Because most philosophies that frown on reproduction don't survive.

Wednesday, April 20, 2016

Sanders is Rich, but Not a Tax Hypocrite

Bernie Sanders, who has been doing just well enough in the Democratic Party primary contest to keep up the hopes of young progressives, but not well enough to actually have much of any chance of winning the nomination, just bowed to pressure and released his 2014 tax return for public scrutiny. Sanders and his wife turn out to have made a combined $205,617 in gross income in 2014 (a combination of his pay as a senator and their social security payments as retirement-age Americans) which puts them within the top 5% in the US by income. However, it also makes Sanders a lot lower income than his fellow president contenders. Hillary Clinton made $28,336,212 in 2014. Ted Cruz made $1,210,382. Donald Trump claims that he can't release this tax returns because he's audited every year by the IRS due to his deep Christian faith, but he'd like us nonetheless to believe that his income is yuuuuge.

Nonetheless, Sanders has caught a certain amount of criticism for his tax return, in part because on those $205,617 in gross earnings he paid a total of $27,653 in taxes, an effective tax rate of 13%. I've seen a number of people on social media claiming that this makes Sanders a hypocrite, since he advocates an increase in the tax rate table which would put the top marginal rate (for those making over $10 million) at 52%. If Sanders thinks that it's obligatory to pay a higher tax rate than the current one, so the argument goes, why doesn't he pay one now?

I think this is actually a pretty poor argument for two reasons.

First, it fails to account for Sanders' actual proposal. He would keep tax rates the same as they are now for those making less than $250,000 per year (a group which includes him) but increase rates on those making more. Now, there's a lot to criticize about this proposal as well: That he only wants to increase taxes on those making more than himself, that the increase is not in fact nearly enough to pay for the additional programs he promises, that the increased rates would not actually be good for our economy. But one thing that can't be claimed is that he's paying less now than he would under the rates in his proposal.

However, even setting this aside, I think that argument is a bad one. The reason why people propose tax increases is not generally that they believe it is immoral in and of itself to pay less than a given tax rate. Rather, the argument that it's morally necessary to have higher taxes is generally something like this: There is a strong moral reason for the government to provide the following program. Providing this program would require more tax revenues than are currently collected. This means that we must support raising taxes in order to provide this program.

The IRS does not really make any kind of provision for people paying higher taxes than the rates would indicate, but even were Sanders to pull this off somehow, if his object is that new government programs be provided for, paying higher taxes voluntarily would not actually achieve his objective.

This is not to say that Sanders' taxes leave him above reproach. I think they do point to certain contradictions in his behavior, but failure to voluntarily pay extra taxes is not one of them.

What does strike me about Sanders taxes is that they are very ordinary for an upper middle class couple. The Sanders made $205,617 in 2014. They took $56,377 in itemized deductions and the standard exemption for a couple with no children at home ($7,900.) That $56,377 in deductions breaks down in the following fashion:

$22,946 in mortgage interest deduction
$9,666 in state/local income taxes
$14,843 in real estate taxes
$8,350 in charitable donations
$4,473 in unreimbursed business expenses
$204 in tax preparation fees

A couple things jump out to me here.

The Sanders' charitable donations constitute a fairly low percentage of their gross income at about 4%. This may be typical of many Americans (rich and otherwise) but from someone who is supposed to have such a deep concern about the poor and such a suspicion of wealth, you might expect to see more giving to those in need from someone who is, while not as rich as his opponents, still within the top 5% of Americans in terms of income.

Their mortgage interest deduction is also pretty large. For comparison, our mortgage interest deduction was just over $10,000, and that's on a house costing just under $300,000 which we bought only five years ago with only about 10% down payment. (In other words, with a thirty year mortgage, interest is still a large percentage of our payment each month.) That Sanders' mortgage interest deduction is over twice that suggest that he has a fairly expensive house, especially since he is in his 70s and probably didn't buy his house as recently or with as small a down payment. If I had to guess, he must have real estate totally a good $750k to a million in value.

Both of these things would be very normal in an upper middle class striver, the sort of person one might envision being a loyal Republican. However, the combination of expensive houses and comparatively little charitable giving seems an odd profile so someone whose life is supposedly focused around seeking justice for the poor while decrying the lifestyles of the rich. Sanders may not be a rich as a hedge fund trader, but he's definitely rich compared to the average American. Median household income in the US is about $52,000 or about one fourth the income of Bernie Sanders. In general, people consider those who make four times what they do to be rich.

One might reasonably expect someone of Sanders' convictions to have lived more simply and donated much more of his money to those in need. That, I think, is a reasonable area of critique, whereas his failure to pay extra taxes is not.


Jenny said...

I'm not a big fan of the mortgage deduction because I generally think it subsidizes large homes for people with lots of money and pushes up the general real estate price.

I have itemized exactly once in my adult life. It was after the feds were so gracious as to allow people to choose to deduct sales taxes as an alternative to the state income taxes. Seeing how Tennessee has no income tax, it was nice to have a bone thrown our way. It was also the year we bought two vehicles. One vehicle was a planned purchase and the other one most certainly was not. We also had to unexpectedly buy a refrigerator. And a water heater. It was a banner year for high dollar unexpected purchases. All in December. Yay.

We could specify the sales tax on those items and write them off. Plus the general sales tax. Plus charitable deductions. Plus the mortgage interest. With all that, our deductions amounted to something like 15K. Level itemized deduction achieved. I don't envision it happening again any time soon.

We could have itemized one other year if Mr. Obama hadn't fixed the medical deduction percentage for us.

Anyway, I think much like the $15 minimum wage, the mortgage deduction is probably useful in select areas of the country and is just a problem for most of us.

Jenny said...

Wait, I lost my way a bit.

My point was that the primary advocate for the poor still deducts nearly double my entire yearly house payment off his taxes. Color me unconvinced.

Michael said...

I 100% agree with all you've written.

However, you write "The IRS does not really make any kind of provision for people paying higher taxes than the rates would indicate"

There is a way to do this, and that is to just not claim as many deductions as you're able. Don't itemize, etc.

I don't think anyone *should* overpay, but the IRS makes it easy to do so and will happily take your money.