Wednesday, December 22, 2010

Taxes and Debt

This is going to be a rant.  It is also going to be long.  Sorry.  On the bright side, it will be controversial and may even spark a few comments.  This post was inspired by 1) the recent debate over the "Bush-era" tax cuts, 2) the vitriol that the media spews toward the "mega wealthy," 3) the emails I keep getting from the bank about re-paying my student loans, 4) an article I read on MSNBC today about the crushing increase in student loan debt plaguing the U.S., and 5) a need to fill my weekly "current events" quota.

Let me start with some quotes:
1) Americans now owe more on their student loans than they do on their credit cards — a debt fast approaching $1 trillion with no end in sight. (Source: MSNBC)

2) The debate that’s now got Washington tied up in knots is whether to keep the Bush-era tax breaks in place for households with more than $250,000 in income; the super wealthy ($200,000 for individuals) (Source:

3) At a time when this nation has a $13 trillion national debt and a widening gap between the very rich and everyone else, the dumbest thing we could possibly do is to provide hundreds of billions of dollars in tax breaks to some of the wealthiest people in America. (Source: Vermont Senator Bernie Sanders via Washington Times).

4) Is this really the choice we currently face—between dour, flinty responsibility or profligate favors for the fortunate? (Source: Newsweek)

5) Message to Republicans: Tax cuts for the rich were so important to you that you took the country hostage, you refused to help the unemployed, you obstructed everything to get them. (Source: Huffington Post)

6) In 2008, the top 1 percent of tax returns paid 38.0 percent of all federal individual income taxes and earned 20.0 percent of adjusted gross income. The top 5 percent earned 34.7 percent of the nation's adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes. (Source: Tax Foundation)

First of all, I refuse to believe that if you make $200,000 you are in the top 3% of all income earners in America (or, at the very least, that you feel like you're in the top 3%).  But all right, let's assume that's true.  There is one thing that is never talked about when criticizing the "rich" for getting "unfair tax breaks:" Student Loan Debt. Here's my gripe: If you're super rich making $200,000 a year, chances are you went to college, and probably, grad school (i.e. law school, med school, or business school).  Also, chances are, you took out student loans at some point in order to finance your education.  The cost of acquiring a degree "has risen at twice the rate of inflation, dramatically undermining any value" of a college degree.  In fact, the average law student has $100,000 in student loan debt! (Source: Forbes). This does not even include undergraduate loans.  Student loan debt is so bad, in fact, that college grads don't pull even with high school grads in lifetime income until age 33 on average! (Source: same Forbes article).  I don't even want to think about what it is for people who went to grad school.

Still with me?  See where I'm going with this?  If you make $200,000, you took out significant loans to get the job that pays you that much.  On top of that, the rest of the country is pissed at you so they decide that you should be taxed more heavily than anyone else.  And they'll criticize you for it along the way.  Now comes the really f*ed up part.  If you make more than $70,000, you can't deduct ANY of your debt. Here's how that works:  The maximum amount of student loan interest you can claim as a tax deduction is limited to $2,500.  The deduction is also limited by your total income. If your income is under $55,000 (or $115,000 for married couples filing a joint return), then you can deduct up to $2,500 in student loan interest.  If your income is over $55,000 but under $70,000 ($115,000 to $145,000 MFJ), then your deduction for student loan interest will be prorated.  If your income is over $70,000 ($145,000 MFJ), then your student loan interest is not deductible at all. (Source: IRS)

So you're criticized for making a decent living. Then you're forced to fork over nearly 40% of your income, yet no one ever bothers to consider the crushing debt you incurred to get to where you are.  Never mind the hard work and personal sacrifice it takes to actually make that much money.  Are there some trust fund babies?  Of course.  But the vast majority (I'd say 99%) of the people I went to law school with were not trust fund babies.  In other words, they personally financed their education with loans (something anyone can do) to give themselves the chance to make a good living. Then, as soon as you start making money, the government says, "okay, you not only have to pay back your loans, but you also have to pay higher taxes AND you don't get to deduct that student loan debt AND by the way, your student loan debt is not dischargeable in bankruptcy).  So it's not as simple as "rich people can afford it."  

I accept that the financial burden on someone making $200,000 (i.e 35% tax) is different than someone making $50,000 (25% tax), especially if you have kids (of course, here is where I would extol the virtue of condoms and keeping it in your pants until you are financially stable...but that's a post for a different day).  So I agree that if you're making that much money, you can afford a SLIGHTLY higher tax.  That said, if the desire is to punish trust fund babies (something I don't think we should do, but that seems to be where the hate comes from), then why not allow people with crushing debt to deduct their loan payments? You wouldn't be earning that much if you didn't incur that much debt. You should be allowed to deduct 100% of your student loan interest and, say, 50% of your student loan principal payments every matter how much you make!  It is complete and total crap that someone making $150,000 with at least that much in debt has to pay higher taxes AND student loan payments AND get criticized for being successful. 

And you wonder why I get you that ugly ass sweater for Christmas...

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