How to Blunt Rising Taxes - Barrons

[Nords]

I'm thinking that it's hard to sympathize with the tax burden of those making over $250K/year.

Spouse and I will just keep enjoying our below-the-radar ER...

 

[Hiredgun]

No one is asking for sympathy. I'm just pointing out that if you keep taxing and taxing and taxing those that are productive, smart & hardworking, we will simply stop. We are the small business community. We are the backbone of the American Economy and we will simply stop. We are not fools and we take the economic cost and benefit of things into account in determining how hard to work.

We will stop being productive beyond the point of the abusive taxation.

We will stop providing good jobs for our employees.

We will stop providing health care, 401Ks, disability insurance and other benefits for our employees.

We will stop when the government takes more than we do from our profitable businesses, despite the fact that govt does nothing to contribute.

And when we stop, all the things our profitable small businesses buy from other large and small businesses will stop. It will have an enormous domino effect.

Do we want sympathy? No. We simply want to be left alone. We want the boot heel of our neck. We want the government NOT to take more than 50% of what we produce when it does NOTHING to earn it. When it is given to PUBLIC union workers who now make more on average than the private sector workers.

Read "Atlas Shrugged" by Ayn Rand, the hard workers decide its not worth it anymore and leave. This is happening in New Jersey and New York. Well of individuals are leaving for other states where they will not be taxed into oblivion. If the rest of this country becomes like N.Y., New Jersey, Calif and Michigan, I will leave and find somewhere else.

We are smart, hard working, resilient. We are the entrepreneurs and the backbone of this country. We don't want sympathy. We don't even want a thank you. However, we would like to know exactly how much it is okay to tax us? We already pay over 80% of the taxes in this country and almost 50% in this country pay no taxes. Is this fair? Equitable? How about "spreading the taxes around" along with "spreading the wealth around"?

I share the goal of those on these boards to leave the workforce early. Part of the reason is because running a small business and managing people is stressful and a helluva alot of hard work. And I refuse to feel bad for being successful. But another big part of wanting to RE is that I see where things are going and 2011 and 2013 will begin large tax increases and it's just the beginning.

I don't want sympathy. But please understand that when small business people leave the workforce it means "less revenue" for all the rest, not more. "Socialism is a great idea until you run out of other people's money." Margaret Thatcher

 

[chinaco]

The socialism hyperbole wears a little thin... American Small Business will survive.

We have a progressive tax system for a number of legitimate reasons.

The Bush Tax cuts were not effective tax cuts for most... Oh sure, it applied to all taxpayers, but few Americans were able to take real advantage of it. It was a shell game that fooled the middle class and favored the wealthy. You get a few bucks... we get buckets of bucks.

Since most Americans put retirement savings in tax deferred accounts.. they did not really benefit. At best most Americans lowered their marginal payroll tax a little and spent it.

The people that really benefited were people with very high incomes and large amounts of taxable investments (often the wealthy or very wealthy) or heirs of very large estates.

They got richer... the vast majority of Americans just kicked the can down the road and got a delayed tax burden.


IMO - on the political front... Granted there are a few people on the extreme edges of the left or right. But the vast majority of us are center oriented. No matter how one slices it... most Americans want some sort of social floor. Most of us do not want to live in a third-world USA. That type of disparity could lead to anarchy and corrupt/oppressive regimes... while there is a lot of rhetoric and back room deals, our government is not flat out corrupt (although politicians on all sides often will sell out their political morals for a campaign contribution).

 

[MichaelB]

The Barron’s article is purportedly about tax advice (Which taxes will rise, what you should do right now). Here is a summary of their tax advice, although I really don’t think forum members will find it to be useful. The article is really a pretext to speculate (superficially) on impending tax changes.

1. Be aware of what they are doing in Washington

2. Sell your winners and buy them back

3. Don’t use up your realized losses

4. Move your dividend paying stocks to your tax deferred accounts.

5. Invest in tax exempt munis.

6. Time your variable income stream to minimize tax exposure

7. Convert your IRA to ROTH.

8. Overfund your life insurance policies, borrow the excess, never cash out the policy.

9. There may be changes the estate tax next year.


BTW, they omitted all discussion of state, sales, use and property taxes.

 

[dex]

The Bush Tax cuts were not effective tax cuts for most... Oh sure, it applied to all taxpayers, but few Americans were able to take real advantage of it. It was a shell game that fooled the middle class and favored the wealthy. You get a few bucks... we get buckets of bucks.

What do you mean by 'effective'?

 

[dex]

No one is asking for sympathy. I'm just pointing out that if you keep taxing and taxing and taxing those that are productive, smart & hardworking, we will simply stop. We are the small business community. We are the backbone of the American Economy and we will simply stop. We are not fools and we take the economic cost and benefit of things into account in determining how hard to work.

We will stop being productive beyond the point of the abusive taxation.

We will stop providing good jobs for our employees.

We will stop providing health care, 401Ks, disability insurance and other benefits for our employees.

We will stop when the government takes more than we do from our profitable businesses, despite the fact that govt does nothing to contribute.

And when we stop, all the things our profitable small businesses buy from other large and small businesses will stop. It will have an enormous domino effect.

Do we want sympathy? No. We simply want to be left alone. We want the boot heel of our neck. We want the government NOT to take more than 50% of what we produce when it does NOTHING to earn it. When it is given to PUBLIC union workers who now make more on average than the private sector workers.

Read "Atlas Shrugged" by Ayn Rand, the hard workers decide its not worth it anymore and leave. This is happening in New Jersey and New York. Well of individuals are leaving for other states where they will not be taxed into oblivion. If the rest of this country becomes like N.Y., New Jersey, Calif and Michigan, I will leave and find somewhere else.

We are smart, hard working, resilient. We are the entrepreneurs and the backbone of this country. We don't want sympathy. We don't even want a thank you. However, we would like to know exactly how much it is okay to tax us? We already pay over 80% of the taxes in this country and almost 50% in this country pay no taxes. Is this fair? Equitable? How about "spreading the taxes around" along with "spreading the wealth around"?

I share the goal of those on these boards to leave the workforce early. Part of the reason is because running a small business and managing people is stressful and a helluva alot of hard work. And I refuse to feel bad for being successful. But another big part of wanting to RE is that I see where things are going and 2011 and 2013 will begin large tax increases and it's just the beginning.

I don't want sympathy. But please understand that when small business people leave the workforce it means "less revenue" for all the rest, not more. "Socialism is a great idea until you run out of other people's money." Margaret Thatcher

I agree with you that high taxes are not a good thing. Basically, corporate taxes and taxes on small business are regressive taxes. Corp and small businesses are conduits that pass along taxes (just like material costs) to the consumer in the base price of their product. So the poor get hurt the most.

As to small business cutting back because of the high taxes - I can see that happening in a short term with some of the current small business owners if they can not pass along the tax increases to the consumer. People adapt. They also forget. New people starting a business see opportunities and high taxes are just the cost of doing business.

In those industries that can not pass along the tax increase to the consumer business may go out of business, businesses may consolidate for efficiencies and pass along the tax increases later. Again, these things will hurt workers, the poor and owners.

Large tax increases are coming, VAT or Nat'l sales tax is coming and the people it will hurt the most are the poor - no matter how much the tax is increased on others. The discussion about increasing the taxes on the 'rich' is the magician's distraction: 'Watch this hand (tax the rich while the other hand takes from the poor).

A large and affluent middle class if a modern invention - primarily post WWII (the Federal Gov't will still be able to provide what is considered a middle class lifestyle for a long time). We are beginning to revert to the mean - large number of poor, small fragile middle class, very few rich.

The decisions that led us here were made decades ago; we are reaping the effects of those decisions.

 

[Rustic23]

Nords you are right, but then it is hard for the person making $20,000 a year to relate to your lifestyle, and that is the problem, imho, with the 'tax the rich more' solution rather than 'spend less' solution. For me it was the 'bridge to Alaska' that really set the focus on excess government spending. As I grow older, I become more and more of a libertarian when it comes to federal spending.

 

[audreyh1]

Dex, thanks for the information. So as I calculate it, that would represent approximately a 10% increase in their tax bill is that about your read?

Those of us in this top 1% category (I'm included) got a huge windfall from the Bush Tax cuts. For several years I was able to realize a lot of capital gains at historically very low rates. Nice break on that qualified dividend income as well.

My regular taxes stayed pretty low - well actually that AMT would get me most of the time, raising my effective tax bracket. It essentially forced 26% from dollar 0 of non-cap-gains income, wiping out and "lower marginal tax rate" benefit.

I've structured things so that I don's have a lot of unrealized cap gains left and I'll probably be able to easily fly under that $250K radar going forward and probably be able to avoid AMT as well.

So now the party is over. Whatever. It was fun while it lasted.....

I never figured those tax cuts were sustainable. There was a reason they were never made permanent.

I'm not crying for myself, so don't waste any tears on me!

Audrey

 

[ziggy29]

I've been saying for a while now that I think we're entering an economic era where financial planning for retirement will increasingly emphasize making moves to need less money in retirement rather than simply maximizing your retirement portfolio. Yes, there will still be emphasis on growing your money but in a tougher economic environment with this many headwinds, it will also be important for many to reduce expenses, reduce taxes and protect future means-tested health insurance subsidies if a decent retirement is still in the cards (particularly for the pensionless).

In other words, if someone is totally debt free, owns their home mortgage-free and has a relatively non-material lifestyle, in the next few years they may be able to live just about as well on a $35,000 AGI as someone with a mortgage, a fair bit of consumer debt and a $60,000 AGI -- especially factoring in the impact of graduated income tax and future health insurance subsidies at lower income levels.

Our laws and policies are increasingly discouraging working longer and harder to amass more wealth, and is instead starting to encourage pulling the plug when you have "just enough" to make it for the rest of your life. And I think this concept will be more and more a part of mainstream financial planning -- developing a lifestyle that creates an income "sweet spot" where much less income threatens retirement security and drops one below an acceptable lifestyle, but much more results in diminishing returns on continued work due to progressive income taxes and loss of health insurance subsidies (and perhaps loss of means-tested SS in the future, too).

 

[Gone4Good]

I'm not crying for myself, so don't waste any tears on me!

Nicely said.

People act like returning to tax rates that prevailed during the 1990's represents some kind of apocalyptic scenario. And then they conveniently forget that rates were almost twice as high as those in the 90s for nearly the entirety of the 20th century.

Nobody likes to pay taxes, but a little historic perspective helps to put things into context. A recognition that government receipts as a % of GDP at about 14% this year, the lowest rate since the 1940's, also helps dispel the notion that somehow taxes are already extraordinarily high.

 

[ziggy29]

And then they conveniently forget that rates were almost twice as high as those in the 90s for nearly the entirety of the 20th century.

As opposed to conveniently forgetting that with those punitively high rates came an almost infinite ability to avoid them with all the deductions, loopholes and shelters available before the Reagan-era reforms?

I'm not arguing against tax increases where they are necessary but I grow very tired of hearing about past tax rates as an example of why taxes are too low now, all the while not acknowledging all the deductions and shelters which accompanied the high rates of the past.

 

[Gone4Good]

As opposed to conveniently forgetting that with those punitively high rates came an almost infinite ability to avoid them with all the deductions, loopholes and shelters available before the Reagan-era reforms?

And I believe I posted a study, in response to a similar comment by you some time ago, showing that the effective tax rates of the top income earners is much lower today than it was in those prior periods. (did you "conveniently forget?). I don't have time to look it up right now (I'll be back with more).

 

[FIREd]

Those of us in this top 1% category (I'm included) got a huge windfall from the Bush Tax cuts.


My regular taxes stayed pretty low - well actually that AMT would get me most of the time, raising my effective tax bracket. It essentially forced 26% from dollar 0 of non-cap-gains income, wiping out and "lower marginal tax rate" benefit.

I've structured things so that I don's have a lot of unrealized cap gains left and I'll probably be able to easily fly under that $250K radar going forward and probably be able to avoid AMT as well.

So now the party is over. Whatever. It was fun while it lasted.....

I never figured those tax cuts were sustainable. There was a reason they were never made permanent.

I'm not crying for myself, so don't waste any tears on me!

Audrey

You are lucky. I just joined the top 1% category this year and expect to remain in that category for the next 2 or 3 years. So, while we saw our taxes reduced somewhat during the Bush years (we were in the 28% bracket during Clinton years and the 25% tax bracket during most of the Bush years), we didn't enjoy the kind of windfall you are talking about.

But like you say, we don't need people to feel sorry for us. In 3 years, we'll join the ranks of the subsidized middle class again and let others do their parts to save the country. By then, we will have paid close to a cumulative $1M in income and payroll taxes. More than our fair share, IMO.

 

[ziggy29]

And I believe I posted a study, in response to a similar comment by you some time ago, showing that the effective tax rates of the top income earners is much lower today than it was in those prior periods. (did you "conveniently forget?). I don't have time to look it up right now (I'll be back with more).

But not nearly lower by the difference in tax rates, which is what some folks might easily infer. And it's still misleading (assuming honest motivations to be charitable) to use the massive differences in tax rates as justification for raising taxes. Why not just use the fact that the overall effective rate is lower today and stop using the (IMO, intentionally) misleading "70-90% tax rate" stuff?

 

[Hiredgun]

"Windfall", wow! When did the definition of a windfall become being able to keep more of the money I earned.


And yes, I think future retirees will look for that sweet spot where they have enough to RE but trying to amass more makes no sense because of taxes. We are moving toward European Socialism, have been for some time.

And like Firedreamer, I've only been in the 1% for a few years, but by the time I get out in five years I will more than have paid my fair share.

 

[M Paquette]

What do you mean by 'effective'?

I assume he meant 'effective tax rate', the actual income tax paid divided by net taxable income before taxes.

The Tax Reform Reconciliation Act of 2001 and it's followups had minimal effect on my effective tax rate (29.1% to 28.6%; I was still working then, and in a high bracket.) The real savings didn't start to show up until you got to a very high six figure/low seven figure income, where the top bracket changes covered a significant part of one's income, or at the other end of the range, if one had a 'barely taxable' income and suddenly dropped to an effective rate of zero.

It would be pretty easy to make the argument that the folks who slid from an effective federal tax rate of 1-2% to zero benefited the most in terms of improving their economic condition. I remember from my youth when bringing in an extra 60 or 70 dollars in a month made a huge difference for our little family. The break at the high end was a bit of a gift.

 

[Delawaredave5]

and what, kill themselves to avoid the tax increase?

Agree. I see a lot of "house is burning" and "taxes-are-going-up" articles (which I agree with) - but I do not see a whole lot of actionable advice. Yea, the usual "time your bonus" suggestions...

Is anyone making material changes to their asset allocations, taxable / tax-advantaged mix, or accumulation / withdrawal strategies as a result of these believed tax changes ??

 

[ziggy29]

Is anyone making material changes to their asset allocations, taxable / tax-advantaged mix, or accumulation / withdrawal strategies as a result of these believed tax changes ??

I'm not doing anything yet, other than increasing my emphasis on financial planning for "cost avoidance" or "income avoidance" and putting less emphasis on working more years to increase my retirement income which may largely be offset by higher taxes and lost subsidies and means-tested goodies. The other thing I'm doing is trying to diversify my investments between traditional deferred, Roth and taxable vehicles so I'm more likely to be able to "engineer" taxable income in any given year to be just below the next higher tax bracket.

One thing seems fairly likely to me: In the future there will be increasingly "diminishing returns" on working more years to increase income, a higher income which, after factoring in higher taxes, less health insurance subsidy and perhaps means-tested Social Security is not nearly "higher enough" to justify the extra years in the w*rk force earning and saving it.

I'm glad this shift is clearly visible now and not 10 years from now, because I still have time to adjust my retirement planning and perhaps save even more aggressively today to pull the plug earlier in a few years.

 

[Ronnieboy]

and what, kill themselves to avoid the tax increase?

No, b/c then you'd be taxed at 45%, unless you do it quickly.

 

[FIREd]

Is anyone making material changes to their asset allocations, taxable / tax-advantaged mix, or accumulation / withdrawal strategies as a result of these believed tax changes ??

Absolutely. I thought that the article gave some good actionable advice and I had already started implementing a lot of it before even reading that article. For example, I used the latest dip in the market to sell some dividend-paying equities (preferred dividends) in taxable and move them to our IRAs. In the meantime, I sold some taxable bonds in the IRAs and bought munis in our taxable account.

"Believed tax changes"? Do you think there is a chance that Congress will block the upcoming tax increases?

 

[Hiredgun]

I have also been buying munis in light of the new taxes the Health Care bill will impose in 2013.

Also, I'm sure there are alot of smart financial planner/accountant types on this board. I'm hoping they can answer the following question:

Will the increase in medicare payroll taxes that takes place in 2013 (1.45% to 2.35%) apply ONLY to wages or to a small firms entire Net Income?

For example, right now my wife and I only pay medicare and social security on the salaries we pay ourselves. We are an S-Corp. The additional shareholder distributions the corporation makes to us throughout the year (essentially the additional net income of the firm) are not subject to these taxes.

Thanks,

 

[LOL!]

Is anyone making material changes to their asset allocations, taxable / tax-advantaged mix, or accumulation / withdrawal strategies as a result of these believed tax changes ??

Not us. We have already been investing extremely tax efficiently for the past several years. Our income is less than $200K and we have a few hundred thousand in carryover capital losses to obviate any cap gains tax increases. Our kids are about to enter college, so we will get tax credits for paying education costs for the next 8 years. I would not be surprised if our federal income taxes went to zero.

I think only the folks who deserve to pay income tax will have substantial changes. Of course, if they were not investing tax efficiently already, they should get their act together.

 

[Nords]

No one is asking for sympathy.
I don't want sympathy.
But please understand that when small business people leave the workforce it means "less revenue" for all the rest, not more.

I wasn't asking for a lecture, either, but maybe if you put more words in uppercase then I'll be able to understand them better.

As for "please understand", how 'bout a little credit here? I've never had to make a profit but I've spent a few years making myself quite familiar with small-business taxation and Ayn Rand, too. I spend a significant portion of my free time with people who are starting their own small businesses. What you see as a throttling "boot heel" of over-regulation, others see as a competitive opportunity. They hire tax consultants to figure out more tax-efficient ways to do business.

Nords you are right, but then it is hard for the person making $20,000 a year to relate to your lifestyle, and that is the problem, imho, with the 'tax the rich more' solution rather than 'spend less' solution.

I just think that there's a lack of fairness when Warren Buffett's tax bracket is lower than his secretary's tax bracket. But I agree that it's better to keep the revenue out of the govt's hands in the first place... perhaps by first lowering the taxes at the lower end of the bell curve rather than rewarding those who have plenty of money to spend on lowering their taxes at the higher end of the bell curve.

 

[Hiredgun]

"Deserve to pay" more taxes? "Windfall" due to the government letting me keep my own money?

Boy the mainstream media has done its job and class-warfare is alive and well on these boards. Please stop drinking the cool aid. I'm kind of surprised since most here seem to be frugal savers and all working toward a financial goal, ER. I would think everyone would be rooting for each other to make the finish line. Instead, I see alot of class envy, (i.e. those who deserve to pay more, I don't feel sympathy for those who make alot of money and get socked with more taxes).

Even when I was not in the 1% (only 2 or 3 years ago) I didn't begrudge those that were. I thought, good for them, they worked hard and deserve it. I didn't think, boy they are more successful than me, I hope the government punishes them (through higher taxes). Hey they are a big corp, they can afford to pay more, let's stick it to them.

I see way too much of that already on this board. I'm surprised. I guess people don't realize that my making money (or anyone else making a ton of money) has ABSOLUTELY NO effect on their ability to make a ton of money.

The economy is not a pie where the pieces are limited and if I get a bigger piece, you get a smaller piece. If you work hard, have a great idea, run a good business, your potential gains are unlimited. My making a ton of dough does not affect your ability to go out and make a ton of dough.

Also, the studies show that increases in corporate taxes result in a decrease in the tax revenues the government collects. This is a fact. So raising taxes (especially in a recession) will result in more job losses, more unemployment and less revenue for the Federal Government to give to the State Government workers (i.e. unions).

I will gladly pay my higher tax rate until I too become part of the subsidized middle class in 5 years (through careful tax planning). I won't like the increase, but it will be temporary for me. What I really don't like is the huge impact it will have on the country and my son's future. I doubt he and his generations will have the same opportunities many of us had.

 

[Rustic23]

You can not compare Tax Rates in the past with Rates today. The tax laws have changed along with the rates. Many things that were deductions in the past are not today. It is not as simple as saying we had higher rates in the past, because it does not reflect the actual percentage of income paid to taxes. I have not seen a comparison of this. You also can't use hard numbers like $1,000,000 because of the time value of money.

People that use the argument of it was higher in the past either don't understand this or are conveniently ignoring it.