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I have been thinking about this theory for a few years and am interested in hearing opinions on it. Obviously we all (I hope) pay federal income taxes. However, federal income taxes are based solely on income and do not take into account cost of living. It is a fact that the cost of living varies dramatically between metropolitan statistical areas (MSA). The government already recognizes this difference as is evident by the difference in pay between military and civil service personnel at the same grade level in different metro areas. These individuals may earn the same base salary, but based on which MSA they are located in are paid an additional amount to “off set” the cost of living in their respective areas. For most of the U.S. the cost of living percentage is somewhere around 13%, but those in more expensive metro areas receive an increase of 20%+. There are many factors the government uses to determine the different cost of living percentages; however one of the primary inputs is based on average housing prices and rental rates. Arguably, housing is the largest cost for most households.
With that background information I started thinking. Why should a family of four with a household income of $100K in NYC pay the same federal income tax rate as a family with the same demographic and income in Montana? All other things equal, the two families will be paying the same percentage in federal income taxes. However, the quality of life of the family in NYC is more negatively impacted by paying the same dollar value in taxes as their Montana counterparts. It seems to me this becomes a redistribution of wealth based on one’s city/state of residence. Since the federal government already recognizes these cost of living differences, why then should we not have cost of living deductions in the federal tax code?
Last edited by AnalyzeThis; 10-29-2009 at 12:02 PM..
Reason: Fonts were messed up
Good questions, and your idea is pretty interesting. I don't want to sound too simplistic, but wouldn't there be an argument that one chooses where to live, therefore deals with the added expenses (Ex: living in NYC versus Montana).
I'm just asking myself, but your points/questions are valid, and interesting.
I do not think you sound simplistic at all. I have actually thought about that argument at length. However, one can also argue that the decision to have children is a personal choice. Yet, households with children receive tax deductions that childless households do not. As an individual with no children yet, I can make many arguments as to why I should pay less taxes than households with children. Many careers are concentrated in a few areas, therefore some individuals are in an area primairily for career progression, not for any other strong desire to be there. Either way, both are personal choices. Why should one be subsidized and the other not?
why then should we not have cost of living deductions in the federal tax code?
Because the Federal Govt (the IRS in particular) doesn't give a rat's fart about "fairness" or your standard of living. They just want your/my/our money.
Bascially it would have to account for the difference in pay aloso in differewnt areas; not just the cost of living.Then you have to actaully take into account a standard of living. With so many not actually paying any income tax it would take another tax code entirely.
Well there are many things the government should do but don't, and do but shouldn't. My question was really more theoretical, in that if we assume the government would consider a plan like this what would be hindrance to actual implementation. Or what would be the pros/cons of adopting such a plan.
Bascially it would have to account for the difference in pay aloso in differewnt areas; not just the cost of living.Then you have to actaully take into account a standard of living. With so many not actually paying any income tax it would take another tax code entirely.
texdav, can you explain what you mean about it having to account for the difference in pay? In my example the two families have the same income, yet inevitably their costs will differ greatly.
When you talk about people not paying income taxes, are you referring to the low income households? I could be mistaken, but if they aren't paying taxes then how would they benefit from any tax deductions? Can they qualify for deductions now?
The Fedgov would love that idea. That could possibly create hundreds if not thousands of new government jobs to keep track of salaries/cost of living in all these cities. Another few hundred-thousands over at the IRS to formulate new tables and forms.
Oh yes..I can see the government LOVING this idea.
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