The Really Useful Pocket Guide to Taxes and Fiscal Terms
Taxes. Everyone hates them, but everyone (well, almost) has to pay them.
And taxes are what the government is focusing on right now, in an effort to, well, save the economy.
New policies could change the way our entire tax system works, something that will impact every citizen in America who works - or who depends on someone who does. Taxes are unsexy and wonkish, but they matter.
So here it is: a straight-to-the-point guide on the lingo, politics, and people of the current tax debate.
A lot of terms and phrases relating to the tax system are being tossed around. Here's a mini-dictionary of taxation.
Basically, the fiscal cliff is the combined effect of two things that are happening at the same time (in January): a scheduled tax increase and spending cuts. People are worried that if the government doesn't take action, and both of those things take place as scheduled, it might really hurt the already weak economy.
(Psst, we wrote up a whole guide on the fiscal cliff recently. It's actually kind of fun to read. See for yourself.)
The fiscal cliff is the big focus right now. The Democrats' approach is to focus mostly on increasing revenue. And how does the government make money? The number one way is increasing taxes. Republicans are allergic to raising taxes. They'd rather cut spending. Mostly by cutting programs like Social Security and Medicare. (Keep reading for explanations about all of these things.) The question is, will the two parties compromise? And if so, how?
Deficit and Debt
Deficit and debt are often used as synonyms. They're similar, but they're not exactly the same thing.
A deficit occurs when the amount the government spends is more than the money it's taking in. When that happens, the government has to borrow money. Right now the government has a humongous deficit.
All the money the government borrows to make up the deficit - the money it owes - is the debt.
The nonpartisan Center for American Progress summed up the difference this way:
In other words, the deficit is the yearly shortfall, and the debt is the total amount that the government owes to its creditors from whom it borrowed to make up those shortfalls.
Everyone wants to decrease the deficit, but Republicans and Democrats don't agree on how best to do that. Basically, though, Republicans are against spending more money than you have, so they focus on cutting spending. Meanwhile, Democrats resist cutting back on what they see as essential programs, so they focus on raising revenue.
The debt limit is the total amount of money that the U.S. government is allowed to borrow to pay for things it has to pay for, like military salaries and Social Security and Medicare benefits and tax refunds.
The thing is, the government also has the power to set the debt limit. That means it can tell itself how much it's allowed to borrow.
President Obama (Democrat) and the Speaker of the House, John Boehner (Republican), are arguing about the debt limit for 2012. Obama wants to raise the limit, but Boehner says “There is a price for everything."
Entitlement programs is the nickname for programs like Social Security and Medicare that give citizens financial benefits when they meet certain requirements, like being a certain age or earning below a certain amount of money.
In other words, if you are in a certain group, you are entitled to specific government benefits. Hence the name.
Entitlement programs have recently come under fire as Republicans urge changes to the programs and Democrats resist.
Democrats want to ensure that entitlement programs continue to exist under government control, to guarantee benefits. On the other hand, Republicans propose letting private companies control some portion of these programs, to benefit businesses and foster competition on the open market.
Still, these programs cost a ton of money, so something will have to change.
One of the main entitlement programs. In a nutshell, Medicare guarantees health insurance to Americans age 65 and older.
Some Republicans want to give Medicare recipients a choice between coverage from private companies and coverage from the government, while Democrats generally want Medicare to remain controlled by the government.
The other big entitlement program. In fact, Social Security is the U.S. government's largest expenditure. But what is it? It's an insurance program for Americans who are retired, disabled, or survivors of a deceased family member.
It is sometimes called the "third rail" in American politics, because it's generally unpopular to suggest reforming something that benefits so many people.
A Democratic leader in the House named Dick Durbin proposed taking Social Security out of discussions about the fiscal cliff entirely. Republicans want the possibility of cutting Social Security to stay on the table.
The tax rate is actually kind of confusing, but basically, for the American taxpayer, it's the percentage at which income is taxed - not the total dollar amount you are taxed, but the rate at which your income is taxed, based on how much you make.
There are these tax brackets that set the rate. Here's how it works, basically. Say for example you're a single person who earns $20,000 a year. The first tax bracket is from $0 to $8700, so for the first $8700 of your income, you're taxed at the lowest rate (10%). The next bracket is from $8700 to $35,350, so for the rest of your income - $11,300 - you're taxed at the second-lowest rate, which is 15%.
Tax rates are important now because some have proposed raising tax rates on the wealthiest Americans.
Obama proposes raising taxes on the wealthy. He says they can afford it. Democrats back this plan.
Some wealthy people, including one of the richest people in the world, Warren Buffett, agree.
Republicans do not like this at all. They say raising taxes on the wealthy - who often run businesses - hinders job growth.
Tax cuts are just what they sound like: a reduction in how much you have to pay in taxes. President Bush pushed through what became known as "the Bush tax cuts," but they were put into place with an expiration date. That's why they're being debated again now. Should the government keep them going or not?
Republicans resist lowering taxes for the wealthy because they say that would chill their ability to boost the economy. Democrats say the tax cuts have worsened the deficit, but they don't like the idea of raising taxes for the middle class.
The Tax Players of Politics
Now that you know what the issues are, you should take a look at the people who are leading the charge on tax reform.
Obama wants to raise taxes on the wealthy in order to avoid the fiscal cliff. He says that by re-electing him, voters were saying they agreed with him on taxes.
Norquist is the Pied Piper of low taxes. He's a lobbyist who campaigns, hard, against raising taxes.
As the current Speaker of the House of Representatives, Boehner, a Republican, believes that no tax increase is needed to avoid the fiscal cliff.
She's a Democrat and the the minority leader of the U.S. House of Representatives. Pelosi believes any fiscal cliff deal must include a raise in taxes on the wealthy.
What can you do? Here are ways to take action:
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