Progressive Nature of Tax Code

[stephenandrew]

I thought this was interesting. From the IRS Statistics of Income Bulletin, Spring 2008.


In 2006, slightly less 4.1 million tax returns were filed with adjusted gross income of $200,000 or above. The total income reported on these forms was about $2.4 trillion. This works out to an average of about $594,000 per return. Average tax liability was $136,300. In the same year, about 37.6 million returns were filed where adjusted gross income was less than $15,000. Total income for this group was $189 billion, or an average of $5014 per return. Average tax liability: $151.

Obviously, there is a huge disparity in income. The higher earning group reported income that was about 118 times what the lower earning group reported. The higher earning group also paid taxes at about a rate of 900 times what the lower earning group paid. I knew the tax code was progressive, but never realized it was this progressive.

Disclaimer--I am not in the $200K+ group.

[OAG]

Just study this little form (for a details of how it breaks down) here: http://www.irs.gov/formspubs/article...164272,00.html

It is for 2007 but you can get the idea. Remember this is "taxable income" after all deductions, credits, exemptions, etc.

Also remember I think something like 40% of people that actually have income are not even required to file a tax return.

Sort of gives you an idea of how the "performers" in our economy are carrying a load; a load that may be getting much worse shortly,

[ladelfina]

Since $15k is barely subsistence in modern America, I have no problem with a $15k worker paying $151 in 1040 taxes..

stephen, if you wished to dig below the surface, you can find tons of regressive taxes that balance this out somewhat (sales taxes, "sin" taxes, FICA, gas and car taxes, and so forth).

Also, I can't believe you haven't come across this :
The Raw Story | Billionaire Buffett still complaining his taxes are too low
Supporting Gravel: Taxation Part I: Warren Buffett's Secretary, and The Regressive Upper End

People with high earned income do pay more percentage-wise, but the truly wealthy get to keep far more of their income as a percentage than the poorest 20%. I don't see regular people getting breaks on sales taxes too often, but I see California insisting on keeping their sales tax exemption on yachts (in the face of a $14 billion deficit).

so, err.. let's all sing:
"don't cry for me, Argentinaaa..."

[FinanceDude]

One more reason for a flat tax..........

[FIRE'd@51]

Quote:

Originally Posted by ladelfina . Also, I can't believe you haven't come across this : The Raw Story | Billionaire Buffett still complaining his taxes are too low Supporting Gravel: Taxation Part I: Warren Buffett's Secretary, and The Regressive Upper End

I question Buffett's numbers. From the 2006 Tax Tables (article you link was Oct, 2007):

Assuming secretary had an AGI of 60K, filed a single return, and did not itemize.

Taxable income = 60K - 5.15K (standard deduction) - 3.3K (one exemption) = 51.55K

Federal Income Tax = 4.22K + 25% of amount over 30.65K = 4.22K + 0.25 x (51.55 - 30.65) = 9.445K

FICA (SS/Medicare) Tax = 7.65% x 60K = 4.59K

Total Federal Tax = 9.445K + 4.59K = 14.035K

So the secretary would have paid a total of about 23% of her income in Federal Tax (not 30%) and one-third of that was FICA taxes. Her Federal income tax rate was 15.7%.

[Midpack]

Quote:

Originally Posted by ladelfina People with high earned income do pay more percentage-wise, but the truly wealthy get to keep far more of their income as a percentage than the poorest 20%.

Any evidence to support this statement? I must be stupid because I have a relatively high income and I damn sure don't get to keep "far more of my income as a percentage" as compared to those with lower incomes. My evidence aside from my own return, I have a pretty good idea what the taxes are for my 80 employees. And I'm not sure how many of the poorest 20% even pay taxes...

[eridanus]

Maybe Phil "Enron" Gramm was right.

[stephenandrew]

Quote:

Originally Posted by ladelfina . People with high earned income do pay more percentage-wise, but the truly wealthy get to keep far more of their income as a percentage than the poorest 20%. I don't see regular people getting breaks on sales taxes too often, but I see California insisting on keeping their sales tax exemption on yachts (in the face of a $14 billion deficit). so, err.. let's all sing: "don't cry for me, Argentinaaa..."

Well, I'd like to see any data you have to support that statement. Based on the same source data I sited above, the average tax rate for those returns with over $200,000 in agi is 22.91%. For those that earn < $15,0000, the comparable figure is 3.01%. So it would appear to me, atleast from a Federal income tax standpoint, the poor get to keep more of their income than the rich. No doubt it is a smaller amount, but in percentage terms it is larger. Are you thinking that all of the payroll, sales, property taxes, etc. change these figures? It could be, I just don't have any data to examine that.

[MichaelB]

Quote:

Originally Posted by stephenandrew Well, I'd like to see any data you have to support that statement. Based on the same source data I sited above, the average tax rate for those returns with over $200,000 in agi is 22.91%. For those that earn < $15,0000, the comparable figure is 3.01%. So it would appear to me, atleast from a Federal income tax standpoint, the poor get to keep more of their income than the rich. No doubt it is a smaller amount, but in percentage terms it is larger. Are you thinking that all of the payroll, sales, property taxes, etc. change these figures? It could be, I just don't have any data to examine that.

If you include payroll tax, that 3.01 - if correct - jumps to around 18%. The average rate for the high earners hardly budges because the bulk of the income is for extremely high earners and unearned income pays no payroll tax.

No tax system is fair - and most people I know feel they pay a higher burden which benefits or subsidizes others. The US, however, is particularly uneven because the political process and tax code is used to benefit a few with a massive concentration of both income and wealth.

Michael

[stephenandrew]

Quote:

Originally Posted by MichaelB If you include payroll tax, that 3.01 - if correct - jumps to around 18%. The average rate for the high earners hardly budges because the bulk of the income is for extremely high earners and unearned income pays no payroll tax. No tax system is fair - and most people I know feel they pay a higher burden which benefits or subsidizes others. The US, however, is particularly uneven because the political process and tax code is used to benefit a few with a massive concentration of both income and wealth. Michael

Ok, fair enough, but 18% is still lower than 22.91%, so I am still not seeing how this benefits the "few"--they still appear to be paying a higher rate

[NW-Bound]

The link that Ladelfina included shows Buffet paying only 17.7%.

I don't think any of our forum members can qualify as the "truly rich". We may be good wage earners, but the truly rich get their income from dividends and capital gains, and those are taxed at lower rates. Am I missing something? Another obscure tax code that cancels out the above?

One more reason for flat tax. Income is income ...

[ladelfina]

All the states are different, but I found a few things here:
On the D.C. Tax Burden Report
at the state/local level taxes went from between 7-8% for everyone in '97.. to 9.5% for those making $150+k and over 12% for those making $25k in 2005. Between 03 and 05 all went up except the $150k+ which went down.

Washington state:

Quote:

The wealthiest one percent of Washington taxpayers—with average incomes of $1.6 million—pay only 3.3% of their income in Washington state and local taxes. After accounting for tax savings from federal itemized deductions the effective rate becomes just 3.2%. # Middle-income Washington taxpayers earning between $31,000 and $48,000 pay 11.1% of their income in Washington state and local taxes, almost three and a half times the effective rate of the very wealthy. # But Washington families earning less than $17,000—the poorest fifth of Washington non-elderly taxpayers—pay a whopping 17.6% of their income in state and local taxes, more than five times the rate on the best off. The study found that Washington’s taxes are so extremely regressive because the state lacks an income tax and instead relies primarily on regressive sales and excise taxes to pay for public services.

http://www.itepnet.org/wp2000/wa%20pr.pdf
this is a 2003 report


Here's a good (yet a bit goofy take on it) I came across..

Quote:

Follow the money. Why should the rich pay more? Some say, for the same reason reason John Dillinger robbed banks: because that's where the money is. There is some logic to that, the richest 2% control in the ballpark of 40% of the private wealth in the USA. [note: this is ten years old or more, so we need to update this to 1% and 50%] Others say; "Because they can afford it." Others who complain about progressive taxes say it's because people want "revenge on the rich", or it's "class envy". Or they say, "Why should the successful people be penalized?" That is an interesting take on reality. But there is one argument that is not often seen, the "follow the money", or follow the tax money argument. Simply put, it says you get what you pay for. It says that if you eat a gourmet meal, you have purchased an entire different meal (not just more of it) than for a McDonald's Happy Meal. We claim that progressive taxes buys Rich Boy toys, regressive taxes buy Poor Boy toys. We say fair is fair. To test this idea, we follow the tax money. Progressive taxes (such as income taxes) pay mostly for Rich Boy toys: Desert Storm, Cold War, gunboat diplomacy, the Fed's infinite labor pool (WANTED: unemployment) and any related poverty, NAFTA, GAT, free trade agreements, interstate freeways, National Parks, FBI, CIA, a hot-shot standing military, etc. And regressive taxes: (mostly local sales taxes and fees) go for Poor Boy toys: local roads, hospitals, schools, local parks, libraries, cops, city/county councils, fire fighting, etc. If "toys" sounds too flippant, feel free to swap with a term that rings true for you, such as "tools of the trade", or "economic infrastructures." To oversimplify a bit, a carpenter does not require the Rich Boy toys, and the CEO of GM does not require the Poor Boy toys. And progressive (mostly federal income) taxes soak the rich, regressive (mostly local sales) taxes soak the poor. So each Boy is largely paying for his own meal. Libertarians often argue: TAX IS THEFT! It's human nature to overestimate one's own powers and to undervalue the help we have received. The toys. Perhaps taxes are like any other transaction. A bundled transaction. When you buy a set of tires or a meal at a restaurant, you are paying for employee theft, drunk employees, security, air conditioning, accountants, and stupid business moves, etc. that you may disapprove of, bundled into the cost of doing business and it's not on your invoice. Bottom line: nobody is forcing you to buy the tires or the meal. Your choice. You can live like a hermit in a shack, eating roots. If you do not consume the toys, likely you will be poor and owe no taxes. But once you have eaten and grown fat you are now in debt. There is no free lunch. Some say that the American meal is the best meal in the world. If you have eaten of it, pay your debts, and don't try and sneak out the back door. ... Beware of the so-called tax cut. The tax cut is a funny way of managing a household. It's like deciding that you are spending too much money, so you ask your boss for a wage cut. Perhaps the best way to stop spending too much money is to stop spending too much money. What an idea! Fix or cut the wasteful programs. Sometimes a tax cut is not really a tax cut. That's because there is no free lunch. If a needed program is blindly defunded, then the money has to come from somewhere. Often if it's a federal program that is defunded, the slack is taken up by local (largely regressive) taxes. What we have is not a tax cut, but a tax shift, from the Rich Boys debt onto the Poor Boy's shoulders. In 1996 a federal across-the-board "tax cut" was popular in certain circles. Here is how cutting progressive (income) taxes might have affected you: If you made 36K, Dole's 15% "cut" takes $320/year less from you. But if local sales taxes edge up 1% to make up, you just lost money. Beware of the free lunch. While most Rich Boys don't want the Poor Boys to shoulder their debts, keep in mind that for many of the very Rich Boys, that's part of their job. That's just simple economics.

Regressive, Progressive taxes/taxation explained.

---
also... verrry interesting and an aspect nowhere to be found in the above figures:
http://www.npr.org/templates/story/s...oryId=10991519
I didn't listen to the story yet, but here's the salient point from the blurb

Quote:

A pair of $3 canvas sneakers has the single highest tariff in the United States: 67 percent. But $12 sneakers are assessed 37 percent, and for $300 Italian leather imports, there's no tariff at all. Why are tariffs higher on the shoes that poorer people buy?

---
let's see what has happened to the bill (HR 3934) proposed by the Rep. in the story to remove the high tariffs on cheap shoes:
http://www.congress.gov/cgi-bin/bdqu...p/~bdDVbs:@@@X

Quote:

Latest Major Action: 10/23/2007 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

looks kinda stalled.

---
even more interesting:
http://www.ppionline.org/documents/T...x_the_Poor.pdf

Quote:

Spoons made from precious metals have a tariff of 4.2 percent. By contrast, spoons imported for 25 cents or less apiece face a 14 percent tariff. Silver-plated forks and knives face no tariffs at all.Tariffs on sets of table china valued below $56 are 26 percent. Tariffs on very expensive porcelain sets of plates and cups—those worth more than $200—are only 6 percent. Tariffs on drinking glasses, if they are worth more than $5 each, are 3 percent; if they cost less than a dollar, the rate is 16 percent.5

etc. etc. ..
Since most of what Americans buy is imported this is a huge systemic discrepancy in the hidden taxes people are paying for cheap goods vs. luxury ones. As the radio piece stated, this was supposed to protect American jobs but has obviously failed. It's still unclear why, if there are tariffs at all, that only the lower-priced goods are targeted. Don't we want high-end stuff to be made in USA, too? Anyway.. interesting, I thought.
And if you bother to look at the PDF, it's also interesting that the countries paying the most tariffs are the poorest countries as well, since they make the low-end stuff. For example,

Quote:

Mongolia $390 $0.143 billion $23 million 16.1% Norway $33,470 $5.173 billion $24 million 0.5% Bangladesh $370 $2.353 billion $331 million14.1% France $24,170 $30.023 billion $330 million 1.1%

First # is per capita income, second is total exports to US, third is total tariff paid, and last is percent of transaction paid in tariffs.

So we are taxing Bangladesh and Mongolia ten times more than France and Norway and at the same time creating costlier low-end goods for low-end consumers in the US. Win-win...

[FANOFJESUS]

Quote:

Originally Posted by stephenandrew I thought this was interesting. From the IRS Statistics of Income Bulletin, Spring 2008. In 2006, slightly less 4.1 million tax returns were filed with adjusted gross income of $200,000 or above. The total income reported on these forms was about $2.4 trillion. This works out to an average of about $594,000 per return. Average tax liability was $136,300. In the same year, about 37.6 million returns were filed where adjusted gross income was less than $15,000. Total income for this group was $189 billion, or an average of $5014 per return. Average tax liability: $151. Obviously, there is a huge disparity in income. The higher earning group reported income that was about 118 times what the lower earning group reported. The higher earning group also paid taxes at about a rate of 900 times what the lower earning group paid. I knew the tax code was progressive, but never realized it was this progressive. Disclaimer--I am not in the $200K+ group.

I earn a little more than 15k but if you give me a job for 594,000. I will gladly pay taxes of 136,300 and give you a 5k tip.

[Texarkandy]

Quote:

Originally Posted by rec7 I earn a little more than 15k but if you give me a job for 594,000. I will gladly pay taxes of 136,300 and give you a 5k tip.

Well, as long as we are giving out incomes - I'll take one for 10 million a year & you can tax me 8 million.

Therein lies the buy-in by much of America to progressive taxation. That anyone wealthier than them has been "given" more money, so they should appropriately punished.

[Shawn]

Quote:

Originally Posted by rec7 I earn a little more than 15k but if you give me a job for 594,000. I will gladly pay taxes of 136,300 and give you a 5k tip.

Cute, but no one is going to "give" you a job for $594K.

Currently, my salary is a little over $180K/yr. While that doesn't make me rich, it's still a good income. But no one gave it to me. I've earned every penny of it through career choices and hard work. In the 17 years I've been with my employer, I've taken 10 days of vacation. I've never taken a day of sick leave. On a typical weekday, I leave for work at 7 am and don't get home until 8 or 9 pm. I'm fortunate to have only a 15 minute commute by bicycle. This morning, I was in my office at 5:30 am because something had to be done by 8. And I was at work until 11 last night. This is not unusual. (Yes, I'm wasting time on the internet right now.) When I'm not handling the hundreds of emails I receive each day, I'm often in worthless meetings. I generally take it easy on the weekends, perhaps working 4-5 hours on both days. Evenings, weekends, and holidays are the only time for productive work. And I do a lot of it. As a non-academic research scientist, I have over 30 peer-reviewed journal publications. I've licensed software to other companies and organizations. I was PI or co-PI on about $8M in proposals last year. I've been interviewed on local/national television 8 times (?) during my career. I've been on the Discovery Channel. Depending on how you count, I supervise about 20 other scientists, engineers, and technicians. I sacrifice and the sacrifice has a cost. I often wake up with dread in the middle of the night with thoughts of work (funding, personnel conflicts, being yelled at, competition, never ending bureaucracy, one problem after another, etc).

I'm not complaining. These are the choices I've made. But I work for every penny I earn. But that work has limits. I'm not in it for the government or the benefit of mankind. I'm in it for myself. People with higher incomes have higher incomes because they work for it. And I guarantee you. The more the government takes, the less they're going to work.

My total marginal tax rate is almost 50% (federal, state, SS, medicare, etc). What incentive do I have to continue working when such a high fraction of my effort goes to taxes. I'll turn 50 next year and be eligible to retire with lifetime medical benefits. Why should I continue to be a productive member of society when it's much easier to be a leech. The IRS has lost this worker. Let other poor saps foot the government tax bill. I'm going to Disneyland.

[Hamlet]

I'm not disagreeing with anything you said.

I just want to point out that SS does not factor into your marginal tax rate, since your income is beyond the limit for SS taxation.

Quote:

Originally Posted by Shawn Cute, but no one is going to "give" you a job for $594K. Currently, my salary is a little over $180K/yr. While that doesn't make me rich, it's still a good income. But no one gave it to me. I've earned every penny of it through career choices and hard work. In the 17 years I've been with my employer, I've taken 10 days of vacation. I've never taken a day of sick leave. On a typical weekday, I leave for work at 7 am and don't get home until 8 or 9 pm. I'm fortunate to have only a 15 minute commute by bicycle. This morning, I was in my office at 5:30 am because something had to be done by 8. And I was at work until 11 last night. This is not unusual. (Yes, I'm wasting time on the internet right now.) When I'm not handling the hundreds of emails I receive each day, I'm often in worthless meetings. I generally take it easy on the weekends, perhaps working 4-5 hours on both days. Evenings, weekends, and holidays are the only time for productive work. And I do a lot of it. As a non-academic research scientist, I have over 30 peer-reviewed journal publications. I've licensed software to other companies and organizations. I was PI or co-PI on about $8M in proposals last year. I've been interviewed on local/national television 8 times (?) during my career. I've been on the Discovery Channel. Depending on how you count, I supervise about 20 other scientists, engineers, and technicians. I sacrifice and the sacrifice has a cost. I often wake up with dread in the middle of the night with thoughts of work (funding, personnel conflicts, being yelled at, competition, never ending bureaucracy, one problem after another, etc). I'm not complaining. These are the choices I've made. But I work for every penny I earn. But that work has limits. I'm not in it for the government or the benefit of mankind. I'm in it for myself. People with higher incomes have higher incomes because they work for it. And I guarantee you. The more the government takes, the less they're going to work. My total marginal tax rate is almost 50% (federal, state, SS, medicare, etc). What incentive do I have to continue working when such a high fraction of my effort goes to taxes. I'll turn 50 next year and be eligible to retire with lifetime medical benefits. Why should I continue to be a productive member of society when it's much easier to be a leech. The IRS has lost this worker. Let other poor saps foot the government tax bill. I'm going to Disneyland.

[kumquat]

Quote:

Originally Posted by ladelfina if you wished to dig below the surface, you can find tons of regressive taxes that balance this out somewhat (sales taxes, "sin" taxes, FICA, gas and car taxes, and so forth).

Seems to me that "sin" taxes are discretionary. No one has to pay them.

[Hamlet]

He's counting both halves of FICA. Remember, your employer is forced to pay the same FICA as you are to have you as an employee. If you're self-employed, you have to pay both halves yourself.

FICA really amounts to a 15.3% tax, most of which is only applied to low and middle income earners. FICA is basically meaningless to Buffett.

Buffett benefits from the very low tax rate on dividends. Of course, the argument can be made that the corporate income tax is really an additional tax on dividends, since it reduces companies' earnings and ability to pay dividends.

Quote:

Originally Posted by FIRE'd@51 I question Buffett's numbers. From the 2006 Tax Tables (article you link was Oct, 2007): Assuming secretary had an AGI of 60K, filed a single return, and did not itemize. Taxable income = 60K - 5.15K (standard deduction) - 3.3K (one exemption) = 51.55K Federal Income Tax = 4.22K + 25% of amount over 30.65K = 4.22K + 0.25 x (51.55 - 30.65) = 9.445K FICA (SS/Medicare) Tax = 7.65% x 60K = 4.59K Total Federal Tax = 9.445K + 4.59K = 14.035K So the secretary would have paid a total of about 23% of her income in Federal Tax (not 30%) and one-third of that was FICA taxes. Her Federal income tax rate was 15.7%.

[Pete]

Quote:

Originally Posted by stephenandrew The higher earning group also paid taxes at about a rate of 900 times what the lower earning group paid.

I look at this very different from most people. The rich in this country are soooooo rich they can afford to pay 900 times the tax the poor pay, and still get richer. WOW.

[haha]

Quote:

Originally Posted by NW-Bound The link that Ladelfina included shows Buffet paying only 17.7%. I don't think any of our forum members can qualify as the "truly rich". We may be good wage earners, but the truly rich get their income from dividends and capital gains, and those are taxed at lower rates. Am I missing something? Another obscure tax code that cancels out the above? One more reason for flat tax. Income is income ...

I am not rich, but I get all my income from dividends and capital gains, and I pay a lot of tax. I am frequently confused by forum members who talk about good upper middle class lifestyles and very low tax rates.

The only way I can see that this can be is if one saved all his/her capital, and was not particularly successful at growing it from investing.

The other thing I don't remember seeing mentioned is that many stealth taxes are based on AGI- the amount you pay for Medicare, your deduction thresholds, front page deductibility of student loan interest, various credits, etc., etc. So sources of income are not differentiated- you are paying the same rate no matter how the income is classified.

Everyone should pay tax; in a democracy it is the only way to prevent unholy alliances of demagogues and non-productive people from robbing those who do succeed.

Ha