In this blog I have spent a number of posts going after the Stimulus, and by association, the Democrats who crafted it and sold it, particularly President Obama. In each, I promised to balance the scales and bash some Republicans. Oh, yes, I did agree with Joel Klein on his opinion of Christine O’Donnell, but I really haven’t balanced the scales. Well, it’s almost time to pay-up.
Before I do, can we spend some time together and discuss some terms that I want to use in next post’s bashing? (Yes, this is the paragraph where I attempt to persuade you to read on in spite of the fact that the bashing will be in the next post. I promise you it will be worth the effort. The terms are on public finance. Work with me here. You will be a hit at parties discussing terms many of your friends don’t know.) Seriously, part of my purpose in this blog is to help educate, which makes this post as important as one that goes after any particular politician or party.
Let’s start with taxes. Let’s define progressive, regressive, and flat taxes. Basically, a progressive tax is one that taxes people who have low income with a small tax rate, or even no tax. As income rises, the rate of taxation increases as well. Our income taxes at the Federal and state levels are examples of progressive taxes. Regressive taxes are just the reverse. As income shrinks, the rate of tax increases. Social security is an example of a regressive tax. A person making $100,000 pays 7.65% in Social Security and Medicare taxes. This rate applies up to a $106,800 ceiling after which there is no tax. That means a person making $200,000 pays about 4% overall for the same tax. A flat tax is a simple tax rate that applies to everyone regardless of income. A sales tax is a good example of a flat tax.
Some related tax terms are transfer taxes and tax incidence. A transfer tax has two definitions. One is a real estate document tax, which is not my purpose here. Another is consistent with my purpose and it is a general term for a type of tax designed to transfer funds from one class of people to another. I submit that Social Security taxes have become transfer taxes, but I will elaborate on this in the next post.
Tax incidence is a term for which class of income bears the tax burden of government. Many opponents of increasing individual income tax rates argue that people in the high rates pay most of the tax, and that increasing tax rates also increase their tax burden. This is a tax incidence argument. Wikepedia has a good discussion on tax incidence.
So much for tax terms. Now let’s discuss funds. Most of us have a checking account and a savings account. Funds are a little bit like this. Sometimes government sets up a fund to collect funds and put them in their own account. We call this a fund, except that the fund is associated with laws that say the money can only be used for a designated purpose. The moneys are then isolated in the funds and reserved. All interest payments on balances are also returned to the funds.
Okay, one last concept that I find a little tough to summarize, but let’s see what I can I do with it. It is about investments and annuities. When we setup a savings account and designate a specific sum to be deducted from our payroll check to be deposited in the account, we notice that over time, the savings earns interest, and the interest earns interest. This interest compounding effect works in our favor. It means having more funds on which to retire at 65. When approaching retirement, we may approach a bank or financial advisor to set up an annuity, which is somewhat like a reverse mortgage. The bank will arrange for a series of payments from the fund taking into account interest earnings on the remaining balances of principal. The first payment has more interest that the second payment. Principal in the first payment is less than the second. This downtrend in interest and uptrend in principal will continue with each successive payment until the principal runs out. The Social Security fund works like this.
One final term. “Gnashing” (pronounced nashing, unless one prefers the Monty Python pronunciation of gah-nashing) is defined as grinding one’s teeth. It is often used to describe scenes where people are freaking out in mass at some ugly thing. It is also found in Biblical passages, sometimes associated with beheadings or killings or some such thing.
Now, we are ready for the Republican bashing. I can see some of them now ….. fearful. Their teeth are clenched and a few are trembling. Imagine dark music in the background. Will it be a gnashing of a bashing?
Read the next post on “Slightly Right of Center”. (Dark music swells.)