"The Rich Should Pay Their Fair Share"

[devans0]

Recently, I have been reading about legal tax dodges. One that I thought was interesting involved creating a dummy corporation overseas, declaring the money on this offshore account, shielding it from US taxes, then repatriating the money. Some of our best known lawmakers use this ruse. Raising taxes is only part of the problem. Artful dodgers are a deeper problem.

 

[ChiliPepr]

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...

While you may be right the the cost to protect the country is the same for each citizen, the rich have much more to "protect".

 

[Lisa99]

Recently, I have been reading about legal tax dodges. One that I thought was interesting involved creating a dummy corporation overseas, declaring the money on this offshore account, shielding it from US taxes, then repatriating the money. Some of our best known lawmakers use this ruse. Raising taxes is only part of the problem. Artful dodgers are a deeper problem.

Artful dodgers is what got Willie Nelson in hot water (via his very expensive tax accountants at a top 5 acct firm) and Enron, among many others....no thank you on the dodge, I'll pay my taxes and sleep well at night.

 

[Gatordoc50]

I'm going to try to look at this beyond the purview of politics and current events and look at it from the standpoint of history, sociology, political science and philosophy.

I guess I'd go beyond discussion of the word "fair" and suggest a different way to look at it -- what's in the best interests of the long-term sustainability of our system and of providing economic and political stability to the republic.

To me that's at least part of the justification of a progressive income tax; regardless of the "fairness" issue it seems to me that many nations (and empires) have been been toppled because the distribution of wealth became too concentrated. Witness France in 1789, Russia in 1917 and Cuba in 1959 among other examples (the latter two into much more despotic regimes). To that end, there is at least some incentive for the upper classes to want to avoid creating an "angry peasants with torches and pitchforks" situation where the concentration of wealth -- the gap between haves and have-nots -- becomes intolerably large for the masses.

Now we aren't there yet, but the shrinking of the middle class -- with more of these folks becoming "have nots" than "haves" -- is still a cause for concern. I'm not suggesting massive tax hikes on "the rich" here, but I do think "the rich" should at least factor in the stability and security of the current economic and political system in formulating their opinions on where tax rates should be. Beyond a certain point, lower may not be better if it results in a larger and larger underclass growing more and more resentment.

It may or may not be "fair" to raise taxes on those of significant means. But to *some* degree, it might -- *might* -- help defuse a potentially explosive situation if more and more of the middle class keeps getting knocked down into the class of the more desperate folks. Because if we reach a critical mass of folks who feel they have little or nothing to lose.......

Just a thought on the potentially explosive situation brewing. I agree, except that the resentment will be toward government employees and their pensions, not the "rich". Someday, the average Joe is going to look around and wonder why he is working 20 years longer than his neighbor, fireman Johnny.

 

[Hamlet]

I think we are going to have to trim back some of the deductions that the upper middle/lower upper folks get.

The amount of income that can be removed from your taxable income is gettting a little silly.

My wife discovered that she actually has access to both a 403b and a 457 plan, and that there is no rule against funding them both to 16.5k.

So our deductions could look something like this next year--

49.5k for tax deferred income
7.5k for mortgage interest
2.5k for property taxes
7k for state income taxes
3k for charity
7k personal exemption
3k exemption for our new munchkin (is that the right amount)
12k for child care tax credit (credit of 3k, about equivalent to a 12k deduction?)

That's about 90k in income that we can avoid taxes on, although I don't know if we will be able to actually make our finances work while saving that much. I'm really tempted to try, though .

Worst case, we fund some of our living expenses out of savings.

I think we will pay less in taxes than many people with half our incomes. My single buddy who rents is getting a little bitter about subsidizing my house and child, since he makes a lot less than me.

But like I said earlier, we could certainly have rising rates on income as it goes far above that $250,000 point. I don't know how much it would really help (need to do the math - how much is 'there'?), but it seems reasonable to me, and probably a good thing psychologically.
-ERD50

 

[samclem]

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.

Why so complicated? Just compute the change in value (gain or loss) after indexing for inflation, that's value on which the person pays tax. It doesn't matter if the individual had a nominal gain: if the value of the investment declined after adjusting for inflation, then it truly lost value and he should get to claim every penny of that as reduction to income from other sources (wages, other investment income, carry forward to future years, etc).

 

[DoraM]

My wife discovered that she actually has access to both a 403b and a 457 plan, and that there is no rule against funding them both to 16.5k.

I have never understood why this is allowed (does she also get a public pension?) and yet the 401K limit is a puny $16,500. With market returns looking very bad over the next decade, and SS questionable for those of us in our 40s, the need to put away more in a 401K and IRAs is crucial.

If you paid off your student loans and really started saving at age 30 (typical) in 2001 by maxing 401K and IRA, you might have $300,000 or so today if you are age 40. Continuing to save $21,500 a year (401K + IRA) is just not going to provide a very decent retirement if SS is taken away and you don't have a pension. *Maybe* by age 60 you will have 1 million or so, but I bet it won't have the purchasing power many think it will.

Getting the 401K limit raised to something significant, like $30,000 probably isn't going to happen though. I guess we better hope SS keeps paying 100% even for those of us in our 40s.

 

[samclem]

. . . yet the 401K limit is a puny $16,500. With market returns looking very bad over the next decade, and SS questionable for those of us in our 40s, the need to put away more in a 401K and IRAs is crucial.

Saving money for retirement may be crucial, but it doesn't have to be in 401Ks or IRAs. If we're going to get the federal budget balanced, the spending has to be reigned in and the tax code made rational (fewer special treatment categories/exemptions/deductions, lower rates). So, I'd be asking more low income people to pay at least something in FIT, and I can't do that and justify allowing the first 80K of a couple's income to be non-taxed because they happened to use it in ways the government favors. People can and should save money for their own later use without special tax treatment. If it is earned income, it should be taxed. That's how we can bring some equity to the system and, in the bargain, help the economy get healthy.

 

[DoraM]

Saving money for retirement may be crucial, but it doesn't have to be in 401Ks or IRAs. If we're going to get the federal budget balanced, the spending has to be reigned in and the tax code made rational (fewer special treatment categories/exemptions/deductions, lower rates). So, I'd be asking more low income people to pay at least something in FIT, and I can't do that and justify allowing the first 80K of a couple's income to be non-taxed because they happened to use it in ways the government favors. People can and should save money for their own later use without special tax treatment. If it is earned income, it should be taxed. That's how we can bring some equity to the system and, in the bargain, help the economy get healthy.

Unless you want to go heavy on the risk side of things by keeping a large amount of stocks in your taxable account, you need a decent amount of tax deferred space to hold bonds. I would like to hold 80% TIPS but just do not have the room in 401K or IRA for that. When TIPS are adjusted for inflation, the adjustment is taxed as income each year. Very hard to grow retirement savings like this.

Perhaps instead of cutting SS, they should increase it such that everyone can retire at age 62 with enough money for a decent living. They could pay for this by eliminating all public pensions, tax deferred accounts, and caps on SS tax. If you want a better living, you have the option of taxable account, but you always have SS to fall back on and it will provide a comfortable retirement. No more 401K, Roth, 403B, etc.

 

[rescueme]

That's about 90k in income that we can avoid taxes on...

Avoid? No. Defer? Yes.

Tax deferral on 40x programs is not avoidance. Somewhere along the road, you will have to pay an (unknown rate) tax.

As far as mortgage, etc. you are getting (just a general observation) a 50 cent credit on $1 in interest paid. Better than nothing, but being debt free is the target.

Just my $.02 (and it's not taxable )...

 

[samclem]

Unless you want to go heavy on the risk side of things by keeping a large amount of stocks in your taxable account, you need a decent amount of tax deferred space to hold bonds. I would like to hold 80% TIPS but just do not have the room in 401K or IRA for that. When TIPS are adjusted for inflation, the adjustment is taxed as income each year. Very hard to grow retirement savings like this.

Your case proves the point (and the problem) with these tax preferenced accounts. You, in effect, get a subsidy from the government and it allows you to invest in ways that you wouldn't invest if the playing field were level. This distorts the flow of capital, and it prevents the most efficient investments from receiving your business.
That's leaving aside the whole fairness issue--why this particular use of money should be subsidized.

 

[DoraM]

Avoid? No. Defer? Yes.

Tax deferral on 40x programs is not avoidance. Somewhere along the road, you will have to pay an (unknown rate) tax.

As far as mortgage, etc. you are getting (just a general observation) a 50 cent credit on $1 in interest paid. Better than nothing, but being debt free is the target.

Just my $.02 (and it's not taxable )...

Time for some number crunching:

Assume 10% return (not adjusted for inflation) in taxable and tax deferred

For a effective tax rate bracket of 25%, that would be a 7.5% return in the taxable.

So...

1.1^30 = 17.45

vs

1.075^30 = 8.76

For the tax deferred to be an equal deal to the taxable, the tax rate on the tax deferred account would need to be about 50%.

Are we prepared to increase top tax rates to 50%? If not, then the 401K, 403B, etc. has effectively avoided paying tax.

 

[Nords]

To me that's at least part of the justification of a progressive income tax; regardless of the "fairness" issue it seems to me that many nations (and empires) have been been toppled because the distribution of wealth became too concentrated. Witness France in 1789, Russia in 1917 and Cuba in 1959 among other examples (the latter two into much more despotic regimes). To that end, there is at least some incentive for the upper classes to want to avoid creating an "angry peasants with torches and pitchforks" situation where the concentration of wealth -- the gap between haves and have-nots -- becomes intolerably large for the masses.

Two comments on this issue:
1. Society always seems stunned that the rich have somehow figured out how to keep getting richer. I guess nobody ever sees that one coming.

2. I think the "peasants with torches & pitchforks" situation is more a lack of class mobility than an effect of anger over who has what. It's one thing to think "Yeah, if I work hard then I can be a millionaire" and quite another to think "I wish I knew who to bribe to get to be a millionaire". The governing systems of the three examples above didn't allow for class mobility.

 

[Lisa99]

I think we are going to have to trim back some of the deductions that the upper middle/lower upper folks get.

The amount of income that can be removed from your taxable income is gettting a little silly.

My wife discovered that she actually has access to both a 403b and a 457 plan, and that there is no rule against funding them both to 16.5k.

So our deductions could look something like this next year--

49.5k for tax deferred income
7.5k for mortgage interest
2.5k for property taxes
7k for state income taxes
3k for charity
7k personal exemption
3k exemption for our new munchkin (is that the right amount)
12k for child care tax credit (credit of 3k, about equivalent to a 12k deduction?)

That's about 90k in income that we can avoid taxes on, although I don't know if we will be able to actually make our finances work while saving that much. I'm really tempted to try, though .

Worst case, we fund some of our living expenses out of savings.

I think we will pay less in taxes than many people with half our incomes. My single buddy who rents is getting a little bitter about subsidizing my house and child, since he makes a lot less than me.

As income goes up, allowable deduction $s go down....so yes, we get quite a number of deductions but because of our income we only get a percentage of those deductions...not anywhere close to 100%.

 

[Texas Proud]

As income goes up, allowable deduction $s go down....so yes, we get quite a number of deductions but because of our income we only get a percentage of those deductions...not anywhere close to 100%.

Also remember that a lot of people who have higher income (because we know that income does not always mean they are rich) get hit with the alternative minimum tax... my boss has over $40K of credits that he though he would get for increasing research... but so far has only taken a few thousand as he gets hit with the AMT... the other shareholders with less income were able to take 100% of their credit...

He does not think that it is fair how much they tax him.... I tend to agree..



ALSO, who determines how much more rich is to rich A lot of people seem to think that there should be an upper limit... but in reality the super rich of the late 18th and early 19th century held a bigger percent of the wealth of the country.... look at JP Morgan and Rockefeller... probably Carnigie and a few others were up there also... I would bet that as a % of GDP they were 'richer' than Gates and Buffet...

 

[glippy]

Remarkable how the prospect of future riches can pacify the masses.

That might work with unemployment below 20% and a general feeling that prosperity for all is possible.

But unemployment among black men over 20 is approaching 20%. And unemployment among black men between 16 & 19 is at over 40% compared to 20% for white men in the same range. Source

I don't know what number it has to hit before the pitchforks come out.

 

[Hamlet]

She pays into a public pension, although it doesn't appear to be very lucrative. They send a statement each year and it's lump sum value is still pretty tiny. I don't expect a whole lot from it, especially with the way public employees are getting demonized lately. Any public pension is pretty much one election away from getting gutted nowadays.

It didn't make sense to me that both plans were allowed, but she checked and they are. I doubt that we will actually fund both, but we will at least switch to the 457 so that we can take the money out anytime after she leaves her employer.

I have never understood why this is allowed (does she also get a public pension?) and yet the 401K limit is a puny $16,500. With market returns looking very bad over the next decade, and SS questionable for those of us in our 40s, the need to put away more in a 401K and IRAs is crucial.

If you paid off your student loans and really started saving at age 30 (typical) in 2001 by maxing 401K and IRA, you might have $300,000 or so today if you are age 40. Continuing to save $21,500 a year (401K + IRA) is just not going to provide a very decent retirement if SS is taken away and you don't have a pension. *Maybe* by age 60 you will have 1 million or so, but I bet it won't have the purchasing power many think it will.

Getting the 401K limit raised to something significant, like $30,000 probably isn't going to happen though. I guess we better hope SS keeps paying 100% even for those of us in our 40s.

 

[Hamlet]

Well, with current tax code, I'm likely to trade a 25% tax rate for a 15% tax rate, since we will have a lot of control over what our realized income will be in retirement, and our income needs will be relatively modest. Rates may go up, but I expect that they will maintain at least some progressivity in the tax code. If tax rates go up, that probably means I'm actually going to get something out of SS and Medicare, so I'll be able to deal with the higher taxes.

With the mortgage, there is just no reason to pay it off with a rate of just about 4%. I think that the stocks I am purchasing will return more than 4% over the next 15 years. Plus, if inflation kicks in, my effective mortgage shrinks dramatically. Ultimately, the tax break is just gravy to me. I'll shoot to pay off the mortgage as we retire, since we will likely be in a lower tax bracket at that time.

Avoid? No. Defer? Yes.

Tax deferral on 40x programs is not avoidance. Somewhere along the road, you will have to pay an (unknown rate) tax.

As far as mortgage, etc. you are getting (just a general observation) a 50 cent credit on $1 in interest paid. Better than nothing, but being debt free is the target.

Just my $.02 (and it's not taxable )...

 

[mickeyd]

"The Rich Should Pay Their Fair Share"

This phrase is seldom used with out this other phrase~ "millionaires and billionaires."

 

[W2R]

Thanks, everyone...

‪Porky Pig Cartoon Ending "That's All Folks!"‬‏ - YouTube