Sunday, August 12, 2007

It's a Tax Trap, Not a Two Income Trap

Earlier this week Glenn Reynolds posted a link to a lengthy post by Todd Zywicki at The Volokh Conspiracy. He refers back to a book I read a couple of years back, The Two-Income Trap: Why Middle-Class Parents are Going Broke. The authors (a mother/daughter team, Elizabeth Warren and Amelia Warren Tyagi) put it down to a bidding war for houses in neighborhoods with good schools. I was kind of bothered by the authors' propensity for not using apples to apples comparisons, something that struck Mr. Zywicki also:

"Reading that excerpt, I thought, "Hmm, that's confusing. I wonder why they listed the actual dollar values for all of the other expenses, but the 'percentage' of income spent on taxes. That makes it difficult to compare to make an apples to apples comparison of the actual tax burdens between the two periods." Presenting it in this manner is even more confusing because the authors then go on to implicitly convert tax obligations to dollar values in order to calculate the total amount of the families' budgets dedicated to aggregate "fixed costs" versus "discretionary spending," concluding that the 2000s couple has less left over for discretionary spending than the prior generation. Yet, although they report the actual dollar values for everything else, in an apparent oversight, [Ahem. Right. emphasis mine Brother J] they never actually report the actual dollar figures for the tax expenditures in the two periods."

Whipping out his handy-dandy calculator he quickly ascertained what the real issue is: taxes.

"So I got out my handy calculator and calculated what the indicated percentage of taxes translates into in terms of actual dollars paid in taxes. In turns out that for the 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income (a higher rate presumably because of progressivity hitting the second wage-earners income) in taxes works out to be $22,374.

Thus, taxes increase in the example by $13,086. By contrast, annual mortgage obligations increased by only $3690 and automobile obligations by $2860 and health insurance $620. Those increases are not trivial, but they are swamped by the increase in tax obligations. Too put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage (the supposed driver of the "two income trap") and about double the increase in the combined obligations of mortgage and automobile payments. This also leaves aside the peculiarity that the 2000s family is paying $9670 in new child care and $2860 in new automobile expenses supposedly to meet a $3690 increase in mortgage expenses, the supposed driver of the model."

It's a lengthy post but the whole thing is worth reading. It certainly does seem to make for another good argument in favor of the FairTax.
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