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Another Bogus “Terror” Alert

In response to the “economic slowdown” plan of the Hedgemony Paul Krugman noted the Return of the tax families, the examples used to terrify people into supporting more and more tax cuts.

One of the examples was “A single mom with two children and $30,000 in earnings would see her taxes go up by 67 percent.”

I realize I’m not one of the VSP, but only the humble proprietor of an on-line opinion magazine. I do however possess the 2007 1040 Forms & Instructions courtesy of the wonderful people at the Internal Revenue Service [available in PDF format at Forms and Publications. A little sucking up can’t hurt, right?]

I decided to find out what “Mom” pays in taxes, and how a 67% increase will hurt. No need to get carried away, so we’ll use the standard deduction, nothing fancy, no tax dodges, just a standard vanilla 1040.

We have check marks for line 4 and two entries for 6c yielding a total of 3 for line 6d. Line 7 is $30,000. It’s all wages, so that is carried down to line 22, and since we’re keeping this simple we will assume that there are no adjustment to the income, so the $30,000 is carried over to line 38 on the back.

On line 40 we take the standard deduction for the head of a household – $7,850, which takes the taxable down to $22,150 on line 41. Then we take three exemptions of $3,400 for a total of $10,200 on line 42, which reduces the taxable amount to $11,950 on line 43. Scanning the tax tables we find the tax is $1,236 for line 44.

I assume that this is the number that is supposed to jump by 67%, which would make it $2,060, an $824 increase – how heartless can these people be?

Actually, the real increase is $60, as from owing nothing to owing a total of $60 because of what happens on line 52, the Child Tax Credit. “Mom” gets a $1,000 tax credit for each of the kids; so all taxes up to $2,000 are eliminated.

That’s not all, based on my reading of the instructions, line 66a, Earned Income credit currently provides an additional $1,634 refund that “Mom” receives, so the net effect would be to reduce that amount by $60.

Bottom line: “Mom” doesn’t pay any income taxes now, and she will see a $60 [3.67%] reduction in the money she receives from the Earned Income Credit when the cuts expire.

Understand, this is without using any of the probable reductions in taxable income for childcare or health care, just the basic, standard deductions.  It’s almost like none of these people have ever filled out a tax form, making these kinds of obvious mistakes.

6 comments

1 hipparchia { 01.20.08 at 7:52 pm }

i did the same thing, and came up with mom owes zero taxes [i’m still not sure where you got the $60, but that doesn’t detract from the overall point], and then i tried to figure out probable child care, health care, education deductions.

i like doing tax forms, and even considered trying another example, but now my head hurts, mostly from rage at having to even address these lies.

2 Michael { 01.20.08 at 8:30 pm }

Guys, guys, guys–they said “earnings,” not “income.” So of course mom is making her living clipping bond coupons and has to pay that nasty capital gains tax (which is of course going to be one of the ones the Hedgemony wants to cut to save our faltering economy).

3 Bryan { 01.20.08 at 9:19 pm }

Hipparchia, the $60 is the result of their projected increase of 67%. The child tax credit only covers $2,000 and a 67% increase on the $1,236 would take the tax $60 above the $2,000.

Actually, you might be right Michael, because the bottom income tax bracket is 10% and would revert to 15%, or a 50% increase, while the current capital gains bracket is 15% and it would rise to 25% a 67% increase. I assumed wages and earnings, but it could be capital gains. In that case there wouldn’t be any FICA taxes, so the overall rate would be lower, but there wouldn’t be an Earned Income Credit either.

I don’t deal with capital gains, I left that to an tax pro the few times it has happened.

4 Bryan { 01.20.08 at 10:21 pm }

I went back and checked, Michael, and if the earnings are interest or dividends, and not a sale of assets, everything would be same except she wouldn’t get the EIC, so she would actual go from nothing to $60, but she wouldn’t be paying the $2,400 or so in FICA taxes that would be deducted from wages.

5 Alice { 01.21.08 at 5:59 pm }

People! Your facts are playing havoc with the Tax Terror Alert! cease and desist, I tell you, before you introduce reality into the Hedgemony’s bubble.

6 Bryan { 01.21.08 at 7:16 pm }

You’re right, Alice, as Jams O’Donnell said at Steve Bates’s place, we are obviously agents of al Gorithm.