Where all the tax deductions go

There was a letter to the editor in today's USA Today noticing that all of the tax deductions and tax shelters go to the rich and not to the poor. The writer thought it would be much fairer if everyone received the same deductions.

This line of reasoning dovetails somewhat with President Obama's comments at his Tuesday press conference about why its fair to cap the amount of deduction that "rich" people receive at the same level that "middle class" people receive.

There is a bit of reality missing from both of these viewpoints.

Under the graduated income tax system we currently toil under, the more money you make the larger the marginal (the tax percentage on the last dollar earned) tax rate is.

For single tax payers, after deductions, the marginal tax rates look like this ...

• 10% on income between $0 and $8,025
• 15% on the income between $8,025 and $32,550; plus $802.50
• 25% on the income between $32,550 and $78,850; plus $4,481.25
• 28% on the income between $78,850 and $164,550; plus $16,056.25
• 33% on the income between $164,550 and $357,700; plus $40,052.25
• 35% on the income over $357,700; plus $103,791.75

For the USA Today letter writer and other like minded people (who probably do not know any better), you might notice that the poor actually pay significantly less in taxes -- both in real and in percentage terms -- then the more well off. In fact, roughly 46% of the population pay no income taxes at all. How much more of a tax deduction / tax benefit do you need once you are at zero dollars in the first place?

For Barack Obama (who certainly does know better), if I am at the low end of the 28% tax bracket and write a check for $500 to charity I get to take a deduction just like the person in the 35% tax bracket but I will be paying about $16,000 in taxes. If I'm in the low end o f the 35% tax bracket I'll be paying $103,000 in taxes. I'm sure everyone would love to be making $358,000 per year but writing that check for $103,000 is a whole lot less fun. And then to have the President stand there and tell you you're not paying enough when about 1/3rd of your income is going straight to the US government in income taxes is fairly disgusting.