How to Blunt Rising Taxes - Barrons

[Hiredgun]

Sorry Nords, I didn't mean to lecture you and it wasn't intended as a personal attack. I read your post late last night and was a bit heated. I watch too much political tv and I really am distressed with what I've seen in the last 18 months.

I think the increase in personal and corporate taxation is going to hurt our economy at a time when it can least afford it. I see taxes going up when we just spent 800 billion to send money to State Governments which did not create the "shovel ready" projects that we were told were going to be there. We saw unemployment go to 10% (real unemployment about 17%) when we were told we needed to spend the 800 billion so unemployment would stay below 8%.

While unemployment was high (and still is) we were told the priority was a health care bill that is a bureaucratic nightmare. And they are still spending (i.e. we need another stimulus package and really, really, this time it will work).

Why don't we stop the spending and these tax increases will not be necessary. We are spending the country into oblivion and I agree that the VAT tax will be the next step.

The new taxes are inevitable. And I'm not so much worried what it will mean to me (I'll come out fine and be done in 5 years). I'm more worried about my kid's future. I think we are another Greece in the making.

But I appreciate your input Nords, finding it both intelligent and well thought out. So I apologize if it came out wrong. Thanks,

 

[LOL!]

....
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).

I'm sorry I should have been more clear about "deserve to pay". Here it is bluntly:

If you are too stupid to not figure out how to pay less taxes, you deserve to pay more taxes. No "class" envy involved as I used to make quite a lot of money.

 

[Hiredgun]

Thanks LOL! that's much clearer.

 

[Nords]

Sorry Nords, I didn't mean to lecture you and it wasn't intended as a personal attack. I read your post late last night and was a bit heated. I watch too much political tv and I really am distressed with what I've seen in the last 18 months.
But I appreciate your input Nords, finding it both intelligent and well thought out. So I apologize if it came out wrong. Thanks,

No offense taken; I approached the issue as a tax question and not a political question.

One of the good things about ER is that almost everyone drops down one tax bracket, sometimes more. Plenty of opportunities there to address future taxation issues.

Some topics, especially those with political aspects, have been repetitively discussed on this board. Members with over 1000 posts are likely to have a more cynical attitude toward the topic and a shorthand response that summarizes their participation in the previous threads. But broadly speaking, this board is not generally a good forum for political discussions. It makes many of the posters (and quite a few of the moderators) grumpy.

 

[IndependentlyPoor]

Boy am I gonna regret this, but what the hey...

I think one of the reasons that folks are so riled-up about taxes now is that individuals are paying a bigger share, and that is more visible to us than corporate taxes. I am not making a political comment here, or even a comment on the merits of corporate income tax. Just sayin' that there might be a good reason for folks to be upset about taxes, even though the total government revenue as a percentage of GDP hasn't changed all that much.

What are the federal government's sources of revenue?

Individual, corporate, and payroll taxes as percent of GDP

Government Taxes and Revenue Chart in United States 1950-2010 - Federal

Total revenue as percent of GDP

Government Taxes and Revenue Chart in United States 1950-2010 - Federal

What, me cause trouble?

 

[eridanus]

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.

Ayn, is that you?

 

[eridanus]

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).

Link to the studies, please. There's an entire thread on the Laffer curve and the "facts" are, well, lacking. The sweet spot is somewhere and every economist has their own idea where it is.

 

[ESRwannabe]

For all of you buying munis, don't be too surprised when states stop issuing them in the future. I don't think the "build america bonds" will be a one time thing. Institutional and foreign buyers greatly prefer build america bonds over munis. Who do you think states prefer as clients for their debts, small time retail investors (that includes you 1% income ppl) or institutional and foreign government investors?

If you want to avoid taxes your best bet is probably Berkshire Hatheway stock.

 

[Nords]

Total revenue as percent of GDP

The chart seems to imply that GDP growth has boomed despite attempts to throttle business (and individuals) with taxes. Either that or tax rates are the lowest in 60 years.

I'm trying to see the problem here...

For all of you buying munis, don't be too surprised when states stop issuing them in the future.

It'll be interesting to see what happens to muni default rates over the next five years. Maybe they'll stop being issued because the issuers can no longer collect enough tax to pay for the debt.

If you want to avoid taxes your best bet is probably Berkshire Hatheway stock.

Worked quite well for us. However in the next 10-15 years (or about an hour after Buffett gives up the job) there will probably be a dividend. It's going to take a long time to persuade investors that Buffett's successor(s) are any good at allocating capital.

 

[dex]

The chart seems to imply that GDP growth has boomed despite attempts to throttle business (and individuals) with taxes. Either that or tax rates are the lowest in 60 years.

Change the data range to FY2015 and it goes back up.

 

[Rustic23]

I think the chart highlights what I said. Looking at the rate alone is only part of the picture. Over the past 60 years, tax shelters have almost been eliminated for the small investor, health care exp. use to be 100% deductible. There are many other things. So while the rates have changed drastically, collections have remained fairly stable.

 

[ejman]

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).

This pretty much describes my approach. I'm not sure that laws and policies pushed me in this direction but I very much enjoy "flying under the radar" - A satisfying outward middle class lifestyle while having a sufficient net worth to sleep well at night. To me the essence of FI/ER. I think Western Europeans in particular discovered quite a while ago that presenting a nondescript low key approach to the rest of the world while having the important things in our own private world was a useful thing.

Some Western European countries have had long experience with confiscatory and overreaching governments of all kinds as well as wars, revolutions and other cataclycisms which somehow they have survived while at the same time by and large maintaining a reasonable standard of living. Maybe some worthwhile lessons there.

Just some nutty thinking - my apologies.

 

[FIREd]

This pretty much describes my approach. I'm not sure that laws and policies pushed me in this direction but I very much enjoy "flying under the radar" - A satisfying outward middle class lifestyle while having a sufficient net worth to sleep well at night. To me the essence of FI/ER. I think Western Europeans in particular discovered quite a while ago that presenting a nondescript low key approach to the rest of the world while having the important things in our own private world was a useful thing.

Some Western European countries have had long experience with confiscatory and overreaching governments of all kinds as well as wars, revolutions and other cataclycisms which somehow they have survived while at the same time by and large maintaining a reasonable standard of living. Maybe some worthwhile lessons there.

Just some nutty thinking - my apologies.

Your thinking is not nutty at all. I think you understand how Western Europeans think. "Flying under the radar" helps us keep the tax man at bay first of all. But many Europeans also feel ambivalent about "wealthy" people, they envy them and despise them at the same time. So I think it makes sense to downplay your wealth or at least hide it behind tall hedges.

 

[Gone4Good]

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?

Because the differences aren't as large as you allege . . .

Note: The chart says "Rates" but if you look at the actual study, what they are calculating is effective tax rateshttp://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf based on individual tax returns.

 

[Gone4Good]

The chart seems to imply that GDP growth has boomed despite attempts to throttle business (and individuals) with taxes. Either that or tax rates are the lowest in 60 years.

I'm trying to see the problem here...

Exactly.

Change the data range to FY2015 and it goes back up.

Yup, because the CBO assumes current law remains unchanged . . . meaning no ATM fix and bye, bye to the 2001 tax cuts.

 

[IndependentlyPoor]

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.

Glad you brought it up. I have been meaning to look into this.
Here are the average (I assume this means effective) tax rates by descending cohort.

and here is the share of adjusted gross income

The avg. tax rate for the top 1% went from 33% to 22% from 1986 to 2007, while their share of income went from 11% to 22%.

This doesn't capture the ability of high income folks to avoid taxes, but it is the best I have been able to do so far.

source:
Historical Returns with Positive AGI, by Descending Income Percentiles
A look at the bottom cohort next.

 

[IndependentlyPoor]

And here is the data for the bottom income percentages.
Average tax rate

Share of AGI

Source
Historical Returns with Positive AGI, by Ascending Income Percentiles
Unfortunately, the source doesn't give numbers for the bottom 1%, 5%, etc.
Maybe inconvenient for the site's politics? I dunno.

 

[IndependentlyPoor]

Here is the share of income taxes paid, by income percentage.

Historical Returns with Positive AGI, by Descending Income Percentiles

 

[jIMOh]

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


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).

I snipped a section on the bush cuts, something on that shortly...

Small business needs to flourish, not just survive, for the economy to feel the boom like it did when Clinton was President.

I hardly think that under Bush 50% of americans ("most" as you put it) were close to living a 3rd world standard of living.

If you take the poorest union workers in the USA and put them in Mexico, India or most african countries, they would probably be among the richest 75% of the people which lived there.

My #1 philosophy is keep what you earn... this is the true measure of wealth. If you see someone earning more, or saving more, it is not up to government to be the great equalizer.

Government does not need to tax the rich to redistribute to the less wealthy
Government does not need to regulate the rich (small businessman) so his competitor can compete.

Government can try to regulate the corrupt, but that just creates a new level of corruption LOL

 

[Hiredgun]

Amen Jimoh! Amen Brother.

 

[ejman]

My #1 philosophy is keep what you earn... this is the true measure of wealth. If you see someone earning more, or saving more, it is not up to government to be the great equalizer.

Government does not need to tax the rich to redistribute to the less wealthy
Government does not need to regulate the rich (small businessman) so his competitor can compete.

Government can try to regulate the corrupt, but that just creates a new level of corruption LOL

I philosophically agree with you but... be careful of what you wish for. I have lived in third world countries where basically the government is so impotent that business rules the roost with really no regulation to speak of because business can "buy" any enforcers of any rules they don't like. The end result of that is a strange world. A few have a lot and live like kings, a lot have very little. If you happen to be one of the kings great, otherwise not so good.
But even the lives of the kings are not so good. Not very pleasant to go out of your castle and have beggars trailing you constantly. Plus there is always that little unpleasantness the french uncorked in 1796 or thereabouts

 

[HFWR]

Well, depending on your leanings, we have way too much or not nearly enough government...

 

[kyounge1956]

I am not sure how to interpret the graphs. Does it mean "in 2006, the top 1% of incomes had about 23% of the money and paid about 23% of the taxes" or "in 2006, the bottom 50% of incomes had about 15% of the money and were taxed at a rate of a little under three cents for each dollar of AGI".

 

[jIMOh]

I philosophically agree with you but... be careful of what you wish for. I have lived in third world countries where basically the government is so impotent that business rules the roost with really no regulation to speak of because business can "buy" any enforcers of any rules they don't like. The end result of that is a strange world. A few have a lot and live like kings, a lot have very little. If you happen to be one of the kings great, otherwise not so good.
But even the lives of the kings are not so good. Not very pleasant to go out of your castle and have beggars trailing you constantly. Plus there is always that little unpleasantness the french uncorked in 1796 or thereabouts

I am not asking for no regulation
I am suggesting regulation is not the answer to force the wealthy back to middle class (its OK to be wealthy).

Like I said, if you regulate the corrupt, then a new breed of corruption is created. You cannot regulate corruption (really), just punish it when you find it, but otherwise don't prevent people from getting wealthy by making laws, or trying to redistribute the wealth of the rich to the less rich.

 

[IndependentlyPoor]

I am not sure how to interpret the graphs. Does it mean "in 2006, the top 1% of incomes had about 23% of the money and paid about 23% of the taxes" or "in 2006, the bottom 50% of incomes had about 15% of the money and were taxed at a rate of a little under three cents for each dollar of AGI".

I think the answer is yes to both.
In 2006 the top 1% had 22.06% of the AGI and paid an average tax of 22.79%. In the same year, the bottom 50% earned 12.51% of the income and paid just 3.01% average tax rate. Also in that year, the top 1% paid 39.89% of the FIT while the bottom 50% paid only 2.89%.

At least that is how I read it. I may well be wrong. At any rate (pun intended), I think these charts deserve some serious pondering. The share of taxes paid is drastically different, and can has been used to claim that "the rich" are paying too much, just as the share of income is drastically different and has been used to claim that the "the rich" make too much.

I just noticed that G4G's posting
http://www.early-retirement.org/forums/f28/how-to-blunt-rising-taxes-barrons-50749-4.html#post949676
was about effective rate and not top marginal rate. Just eyeballing the top 1% lines, it seems that G4G's chart agrees with mine.