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RDQ kicked off what I’d call a ‘good ruckus’ with his Billionaires, taxes and you post. I thought I would dive deeper into the “and you” aspect of the conversation.
What about the rest of us? Below are the results of two 2025 tax returns I processed, and one based on the AARP calculator for tax year 2026. Two are retired couples over age 65.
I included a hypothetical worker-bee couple as well, because not everyone reading HumbleDollar is leading a life of leisure like me.They have no kids, are under 65, and earn the median household income. All use the Standard Deduction.
Couple #1
Total Social Security benefits received $47,000
Total Pension Income $15,000
Total IRA distributions $12,000
Total Interest Income $5,500
Total income, all sources $79,500
Total Tax Liability $240
Couple #2
Total Social Security benefits received $77500
Total Pension $5500
Total IRA distributions $31,000
Total Interest and dividends $1700
Tax Free Interest $800
Long Term Capital Gain $1200
Total income, all sources $117,700
Total Tax Liability $2700
Couple #3
Income from W2 $84000
Total Household Income $84000
Total Tax $5723
Do you think these couples should pay more tax, less tax, or is this just about right?
Do you think the tax paid by these couples is commensurate with the benefits and services provided by the federal government?
How about a flat tax? Back in my tax preparer days, it wasn’t unusual for clients to express a desire for a ‘flat tax’. I always would ask them what flat tax rate would be fair. The answer was usually 10% or 15%. What would a flat tax rate look like for the three taxpayers above? Would those tax rates balance the budget, or make things worse?
I find it hard to compare these three cases, since there are some things that are unclear. Social security payments mean that there was money paid for that in prior years. What are “taxes” in the third example, and does that include Social Security withheld? Should Medicare payments fit somewhere, especially IRMAA? Is the third example for someone who is also funding an IRA for the future? We have a complicated tax code, and it is always in one’s interest to figure out how to pay the lowest tax once can, consistent with the law. I think someone in the third example might have ways to lower that tax.
One of the lessons from the last bipartisan tax code revision – way back in 1986 – was that a “flat” tax may not serve all the purposes we need to serve in structuring income taxes, and that a “flatter” tax (as opposed to a flat one) is more achievable. And there is one economically important rule that strongly promotes that “flatter” income tax. The more credits, deductions and offsets the government can eliminate from the tax code, the lower that a “flatter” income tax rate can be. A lower rate is fundamentally good for everyone. It is also more likely that there can be a more level obligation across all taxpayers, though a group may wind up paying more.
Is there anything that still should justify favoritism? Does capital gains deserve a lower rate than other income? Should we continue to incent retirement savings with deferrals of earned income for IRAs and 401(k)? How about charitable deductions? For every favored interest, there is a cost.
Martin, I should have said “income tax” rather than “total tax”; good point. Lots of good questions in your final paragraph.
I have paid taxes since 1959 when I was sixteen. Over my working life I paid $132,818 in SS taxes and $98,080 in Medicare taxes. My property taxes are $13,900 a year. I pay IRMAA premiums and 85% of our social security benefits are taxable income. Our effective income tax rate is 18% in part because of RMDs, interest and dividends.
I am not complaining.
Ten years ago we had received in SS benefits an amount in excess of 50 years of payroll taxes. Now our combined benefits exceed both my and my employers FICA taxes paid.
Unfortunately, our benefits under Medicare have exceeded the taxes paid and the premiums by many times over. Connie’s eye injury alone cost over $300,000. Currently, we are incurring between $14,000 and $20,000 a week in expenses for one of several treatments.
I am not complaining about taxes. I really don’t think Americans understand the value we receive for tax dollars.