Denisa taught three classes at the university last year. (Yay money!) But because she made as much as she did, we went over a threshold and owed a significant chunk more in taxes than we would have otherwise. I’m specifically speaking about the Earned Income Credit. If you make below a certain amount of money (depending on how many children you have, and if you’re filing jointly, etc.), then you get credit toward your taxes–and even a refund if that makes it so you don’t own any taxes.
This is the first year we haven’t qualified for that, and it ended up “costing” us thousands of dollars. Which in turns leads to the inevitable discussion: should Denisa have worked less? Was it worth it having her go through all the extra time away from home? While the simple answer seems like it should be “No,” I don’t really agree with it. Mainly, I’m against making decisions of “I will do nothing, so that I can get a check from the government, instead of doing something, so that I earn that money.” In other words, I put more value on money earned than money given.
In the long run, I believe this attitude pays off. If you’re constantly looking at a certain income threshold and always doing your best to stay beneath it, you end up limiting yourself. There are all sorts of opportunities you might pass up–opportunities which in the long run might lead to much more financial success than simply sitting back and getting a check from Uncle Sam every year. Between my full-time job as a librarian, my writing, Denisa’s baking, and her teaching, there are multiple income streams coming into our house. Why would I want to give up on any of those so that we could guarantee we make little enough to qualify for some subsidy?
But this is a choice many people face on a regular basis. Make too much money, and you stop qualifying for welfare. So maybe you should stop making money. Or maybe you should make money under the table, so you can have your cake and eat it too. (Mmmm . . . Cake . . . ) But isn’t the whole point of these programs to help people who are unable to help themselves? Are we incentivizing a “won’t do” attitude?
To me, there are two potential solutions. The first is to simply make it so that welfare subsidies of any sort go away on a sliding scale, bit by bit. (Disclaimer: I’m neither a tax expert nor a welfare whiz. This might already be what happens.) Basically, make it so that it’s always worth your while to work more. The truth is, Denisa and I have no idea what would have happened if she’d not taught as much. I believe the EIC gets smaller the more you make until it goes to nothing. So instead of looking at that threshold and thinking “What would have happened if we’d stayed beneath it?”, it would be more accurate to realize it was going to get smaller no matter what. (I hope this is the case, at least.)
This probably needs to happen no matter what. As long as there are people in our country who need help, there needs to be a mechanism in place to help them–and that mechanism isn’t the free market. But that’s the topic for a whole different blog post.
The second solution I see is to go with a flat tax. A simple tax rate that applies to everyone across the board. Yes, you’d still have to solve the mechanism for providing assistance to the needy, but perhaps that assistance wouldn’t have to be given out through the yearly income tax ritual. If everyone knew they were going to pay 18% (or whatever percent) of their income as taxes–no matter how much they made–then everyone would be equally incentivized to simply make as much money as they could. In fact, the more I think about it, the more I believe separating welfare initiatives from income tax burdens is something that should happen. Keep the yearly tax code simple: figure out how much you made, and then take X% of that and pay it to the government.
This proposed solution is simple, so it’s likely to be wrong in many different ways. But a guy can dream, can’t he? (And of course, having written all of this, I looked back at my earlier post and saw I came to the same solution then. At least I’m consistent, right?)
In the end, Denisa and I are just happy we had a good year, and grateful for the employment opportunities that have come our way. I don’t mean to sound like I’m whining or doing any sort of humblebrag here. It’s more a situation where filing my taxes led me to want to formulate my thoughts in blog form, and this is the result.
So, loyal readers, what do you think? Discuss away!
The problem with the flat tax is that it would necessarily raise the tax burden on the lower income demographics. Most Americans (who can’t afford it) would pay significantly more in taxes, while a few Americans (who can afford it) would pay significantly less.
Other than that, I totally agree with what you’ve said here. If only it were as easy to solve the problems as it was to describe them. Sigh.
My thought is handle the two problems separately. Flat tax, and then handle the issue of Americans who can’t afford it. But you’re right–describing problems is always much easier than finding the answers.