This election year is all about the economy. From the presidential contenders down to mayors and local state representatives everyone is talking about jobs and the economy. No less important than jobs is taxes. We all know that at least at the federal level our taxes are due to go up next year. But candidates, especially challengers, are likely to say they want to lower taxes on most people, if not everyone. However you should use caution when you hear a politician talk about changing taxes.
Most notably,the distinction between saying they are going to lower your taxes vs lowering the tax rate. Mitt Romney has said he wants to cut taxes for everyone, but also reduce the deductions people are allowed to take. That sounds great to me because the fewer deductions needed the less I need my CPA. I love her dearly but would love more to not have to see her every year.
Mitt hasn’t offered many specifics so it’s hard to tell how these changes will affect your tax bill so this isn’t a critique of policy, just a cautionary tale.
It’s easy to get excited over the idea of lower tax rates. But without those tax deductions the amount of taxes you’ll be paying may or may not actually be lower than before. Check out these two scenarios:
|Total Taxes Owed||$13,125||$13,200|
Obviously there are a lot of factors that go into these calculations: what deductions are available or eliminated, how much the tax rate is changed, etc. But as you can see depending on how it’s done you may not come out ahead in the new tax environment.
One of the other considerations with taxes is what taxes will actually be changed. The income and payroll taxes are just a couple of many taxes you pay. If the government were to reduce the taxes taken out of your paycheck but increased the taxes on gasoline, corporations, and imported goods you might still end up sending more money to the government just through indirect means.
Lower taxes are a great thing in a fiscally stable environment. But be wary of anyone that promises to lower your taxes. All you should care about at the end of the day is how much money you’re sending to the government in every way, shape, and form.