Zero Net Worth? Join the Crowd and our Gov.

Parent Cafe
1

<p><a href=“http://www.latimes.com/news/nationworld/nation/la-na-taxday17apr17,0,4659206,full.story[/url]”>http://www.latimes.com/news/nationworld/nation/la-na-taxday17apr17,0,4659206,full.story&lt;/a&gt;
From the Los Angeles Times
Taxes Flatten but Deep Pockets Still Bulge
By Joel Havemann</p>

<p>April 17, 2006</p>

<p>WASHINGTON — A decade ago, when publishing magnate Steve Forbes ran for president, he vowed to deliver a new era of prosperity with a simple change in the federal income tax: Instead of people with more money paying higher rates, all would pay the same “flat” tax rate — unleashing “the fantastic growth waiting to burst forth in our economy.”</p>

<p>Forbes’ flat-tax plan was dismissed as simplistic by many mainstream economists and viewed with horror by the legions of special interests that benefit from the deductions and loopholes that flat-tax advocates would eliminate.</p>

<p>But as millions of Americans face the deadline for filing their federal tax returns, they are operating in something very close to the world Forbes and other flat-tax visionaries proposed. Without any fanfare or philosophical debate, millionaires and middle-class Americans now pay taxes at almost the same rates. . . ."</p>

2

<p>I hardly call 13.6% and 20.6% "virtually the same rates. Obviously another journalist with no math concepts. That’s a 51% gap. Also are they using Gross or Adjusted Gross Income. The fixed deductions would benefit lower incomes more on a % basis. Also there is a nice expected return of some or all or more than all of that SS money that is being collected depending on age. The PV of that should be deducted from the amount paid.</p>

3

<p>

The way I read it is that the upper-end rates are far lower than they were and they flatten out above $100K. The overall progressivity is very mild running even from the $50K income level (17%) to those with incomes above $1 million (22%). Presumably this is gross income from all sources, and the percentages are “total” rates since they incorporate payroll taxes as well as income taxes, as well as “earned” and “unearned” income (e.g., interest, dividends, and gains from investments). (Read the previous few paragraphs of the story.)</p>

4

<p>IMHO a tax burden of 22% is plenty when you consider it excludes state and local taxes which could easily add another 10%-15% to that-then the governments are taking at least one-third of your gross income. If it gets much more than that why work so hard?</p>

5

<p>Part of the answer to your question is that the overall revenue system is so flat that there is relatively little disincentive to “work harder,” and it’s not clear what the distincentive would be if a modest increase in progressivity were brought back. (Not to mention, as a factual consideration, the main reason the govt. has built up such a huge deficit in recent years is the cutting of taxes at the higher levels; a secondary, though important, reason is military cost escalation, especially for the Iraq War, without any “war tax” being imposed to pay for it.)</p>

<p>Another part of the answer is that for a large majority of the “big” earners, let’s say $1M plus, the bulk of their income isn’t “earned” from work. It comes from savings, investments, and the like.</p>

<p>A third part of the answer – one that I think is the best one to argue about – is whether taxes ought to be progressive based on some calculation of the marginal utility of the added dollar. I haven’t seen anything indicating what level of progressivity turns out to be a distincentive to “hard work” (though I would concede that there has to be some level when it’s not worth it to work any more). Further, when this flattening of the taxes is coupled with the near elimination of the inheritance tax, the income and in particular the wealth distribution in America is becoming a lot more unequal, with “inherited” advantages being perpetuated.</p>

6

<p>I would dispute or at least want to see proof that most $1M plus earners don’t get mostly earned income. Many big city law partners, doctors, investment bankers, executives, business owners, real estate brokers, stock brokers and others earn that kind of money today. I just rented a house to a guy who sells cars and he makes $500k. He’s building a $1,000,000 house and that’s in a small city.</p>

<p>Since everyone’s marginal utility is different it would be insanely hard to calculate that. Mine is pretty low because I value time off a lot and the marginal rate is high. Others in my group work all the time and make double what I do. Fine for them and for me.</p>

7

<p>Shouldn’t the payroll taxes be eliminated from a meaningful debate about relative income taxes? We do not seem to add the amount paid in property taxes in making comparisons. </p>

<p>It is interesting to see how easy it is to support the taxes paid by … others. This may explain the apparent fixation or obsession for some to milk the fat udder of passive income and wealth. Countries that have the luxury of rewriting their entire tax codes do not seem to fall in the same trap of disguised socialism. Funny that we are supposed to be the capitalists and that most of them used to be communists.</p>

8

<p>Given that AMT is moving downwards into the middle income ranges, I think we can assume that it’s not working properly.</p>

<p>First of all, the big issue I have is that a lot of simplistic people don’t distinguish between the truly rich and the professionals who work 80 hours a week but still need to budget. There is a huge financial difference between the private school/private jet crowd and the doctor/wife at home/kids in good public school crowd. However, everyone lumps them together as “rich.” There’s a wide gulf between comfortable and wealthy; tax loopholes benefit the latter but the former cannot take advantage of them.</p>

<p>Teresa Heinz Kerry is a perfect example. She paid less than 15% of her AGI in taxes… something that a doctor, middle management, or young i-banker could never get away with - in short, those who work in professions for their money. Those are the people nailed by AMT and other “tax the rich” measures, while THK and her ilk continue to use loopholes to pay an absurdly low tax rate. </p>

<p>That’s the beauty of a flat tax - we could eliminate the massive abuse by the truly wealthy without worrying about instituting AMT, which is starting to affect the middle classes. The flat tax, to be effective, however, would need to start at something like $25,000/year and tax every dollar over that - that way, the poor would not have to pay any taxes; the middle class would pay some taxes; and the more wealthy would pay more. It would be slightly progressive - but the beauty lies in taxing every dollar equally, regardless of source. </p>

<p>I really think that the “rich” who can take advantage of the loopholes in the tax code are the million-plus annual earners (top 0.3% or so), not the $200k/year earners (top 2% or so). Percentage-wise, the difference might seem small; however, the way that those people earn money is different, and the things they can do with that wealth are different. If you have three kids, live in San Francisco, and earn $200k/year, you ain’t wealthy. You better be frugal if you want to put those kids through college. Not so for the truly wealthy.</p>

<p>Alternatively, we could re-do the capital gains tax. My idea - ideal in the computer age - would adjust basis for current value after inflation, and then tax on the gain. The theory behind capital gains tax rates being lower is that you don’t want to tax money that the person never really earned - that is only there due to inflation (hence the over one year requirement). If you paid $100 for a piece of land in 1975, that land might be worth $500 today - but only because $100 then is worth $400 now. Instead of doing this indircectly, a comp. programme could adjust basis for inflation (or a table could be used - for example, if you bought it in 1983, multiply basis by 2.5), and then subtract selling price for gain. Tax on that. Then, you could apply the same flat tax rate. </p>

<p>Rant over. :)</p>

9

<p>There is little “beauty” to the flat taxes that have been proposed. If you look carefully, they are almost always based on what is called “earned” income – that is, income from work. Most of what you call the “super rich” receive a majority of their income as “unearned” income. And that income is typically excluded from taxation under flat tax proposals. The flat tax turns out to be something of a ruse when most of the income of the super rich is excluded from the calculation.</p>

10

<p>I don’t know; we use Turbotax and one of things it will calculate for you is your final tax rate, along with comparisons to the other averages in your income class.</p>

<p>My husband I, both professionals, work about 90 hours a week between us. Our final tax rate was not much more than 15% (although maybe that wasn’t figured on AGI). We found that others in our income class made, on average, a significant portion of their income from interest and dividends–way more than I expected. And no, we’re not super-rich! </p>

<p>All this makes me ask… the statements about working people, earned income, the super-rich, effective tax rates, etc etc. These are all pretty compelling points beig made. Are they backed up by actual numbers? Do we know what U.S. taxpayers really look like?</p>

11

<p>“There is little “beauty” to the flat taxes that have been proposed. If you look carefully, they are almost always based on what is called “earned” income – that is, income from work. Most of what you call the “super rich” receive a majority of their income as “unearned” income. And that income is typically excluded from taxation under flat tax proposals. The flat tax turns out to be something of a ruse when most of the income of the super rich is excluded from the calculation.”</p>

<p>It may excluded, but a better the question is … how many times was it excluded! Excluding passive income from double taxation should not be a ruse, but a matter of equity. The biggest problem is that it is impossible to agree on what is … equitable. I would love to a cigarette tax of $10.00 per pack and a 200% extra tax imposed on fancy liquors and wines. I would love to see a $3.00 surcharge on gasoline. I would love to see a series of consumption taxes on luxury items. The problem with any of those is that it creates another set of economic victims. The sad reality is that direct income taxes will soon be relegated to the backstage as the ugly head of indirect taxation continues to rise. And, to solve that problem, there aren’t enough dividend-clipping tax-cheating fat cats to go squeeze.</p>

12

<p>Don’t go after my 18 year old scotch. It already has a significant tax on it. At $75+ per fifth it already cost plenty. You don’t swill that stuff to get drunk and cause trouble so what is your rationale??</p>

13

<p>Okay Xiggi - I’m withdrawing my support for the tuition deduction! :slight_smile:
But seriously, if you want to discuss “fariness” or “incentives” or any other squishy aspect of tax policy, you really should be discussing all taxes. Sales taxes are the most regressive of all - and it’s a form of “double taxation.” Of course, the inequity of “double taxation” is an appealing fallacy. All taxation is at least double, sometimes triple or more. “Double taxation” is little more than a sound bite.</p>

<p>Barrons, I’ve always wondered about the “If you tax my income above $1M too much I’ll stop working so hard” argument. I mean, at that income level, you’re not working to put food on the table, are you? If you need an “incentive” to work hard, wouldn’t most people just stop after $300,000 or so? I don’t think that people actually would work less if their marginal federal income tax rate was, say, 40% instead of 35%, because I don’t think that the extra $5,000 per $100K is why they’re working hard in the first place. Again, it’s a superficially appealing argument but I don’t think it reflects actual behaviors.</p>

14

<p>Sales tax is double taxation. That said, I am not, in principle, opposed to it.</p>

<p>I really like the Massachusetts method of sales tax: nothing on food that you buy from a grocery store; nothing on clothes that are less than $175 per item (each dollar over $175 is taxed at 5%); normal 5% sales tax on everything else, including restaurant meals; and heavy alcohol taxes. “Essentials” are not taxed - so if you are poor, you really aren’t paying much in sales tax (presumably, you aren’t buying much besides food and clothing). Those who consume more pay more - presumably, those with the ability, as they are spending more on non-essentials. </p>

<p>A flat tax, when I think of it, necessarily includes all income, from whatever source.</p>

15

<p>Can someone explain how the US economy was so good when the top tax rate was I believe 70% in the 1950’s and still very high by today’s standards in the 1960’s-- a great time for the economy.
Conservatives always push the idea that higher tax rates on the wealthy ruin the economy for everyone.</p>

<p>I’ll admit that intuitively it does seem like the wealthy , who don’t actually need additional money to live, wouldn’t have the incentive to work if the rates were higher, but as a whole the economy does not seem to react that way. .</p>

16

<p>In the 50’s we were coming off a major and minor war and a baby boom was on. Also there were great leaps in technology. And there were many more deductions so few really paid 70% as few even made enough to be in that class.
Higher tax rates at the levels of 50, 60 or 70 percent are patently unfair. That’s why we have so many ex-pats from Europe in this country and other tax havens. Even the Beatles were down on it.</p>