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Old 07-31-2011, 04:35 PM   #21
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Is this an indication that the rich pay too much in income taxes or an indication that the rich make much, much, more income than the other 95%?
Perhaps we should not focus on what people make but rather what they spend. Frugal people have learned to live on less and therefore should pay more in taxes. Otherwise they just retire early and take up space.
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Old 07-31-2011, 04:38 PM   #22
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I think that a couple of other numbers are relevant to this discussion. I calculate that

(1) The top 10% earn 46% of all income.
(2) After taxes the top 10% still retain 42% of all after tax income.

Thus at the risk of being obvious high earners make a lot of money, pay a lot of taxes but still retain a lot of their money.

Qualitatively I think that is "fair."

High earners can afford to pay a greater percent of their income as taxes but also deserve to retain a significant part of their earnings. (How's that for hedging?)

I think that the purpose of taxes is to fund government services not equalize income. (Some of my more liberal friends disagree.)

Quantitatively, it is obviously a much more difficult and a much more contentious decision. How progressive should taxes be? What is fair? There isn't a right or wrong answer as far as I can tell.

I strongly agree with the comment that we should use a continuous equation for tax rate as a function of income (along with greatly simplifying the tax code) rather than brackets. I have always thought that the reason we don't do that is because most politicians are lawyers and most lawyers don't take a lot of math.

But my basic take on this is that taxes are not our basic problem. Government spending is not our basic problem. The problem is the difference between taxes and government spending.

To fix this I think that spending has to go down and taxes have to go up. As a start I would consider:

(1) Allowing the Bush tax cuts to expire for all brackets. (I'm in the top % or 2 of earners and have saved a lot of tax money because of this in the last decade. Obviously this is probably not a great time to do it.)

(2) Significant entitlement cuts (Medicare Part D ?)

(3) Significant (say 25%) defense spending cuts (We currently spend as much money on defense as the next 20 countries in the world combined.)
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Old 07-31-2011, 07:36 PM   #23
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As a percentage of GDP the US has very low taxes compared to other OECD countries. It is true however that wealthy Americans pay a high proportion of these relatively low taxes.
You have bought into someone's talking points here. There may be some truth to it concerning income taxes looked at in a vaccuum.

But, When you look at the "all-in" tax level on Americans that includes payroll, state, local, property, sales taxes, capital gains, estate taxes (and so on), the tax rates on Americans isn't so low.
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Old 07-31-2011, 08:19 PM   #24
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Perhaps we should not focus on what people make but rather what they spend. Frugal people have learned to live on less and therefore should pay more in taxes. Otherwise they just retire early and take up space.
Continue reading what I wrote until you grok it. It has nothing to do with socialism or whatever other demons keep you up at night.

(The statistic is misleading. It's trying to connect the total take that the rich pay -- 58% -- with what the rich pay individually. Those are 2 different numbers. It's similar to looking at the average pay of a hedge fund trader and a burger flipper and then assuming that they're both rich because the average pay is $260,000.)
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Old 07-31-2011, 08:49 PM   #25
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Two of the huge shocks that I received as I learned to invest was first the huge extent of corporate tax exemptions in various well connected industries, and second, how little investors and businesses can pay after write offs. I really feel like a schmuck that was taken when I look at my tax bites well North of forty five percent for most of my working life and compare the differences.
I don't have sympathy for investors paying more in taxes, not until they meet my percentages in taxes, and IMO they rake in the benefits for corporate welfare. Nor do I have sympathy for poor. I witness too many instances of people gaming the system to avoid work.
I know that many poor need and deserve the breaks, but honestly, when I see the hoops that able bodied people are willing to go to to avoid work, I can only go into old guy rants about what this world is coming to.
We joke in this forum about work being a four letter word, but there are people that really live their lives that way. Politics has reduced itself to become class warfare. This latest razing (intended) the debt limit put me in rant mode.
Am I wrong to feel that I and workers like me, are bearing too high percentage in taxes or are people here paying more and I am simply feeling sorry for myself for being in the same boat as everyone else?
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Old 07-31-2011, 09:19 PM   #26
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Two of the huge shocks that I received as I learned to invest was first the huge extent of corporate tax exemptions in various well connected industries, and second, how little investors and businesses can pay after write offs. I really feel like a schmuck that was taken when I look at my tax bites well North of forty five percent for most of my working life and compare the differences.

The simple solution to that part is to totally eliminate ALL corporate taxes. Those taxes are just passed onto the consumer (you & me) anyway. It would be far more efficient to drop the shell game with all its cost of compliance/avoidance. With no corp tax, we wouldn't have one corp getting favorable treatment over another.

Another way to say that, is your +45% tax rate isn't the whole picture - some of that is buried in the products you buy.

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Old 07-31-2011, 11:22 PM   #27
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I like the opposite way, tax corporations that pass the taxes on and drop our taxes to 0%.
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Old 07-31-2011, 11:45 PM   #28
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The simple solution to that part is to totally eliminate ALL corporate taxes. Those taxes are just passed onto the consumer (you & me) anyway. It would be far more efficient to drop the shell game with all its cost of compliance/avoidance. With no corp tax, we wouldn't have one corp getting favorable treatment over another.

Another way to say that, is your +45% tax rate isn't the whole picture - some of that is buried in the products you buy.

-ERD50
Agreed then the tax rates on dividends and capital gains can be raised to the same as on wages. It is far easier for a company to avoid taxes thru international efforts than an individual who must renounce citizenship to avoid US income taxes (I would also add a permanent bar to any re-entry even for medical reasons you can get as good a care elsewhere)
I wonder how much is spent trying to avoid the corp income tax?
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Old 07-31-2011, 11:55 PM   #29
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I really don't think you can measure how much a person contributes by looking at total revenue and what percentage they have paid into that. If you have 5 people all earning 5 dollars and paying 1 dollar of tax each, then each pay 20% of the total amount. But if person A would all of a sudden make 1000 dollars and then paid 16 dollars of taxes, then you would say they paid 80% of the taxes and thats not fair. But really though 80% seems high, its really a drop in the bucket for person 1. But if for some reason person 1 really wants that military expense and keep tax revenue at $20, and drop their total percent contribution back down to 20%. The the other 4 people would be forced to pay $4 out of the $5 they earn. In your analysis this is fair because they are all paying equal for to run the country. But in fact 4 out of every 5 people would be making only 1 dollar out of every 5 you earn.

This example stretches the point of view of it should be more how much as a percent of what you earn goes to taxes vs how much you totally pay for taxes.

Some people like to quote and say that 50% of america does not have to pay any income taxes and is that fair. But in reality, the are paying plenty of other taxes. What is the total tax burden that they have to pay vs the total income they have including social security, medicare, property tax, gas tax, state tax, sales tax..... Its all inclusive. There is also the amount of money necessary to live on.



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I saw the chart below, which is supposed to be from IRS numbers in 2008. I also keep hearing on the news that the "rich" should have to pay their fair share as a way to get us out of the debt/deficit crisis. From the data alone, it would seem to me that this is already happening and how much more progressive can we get with the tax code and still have some semblence of an "ownership" culture in this country?

And, I know that our tax code has a host of special interest sponsored loopholes that I think should be cleaned up. But, even with those and a couple high profile examples of rich people or companies using them to their advantage, the numbers don't lie. The rich people in this country pay for the bulk of the costs already and still seem to get villified as being greedy and selfish.

What do you think? Are the rich under or over taxed and is this rhetoric we hear a ligitimate strategy or just political trumpeting?

The top 5% of all taxpayers (income split on this group was at $159,619 in 2008) paid 58.72% of all federal individual income taxes in 2008.


Let's continue to break this down:

Top 10% (Income Split Point $113,799) Paid 69.94% of Federal Individual Income Taxes
Top 25% (Income Split Point $67,280) Paid 86.34% of Federal Individual Income Taxes
Top 50% (Income Split Point $33,048) Paid 97.30% of Federal Individual Income Taxes
Bottom 50% (Anyone Making Less Than $33,048) Paid 2.7% of Federal Individual Income Taxes
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Old 08-01-2011, 08:02 AM   #30
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The simple solution to that part is to totally eliminate ALL corporate taxes..
.

Agreed then the tax rates on dividends and capital gains can be raised to the same as on wages.
Cap Gains is still a problem, because inflation comes into play.

Say I bought a stock for $100 30 years ago, and now I sell it for $200. While that is a $100 cap gain, it took place over 30 years and didn't even keep up with inflation. It isn't 'fair' to tax that the same as $100 cap gain realized in just 2 years, or the same as income earned each year.


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I wonder how much is spent trying to avoid the corp income tax?
I think the 'fairtax.org' site may have some info on that. But consider for every dollar they spend to avoid a tax, we end up paying the tax they avoided (or add to the deficit) PLUS the cost of avoidance. It is lose-lose.

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Old 08-01-2011, 08:13 AM   #31
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Cap Gains is still a problem, because inflation comes into play.

Say I bought a stock for $100 30 years ago, and now I sell it for $200. While that is a $100 cap gain, it took place over 30 years and didn't even keep up with inflation. It isn't 'fair' to tax that the same as $100 cap gain realized in just 2 years, or the same as income earned each year.
But cap gains could be indexed for inflation. That would be more "fair" than the rough attempt at equity we accomplish by just lowering the rate for all LTCG. Another benefit--any indexing of taxes to inflation (indexing of CG, indexing of brackets, etc) provides a disincentive to DC to juice up inflation as a way to increase the number of dollars gained through taxes. That's a good thing.
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Old 08-01-2011, 08:20 AM   #32
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I like the opposite way, tax corporations that pass the taxes on and drop our taxes to 0%.
Won't that do wonders for our trade imbalances, you'd like to see another disincentive to US jobs? And your proposal would also further reduce the US taxes other countries pay on our behalf (by buying our products)...
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Old 08-01-2011, 08:31 AM   #33
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But cap gains could be indexed for inflation. That would be more "fair" than the rough attempt at equity we accomplish by just lowering the rate for all LTCG. Another benefit--any indexing of taxes to inflation (indexing of CG, indexing of brackets, etc) provides a disincentive to DC to juice up inflation as a way to increase the number of dollars gained through taxes. That's a good thing.

Agreed - and that is pretty simple arithmetic. Just adjust for time held using a table based on CPI.

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Old 08-01-2011, 08:45 AM   #34
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Cap Gains is still a problem, because inflation comes into play.

Say I bought a stock for $100 30 years ago, and now I sell it for $200. While that is a $100 cap gain, it took place over 30 years and didn't even keep up with inflation. It isn't 'fair' to tax that the same as $100 cap gain realized in just 2 years, or the same as income earned each year.
Gold is treated this way. It keeps up with inflation and yet is taxed heavily after holding for a number of years.

TIPS are also treated this way. You hold them for a long period and then the inflation adjustment is taxed as a gain.

Why should stocks get a reduced tax and not these other investment choices?
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Old 08-01-2011, 09:01 AM   #35
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Gold is treated this way. It keeps up with inflation and yet is taxed heavily after holding for a number of years.

TIPS are also treated this way. You hold them for a long period and then the inflation adjustment is taxed as a gain.

Why should stocks get a reduced tax and not these other investment choices?
No reason that I can think of. I used stock as an example of cap gains, but it holds for any cap gain. Selling gold would trigger a cap gain, right? It would be treated the same then. I don't know enough about how TIPS are taxed to comment, but it sounds like it should be adjusted if it is as you say.

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Old 08-01-2011, 10:16 AM   #36
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I favor some kind of indexing of cap gains but then taxing what remains as regular income. This would complicate Schedule D quite a bit but then again tax simplification and tax fairness do not necessarily work in the same direction.

Here is a method I have thought up over the years:

Calculate an indexed cost basis for each asset sold using an inflation factor. This factor can be capped. The indexed gain/loss is sale minus indexed cost. The nominal gain/loss is sale minus actual cost.

(1) If there is an indexed gain, then use the indexed gain for tax purposes.

(2) If there is a nominal loss, then use the nominal loss for tax purposes.

(3) If there is a nominal gain and an indexed loss, then use zero for tax purposes.

It isn't perfect, but it doesn't give away the store, either. And it discourages short-term trading (just over one year holding period) just to capture the current LTCG rate.
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Old 08-01-2011, 11:16 AM   #37
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One of the problems that I have with the 'tax the rich' mentality is that they are paying a lot and the benefits are just not there...

I am not talking about the tax breaks etc. that are given... but the services of the gvmt... IOW, the cost of the military to protect our country is basically the same for every citizen... same for most of the other gvmt entities...

This means the rich are paying a LOT more for the gvmt services they receive than the poor... heck, the poor are actually being paid by the gvmt to receive these services...

Seems like the gvmt is doing the classic 'we lose a little for every poor person, but we will make it up in volume'....
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Old 08-01-2011, 11:21 AM   #38
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As a percentage of GDP the US has very low taxes compared to other OECD countries. It is true however that wealthy Americans pay a high proportion of these relatively low taxes.
Very true, but we do not have the same level of 'social payments' that other countries do. In many countries health care is free, education is free, full retirement age to receive 'SS' is a much lower age and the unemployment safety net is substantially better.

I have several colleagues in Europe who lost their jobs to workforce reductions last year. Several were able to 'retire' at 55 and one at 52 because of the government subsidies they received from unemployment payments and by the fact that healthcare was free.
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Old 08-01-2011, 11:26 AM   #39
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Very true, but we do not have the same level of 'social payments' that other countries do. In many countries health care is free taxpayer funded, education is free taxpayer funded, full retirement age to receive 'SS' is a much lower age and the unemployment safety net is substantially better.

I have several colleagues in Europe who lost their jobs to workforce reductions last year. Several were able to 'retire' at 55 and one at 52 because of the government subsidies they received from unemployment payments and by the fact that healthcare was free taxpayer funded.
Not trying to be contentious, simply clarifying the definition of "free".
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Old 08-01-2011, 11:30 AM   #40
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Very true, but we do not have the same level of 'social payments' that other countries do. In many countries health care is free, education is free, full retirement age to receive 'SS' is a much lower age and the unemployment safety net is substantially better.

I have several colleagues in Europe who lost their jobs to workforce reductions last year. Several were able to 'retire' at 55 and one at 52 because of the government subsidies they received from unemployment payments and by the fact that healthcare was free.
Time will tell, but it appears those "free" benefits may not not reconcile with revenues in the decades ahead. Greece has begun to see it. No social programs are free...
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