Scoring of "Millionaires Tax" proposal only brings in $47B over 10 years

[MasterBlaster]

The Millionaires tax when scored by an impartial entity brings in much much less than had been suggested by many. Considering all the media attention this topic gets it hardly is evn worth talking about.

Buffett millionaires tax to raise $47 billion: report - Yahoo! Finance

 

[ziggy29]

I look at issues related to taxing and spending a lot like the health care debate. No single thing we could do to fix the mess will do much "in a vacuum" (in and of itself) but together with a number of other initiatives they can collectively make a difference.

 

[harley]

Interesting. I read the AP article yesterday and they were saying it was $31B over 11 years. Today the same article says $47B over a decade. Obviously there's still some question. But at $3B or $4B/year against our multi-trillion dollar deficit, we're talking spillage. I think they might have to consider some other solutions. Too bad, those rich guys were such a juicy target.

 

[Independent]

I look at issues related to taxing and spending a lot like the health care debate. No single thing we could do to fix the mess will do much "in a vacuum" (in and of itself) but together with a number of other initiatives they can collectively make a difference.

+1

 

[martyp]

As Ziggy29 says, every little bit helps. I also thinks "fairness" figures into overall compliance. Everyone is going to be more willing to pay what they owe if they think everyone is paying their fair share. If most people think higher income earners are shielding their income with tax benefits then it is more likely that average people are going to try to find ways to skirt taxes by not declaring tips, getting paid in cash, lying on their returns, etc.

 

[Independent]

The Reuters story doesn't have a link. I went to the Joint Committee on Taxation website Joint Committee on Taxation and didn't see any release dated March 20.

I looked because I recalled that the top 400 tax returns had about $100 billion in AGI, and paid an average rate of 18%. So if that rate went to 30%, I'd expect an additional $12 billion in annual taxes from just those 400 returns.

It seems that the proposal isn't that simple, but I don't know what accounts for the big difference in estimates.

http://www.irs.gov/pub/irs-soi/08intop400.pdf

 

[samclem]

As Ziggy29 says, every little bit helps. I also thinks "fairness" figures into overall compliance. Everyone is going to be more willing to pay what they owe if they think everyone is paying their fair share. If most people think higher income earners are shielding their income with tax benefits then it is more likely that average people are going to try to find ways to skirt taxes by not declaring tips, getting paid in cash, lying on their returns, etc.

You may be right, but I doubt that tax cheating by lower-income people is much affected by what rich people do on their taxes. That may be how people rationalize their theft, but I'd guess actual behavior is more influenced by the honesty of the individual, the availabilities of opportunities to cheat, the perceived likelihood of getting caught, and the penalties for getting caught.
I'd say the best way to promote "fairness" is to reduce/eliminate credits, deductions, and other (legal) ways that income leaks around taxation. And aggressively seek out and prosecute cheaters. The less enforcement we do, the more the tax burdens shifts to honest people. Edited to add: Including honest early retirees.

 

[ERD50]

As Ziggy29 says, every little bit helps.

This is a parallel to the 'every little bit helps' approach that is addressed with respect to the environment in that "Without the Hot Air" publication.

It's fine to help a little bit, but we need to recognize that is what it is - a little bit, nothing more. If not, it might cause unrealistic expectations, and other meaningful actions are not taken, after all, we 'solved' that problem!

When we hear a political speech on the economy that mentions 'tax benefits for corporate jets' 12 times, one should expect that the effect should have that kind of weighting on the economy. But it probably isn't even a small drop in a bucket.

I also thinks "fairness" figures into overall compliance. Everyone is going to be more willing to pay what they owe if they think everyone is paying their fair share. If most people think higher income earners are shielding their income with tax benefits then it is more likely that average people are going to try to find ways to skirt taxes by not declaring tips, getting paid in cash, lying on their returns, etc.

+2. Regardless of the impact, our individual and corporate tax codes need to be drastically overhauled and greatly simplified - though I'm not holding my breath. ...

Agreed. IMO, until we can answer with a reasonable range the simple question "How much Federal Income Tax does a person who made $1,000,000 (or $100,000 or any other number) pay?", I think it is just too slippery to even talk about. We can't even agree on what 'income' is. Which is why, in theory at least, I'm in favor of a National Sales tax with pre-bate. I do think spending is a better measure of ability to pay taxes than just about anything else. But it ain't gonna happen anyhow.

-ERD50

 

[MichaelB]

This thread is interesting but should be related in some way to financial independence or early retirement.

 

[MasterBlaster]

This thread is interesting but should be related in some way to financial independence or early retirement.

We all pull down over $1MM a year now.

don't you too ?

 

[ERD50]

We all pull down over $1MM a year now.

don't you too ?

Not me Thanks for rubbing it in

But it sure would help my retirement if those that do could pay all my taxes for me. I don't think that math works though. But 'every little bit helps', so I'll take a little bit if I can get it, and that should help my portfolio longevity 'a little bit'. As we know from FIRECALC runs, 'a little bit' can mean a lot over a 30-40 year period.

-ERD50

 

[M Paquette]

IMO, until we can answer with a reasonable range the simple question "How much Federal Income Tax does a person who made $1,000,000 (or $100,000 or any other number) pay?", I think it is just too slippery to even talk about. We can't even agree on what 'income' is. Which is why, in theory at least, I'm in favor of a National Sales tax with pre-bate. I do think spending is a better measure of ability to pay taxes than just about anything else. But it ain't gonna happen anyhow.

Heh. Having just completed my Federal 1040 & Friends, 70-odd pages of forms and worksheets, I think I can say with some confidence that raising rates on just about any of the high earners won't have a significant revenue impact. There are just too many nifty little carve outs and exceptions in the tax code. I personally wasn't as aggressive with this the past year, and am paying the price by having to send the US Treasury a check this year. My effective tax rate went positive, to the princely rate of about a half percent. I knew I should have threatened to plant sugar beets in the back yard!

A National Sales Tax would definitely capture more from me. Therefore, I'd have to sic Grover on any Congresscritters that proposed this. He may be cute and furry, but he's got a bite!

 

[martyp]

Agreed. IMO, until we can answer with a reasonable range the simple question "How much Federal Income Tax does a person who made $1,000,000 (or $100,000 or any other number) pay?"

-ERD50

I'll throw this out there to stimulate discussion. Instead of worrying about amount or rate the wealthy should pay maybe we should just think about what they have left after taxes. Should anyone care if they pay a 90% rate if they still have a hefty sum left over?

 

[traineeinvestor]

I'll throw this out there to stimulate discussion. Instead of worrying about amount or rate the wealthy should pay maybe we should just think about what they have left after taxes. Should anyone care if they pay a 90% rate if they still have a hefty sum left over?

OK, I'll bite (and try to keep it related to personal finance ).

I think we should care. As tax rates edge higher, leaving aside the greater incentive to cheat, you would also expect to see capital being allocated in a manner which reduces the tax burden. Historically, this has often resulted in capital being diverted from income producing businesses where profit is realised on a regular basis (and therefore subject to the higher tax) to investments where all or part of the profit is not realised until much later (or possibly never) - real estate and collectables are the classic examples.

So if we see much higher taxes, I'd think about changing my asset allocation - fewer taxable bonds and high dividend stocks and more low or no income stocks, real estate and possibly collectables and commodities.

I'd also expect to see a lot of lobbying for tax shelters and polticians being tempted to give various forms of relief from the high rates of taxation to "important" or "strategic" industries - again creating incentives that will affect capital allocation decisions.

Yes, I'm aware that we already have a lot of this going on but the point is that as tax rates drift higher, the expected effect of these distortions becomes greater.

 

[ERD50]

I'll throw this out there to stimulate discussion. Instead of worrying about amount or rate the wealthy should pay maybe we should just think about what they have left after taxes. Should anyone care if they pay a 90% rate if they still have a hefty sum left over?

Wow. That's a really BIG question. Not sure I should even attempt to tackle it. Let's see...

traineeinvestor said 'leaving aside the greater incentive to cheat', but for me this is huge. 90% rates are a huge motivation to cheat (and I'll include successful lobbying for specific tax breaks as 'cheating'). Cheating creates all sorts of problems, and then my personal tax rate goes up to comp for the cheaters, and affects my FIRE status.

And who is to decide what is a 'hefty sum'? Maybe you have a small business, you apply some very unique skills, and work your rear off, and this business has the chance of a huge payoff - for a few years only. So your plan is to try to attain that big pay-off, and then hold that big pay-off to support yourself modestly for the rest of your life. Someone else is a 'wage-slave' for 45 years. But you say we can't have this choice or diversity - take the money from that 'rich guy'. What if the rich guy adopts a dozen special needs children, and uses his fortune to make a better life for them? Or he wants to 'blow it'? Who are we to decide this?

Nope, I don't like 'wealth' taxes. Too subjective for me. I prefer the sales tax approach. Nothing is perfect, nothing will be seen as 'fair' by all, but I do think that a persons propensity to spend is a better measure overall for their ability to pay (and I do think some form of progressive taxation is required, as a practical matter).

Closer to home, a wealth tax would likely make it impossible for many of us to ER. I don't think I should be penalized for my efforts to scrimp and save, relative to someone else making the same income, but never saving.

-ERD50

 

[Texas Proud]

I also think that people who propose a national sales tax are not thinking it through as much.... people who are making that kind of money are not spending it as much as some think... I doubt the sales tax would hit them as hard as the middle class....

 

[samclem]

I also think that people who propose a national sales tax are not thinking it through as much.... people who are making that kind of money are not spending it as much as some think... I doubt the sales tax would hit them as hard as the middle class....

I wouldn't conclude that someone is "not thinking it through," maybe the framework needs to be adjusted a bit.

A sales tax is not "hitting them as hard" only if we remain in the mindset that we ought to be taking a certain percent of their income. We should re-examine that. Step back and instead accept the sales tax for what it is--taxing consumption. Everyone's consumption would be taxed the same (well, actually the poor would be taxed much less under the "prebate" arrangement of the most talked-about plan). If a person wants to keep plowing money back into his business and employing people, making the nation more wealthy, etc, that's a net benefit to everyone. As wealth is created those folks will be spending money, and the people who buy his products/services will also be spending money, so the taxes will still come in. The same thing goes for people who invest in bonds, stock, etc: They are adding to productivity (by making capital available for businesses).

Productivity is what makes us wealthy. Consumption doesn't make us wealthy.

All taxes "warp" the market and discourage some behaviors while encouraging other behaviors. So, since this is going to happen anyway, it may make sense to avoid taxing the activities that increase overall wealth--of everybody.

But, the national sales tax is a nonstarter from a political standpoint. It's too hard to explain, and the candidates who ran on it got clobbered. I don't think you need to worry about it.

 

[Texas Proud]

I wouldn't conclude that someone is "not thinking it through," maybe the framework needs to be adjusted a bit.

A sales tax is not "hitting them as hard" only if we remain in the mindset that we ought to be taking a certain percent of their income. We should re-examine that. Step back and instead accept the sales tax for what it is--taxing consumption. Everyone's consumption would be taxed the same (well, actually the poor would be taxed much less under the "prebate" arrangement of the most talked-about plan). If a person wants to keep plowing money back into his business and employing people, making the nation more wealthy, etc, that's a net benefit to everyone. As wealth is created those folks will be spending money, and the people who buy his products/services will also be spending money, so the taxes will still come in. The same thing goes for people who invest in bonds, stock, etc: They are adding to productivity (by making capital available for businesses).

Productivity is what makes us wealthy. Consumption doesn't make us wealthy.

All taxes "warp" the market and discourage some behaviors while encouraging other behaviors. So, since this is going to happen anyway, it may make sense to avoid taxing the activities that increase overall wealth--of everybody.

But, the national sales tax is a nonstarter from a political standpoint. It's too hard to explain, and the candidates who ran on it got clobbered. I don't think you need to worry about it.

I have to admit that I wrote that last night with my wife talking in my ear...


But, since it was brought up in a thread about taxing millionaires I was addressing my comment more toward that instead of a VAT tax in general... IOW, if someone is paying 18% of his income as income taxes, adopting a VAT tax with the probable reduction in income taxes would not bring in that much more money from him.... I would think that it would be the same for most millionaires....

And passing a VAT tax without major reductions in income taxes have even less chance of passing than even what you mentioned....

 

[Independent]

I finally found the JCT report - http://online.wsj.com/public/resources/documents/buffettrule20120321.pdf

As always, the devil is in the details. In this case, there seem to be two.

1) The first detail is the "baseline". Under current law, the maximum tax rate on capital gains and qualified dividends is 15%. Hence, very wealthy individuals, who get most of their income from these sources, have average FIT rates of 18%.

IF the 2001 and 2003 tax cuts expire, the rates will go to 20% for CG and 39% for dividends. In addition, IF Obamacare survives, there will be a 3.8% Medicare tax on both.

So the Millionaires tax minimum of 30% doesn't raise (30%-15%) on cap gains, but only (30%-23.8%). Furthermore, it doesn't raise any money on dividends, in fact, the excess dividend taxes above 30% cut into the Millionaires tax on CGs, reducing the calculated impact of the Millionaires tax.

So, IF you believe the other tax increases will go into effect, then the additional impact of the Millionaires tax is $47 billion. And, IF those other increases don't make it through Congress, then the Millionaires tax is much more important.

2) The second detail is a dynamic factor. They quote a cap gains elasticity of -0.7. I believe they mean that an increase in the tax rate from 23.8% to 30.0%, which is 6.2%, results in a reduction in reported cap gains of 4.3%.
This means that the actual increase in tax collected is about 4.9% instead of 6.2%.

Of course, the question is "what happened to those capital gains?" Did they get shifted to interest paying investments and taxed there? Were they simply deferred a few years, so some of them drop out of the 10 year window but will be paid anyway? A lot of "capital gains" are just earned income manipulated into a new tax category (e.g. hedge fund manager bonuses), how do those disappear? There's always the question of how far you take the dynamic analysis.

 

[MasterBlaster]

Of course, the question is "what happened to those capital gains?" Did they get shifted to interest paying investments and taxed there? Were they simply deferred a few years, so some of them drop out of the 10 year window but will be paid anyway? A lot of "capital gains" are just earned income manipulated into a new tax category (e.g. hedge fund manager bonuses), how do those disappear? There's always the question of how far you take the dynamic analysis.

Don't assume that increasing taxes won't change people's behavior. By pushing rates higher, we are disincentivizing capital formation. I believe that's what the elasticity refers to. Higher taxes ultimately mean some degree of lower economic activity.

Also, what is left unsaid in this discussion is that with lower capital formation levels due to tax dis-incentives come lower levels of employment and lower private-sector benefit. In other words, if the government takes more the private sector gets less. And the lessor amount left over isn't only taken from the wealthy.

 

[ronocnikral]

so, this is the "other side of the aisle" playing the same card when someone mentions cutting a program or what not. They usually proclaim, "that is only 5% (or some small insignificant amount) of the budget" and we all keep our nose to the grindstone instead of fixing something. Quantity isn't a stand alone indicator for what is good or bad, right or wrong.

 

[MasterBlaster]

so, this is the "other side of the aisle" playing the same card when someone mentions cutting a program or what not. They usually proclaim, "that is only 5% (or some small insignificant amount) of the budget" and we all keep our nose to the grindstone instead of fixing something. Quantity isn't a stand alone indicator for what is good or bad, right or wrong.

No it isn't.

What this means is that soaking the rich won't do it. Ultimately it will be the middle class that pays more to and gets less from their government.

The concept that if only we'd make those rich pay more then life would get back to normal isn't valid.

 

[ERD50]

... IOW, if someone is paying 18% of his income as income taxes, adopting a VAT tax with the probable reduction in income taxes would not bring in that much more money from him.... I would think that it would be the same for most millionaires....

But I don't know if that would be true or not.

In any given year, a wealthy person might sell some non-appreciated asset (and/or do some tax loss harvesting) - zero FIT taxes due, but maybe they spent $1M that year. Another year they might sell and spend $1M in assets they bought 13 months ago at a $900K cost basis - nice ~ 10% annual gain, but they will only pay LT cap gains rates on 10% of what they spent. Some fraction of 10% is going to be lower than the NST rates that have been floated around.

On average, with careful tax handling, I'm just not sure they would less with NST versus FIT.

-ERD50

 

[Texas Proud]

But I don't know if that would be true or not.

In any given year, a wealthy person might sell some non-appreciated asset (and/or do some tax loss harvesting) - zero FIT taxes due, but maybe they spent $1M that year. Another year they might sell and spend $1M in assets they bought 13 months ago at a $900K cost basis - nice ~ 10% annual gain, but they will only pay LT cap gains rates on 10% of what they spent. Some fraction of 10% is going to be lower than the NST rates that have been floated around.

On average, with careful tax handling, I'm just not sure they would less with NST versus FIT.

-ERD50

True, using this as an example would show less taxes... but both would not be earning a million dollars... also, how long can someone spend $1 million per year without earning something I would bet that this is an extreme example and not like the vast majority of rich folks... I also do not think we should make tax policy to try and 'get' the few who can do what your example shows...

 

[Independent]

Don't assume that increasing taxes won't change people's behavior. By pushing rates higher, we are disincentivizing capital formation. I believe that's what the elasticity refers to. Higher taxes ultimately mean some degree of lower economic activity.

Also, what is left unsaid in this discussion is that with lower capital formation levels due to tax dis-incentives come lower levels of employment and lower private-sector benefit. In other words, if the government takes more the private sector gets less. And the lessor amount left over isn't only taken from the wealthy.

That's the theory, but I can't find any evidence to support it.

The best I've found is this: Amazon.com: Does Atlas Shrug? The Economic Consequences of Taxing the Rich (9780674001541): Joel B. Slemrod: Books which is a collection of research papers on different aspects of tax driven behavior.

IIRC, the answer is that people will ...
1) ... change timing. If cap gains rates are scheduled to go up on 1/1/2013, you can bet there will be more cap gains harvested in the last few months of 2012 than in the first few months of 2013.
2) ... change labels. If cap gains pay lower rates than earned income, hedge fund manager bonuses will become "capital gains". If the rate differential reverses, they will become "earned income".
3) .... not change their actual income producing behavior enough for standard economic tools to pick it up. In theory somebody is making some change somewhere, but it's not common enough to see. The support for "hardly at all" is pretty well documented for wage earners where it's easier to get data. It's more difficult to get good data on investments, but the general statement still seems true.

Then the next step is whether any additional saving/investing by the rich actually benefits anybody else (especially after the tax shift). Certainly, the people doing the investing expect to reap the benefits, they aren't doing that for charity. Does the market force them to share their gains, and if so, how much? Just at a gross level, we've generally had lower cap gains rates since Reagan than before, yet the median worker's income went up noticeably before 1980 and has been pretty stagnant since. That's not proof that the benefits will always get stuck at the top, but it is proof they don't always get spread around.