Are you afraid that the tax system will be changed to VAT, making a Roth a bad deal?

[Gone4Good]

Quote:

Originally Posted by MasterBlaster too low, CBS clocks it at 47% pay no income tax: Nearly 50% Will Pay No Fed Income Tax for 2009 - CBS News

We really need to stop saying this. Taxes are taxes and social security taxes account for about 40% of the general revenue. I know you're specifying "income" taxes but your real point is that they aren't paying taxes . . . otherwise it wouldn't be a topic of conversation.

[samclem]

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Originally Posted by Gone4Good We really need to stop saying this. Taxes are taxes and social security taxes account for about 40% of the general revenue. I know you're specifying "income" taxes but your real point is that they aren't paying taxes . . . otherwise it wouldn't be a topic of conversation.

But, unlike FIT which pay for a vast panoply of government expenditures, SS pays for a specific enitlement that is pegged to an individual. As a result, it is possible to figure a "rate of return" (not an accurate term in this case, but close enough) that a particular taxpayer gets on his contributions. Lower income workers get a tremendously better deal than higher income workers regarding SS payout. We'd have to take this into account as well if we included these taxes in our overall depiction, and I think we'd find that lower income workers still pay (on a "return" adjusted basis) very little.

[Gone4Good]

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Originally Posted by samclem But, unlike FIT which pay for a vast panoply of government expenditures, SS pays for a specific enitlement that is pegged to an individual. As a result, it is possible to figure a "rate of return" (not an accurate term in this case, but close enough) that a particular taxpayer gets on his contributions. Lower income workers get a tremendously better deal than higher income workers regarding SS payout. We'd have to take this into account as well if we included these taxes in our overall depiction, and I think we'd find that lower income workers still pay (on a "return" adjusted basis) very little.

I don't see how "return on taxes paid" has any bearing on the fact that they actually pay taxes. This might make sense if the money was set aside and saved, in which case you could argue that the money isn't really taxed away. But it isn't. Its spent annually out of the general fund. You know, to support things like a judiciary, and roads, and police, and all of the things that rich people use to, you know, become rich . . . but its the poor people who are really getting a good deal for their money.

[Koolau]

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Originally Posted by clifp (Hawaii just changes the rules on Nords and I today damn)

Okay, clifp or Nords. What'd I miss? I rarely watch the news or read the paper. I've already got a big Hawaii refund coming that won't be coming - not for a long time! Was there something else?

[samclem]

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Originally Posted by Gone4Good I don't see how "return on taxes paid" has any bearing on the fact that they actually pay taxes.

This brings us to yet another level.
- If an individual has income withheld all year but gets everything back, did he pay any taxes?
Then,
- If an individual pays SS every year, but builds an expected entitlement exceeding the amount he contributed, what was his net rate of taxation?

Quote:

Originally Posted by Gone4Good You know, to support things like a judiciary, and roads, and police, and all of the things that rich people use to, you know, become rich . . . but its the poor people who are really getting a good deal for their money.

If they are paying a zero (or negative) rate, then I'd say the poor are getting a tremendous deal--could anyone realistically disagree with that? Is it likely that when nearly 50% of the voters pay no taxes but have the power to effectively raise taxes on the remainder of the citizens and gain benefits for themselves without cost, that we have reached a fundamentally unstable situation?

[Koolau]

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Originally Posted by samclem This brings us to yet another level. - If an individual has income withheld all year but gets everything back, did he pay any taxes? Then, - If an individual pays SS every year, but builds an expected entitlement exceeding the amount he contributed, did he truly pay any taxes?

(In my best '60s flower-child accent) Far out, samclem!:

Sort of like the age old questions about the sound of one hand clapping and Coz's favorite "why is there air?".

[Gone4Good]

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Originally Posted by samclem This brings us to yet another level. - If an individual has income withheld all year but gets everything back, did he pay any taxes? Then, - If an individual pays SS every year, but builds an expected entitlement exceeding the amount he contributed, what was his net rate of taxation?

An expected entitlement 30 years forward is not at all the same thing as a dollar today. That is particularly true when we're talking about Social Security where the statement of expected benefit basically says "we don't have the money to pay you this, but here is what you'd get if we did". As a thought, why don't you give me back all of the Social Security taxes I & my employer paid today and I'll turn over to you all of the benefits I actually get. Once you take that deal, I'll adopt your opinion that social security taxes aren't really taxes.

And I won't get into a debate over who gets a better deal from society, the guy who gets food stamps every month or the guy who made himself a billion, because I already know that conversation is pointless.

[Nords]

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Originally Posted by Koolau Okay, clifp or Nords. What'd I miss? I rarely watch the news or read the paper. I've already got a big Hawaii refund coming that won't be coming - not for a long time! Was there something else?

Act 221, passed in 2001, gives Hawaii tax credits to those who invest in local high-tech businesses. Initially it was viewed as a way to invigorate and diversify the state's economy while reducing the UH brain drain and commercializing their patent portfolio. For every $1000 an investor put into a state-approved high-tech business, they could receive a tax credit of $350 that year and be credited for the remaining $650 over the subsequent four years. Unused credits could be carried forward to future tax years. Act 221 has been a very successful stimulus, especially with Web startups and clean tech businesses, but now it's being cast as a drag on balancing the budget.

Over the last couple years the legislature has decided that all tax breaks have to feel the pain before our elected officials could actually tackle any real cost-cutting, let alone budget-balancing. Last year the compromise was that tax credits could be used that year (no more carry forward) and could only offset 80% of that year's tax bill. Informal discussions gave the impression that Act 221 would sunset in 2010, on schedule, but otherwise would be left alone.

However this year the legislature actually drafted bills to claw back all Act 221 tax credits from those who had taken them in previous years, and it's beginning to look like legislation will pass to suspend use of any/all tax credits until 2013. This retroactive law-making is perceived as being a very successful stimulus for Hawaii's litigation industry, and there's no reason for a high-tech business to stay here when it could do just as well in Palo Alto or Boston or San Antonio. No reasons for investors to put any money here, either.

The squeeze is on - Hawaii News - Starbulletin.com
Kim will unveil budget plan - Hawaii News - Starbulletin.com
Honolulu Star-Bulletin Hawaii News

[ERD50]

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Originally Posted by Gone4Good ERD50 (who just a couple of posts above this one claims only $24 on an ~80K AGI) has another thread where he explains all the credits and deductions he takes advantage of. I think he's an exception, rather than the rule, but it can be done.

Just to expand on that a bit - yes, I don't think it is typical that AGI of 80K is going to be taxed just $24. But it also isn't that uncommon - I didn't take any specific steps to achieve it, in fact, my portfolio isn't really all that tax efficient by most standards.

A) No tax deduction for any 401Ks, we are doing Roths.

B) Started with about $4,500 in tax on that $80K after (probably large-ish) deductions.

C) Two kids in college (3 semesters total) provided ~ $3,500 in credits.

D) High School kid, another $1,000 credit.

So, ~ $4,500 minus those credits leaves you near zero. Hmmm, I just noticed another $350 for a "Recovery Rebate Credit" (this was 2008), not sure how that figures in, but I think it actually makes me one of those people who paid a negative amount in taxes. Cra-zeeeeee!

Quote:

I'd be in favor of getting rid of all of that nonsense but that will never happen.

Not until the next revolution

-ERD50

[Gone4Good]

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Originally Posted by ERD50 Just to expand on that a bit -

Thanks for the update.

FUEGO started a thread here about the same thing. He was a little more aggressive in exploiting tax advantaged accounts, etc, to reduce his liability to pretty close to zero on a low six figure AGI.

It seems to me the key to this is children. The child care credits are very large relative to the tax liability of a moderate income family. Add in 401(k) and other exclusions and you can get very little tax liability at relatively high income levels.

If 47% of tax filers pay no income tax, I wonder what percentage of families with children pay no income tax . . .75%, more?

[donheff]

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Originally Posted by ERD50 AGI of 80K is going to be taxed just $24. B) Started with about $4,500 in tax on that $80K after (probably large-ish) deductions. C) Two kids in college (3 semesters total) provided ~ $3,500 in credits. D) High School kid, another $1,000 credit.

This doesn't strike me as nonsensical. A family of six, three kids in college. $4,500 in aide. Did the kids get Pell Grants as well? Next year we will have a bit higher AGI and will pay a lot more tax but I don't begrudge some of it going to get kids through college any more than I resent my property tax paying for schools I don't use. Even under proposals for Fair Taxes, there were always credits for this sort of situation. None of this is to say that the current FIT structure isn't twisted into a far too complicated mess.

[Gone4Good]

I'll file this under "when assumptions meet reality" (not a slam at you donheff, just using your good point to make a point) . . .

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Originally Posted by donheff This doesn't strike me as nonsensical. . . . Next year we will have a bit higher AGI and will pay a lot more tax but I don't begrudge some of it going to get kids through college any more than I resent my property tax paying for schools I don't use.

You'd think from the chorus of whining over the 47% "who pay no taxes" (once you exclude all the other taxes they pay) that we're talking about a bunch of freeloading welfare queens. But when you point out that the reason so many pay no taxes is because of generous child care credits, then maybe the whole conversation takes on a different tone.

Talk about "class warfare". Sheesh.

[ERD50]

donheff & GTG - I think you both have it somewhat wrong.

First - no I don't think they should use the tax code to reduce college costs for a family. It is a needless complexity. There are public colleges funded in part from my (our) tax dollars, and there is FAFSA. Lets have ONE source for this, not multiple conflicting ones. And the tax code, for some unknown reason that I'm sure m Congress critters could not explain, penalizes our family for saving for college and attending. WTF is that about?

Specifically, kids income can be taxed at a the parent's rate if they are under 18 OR if they are a student and under 24. That specifically targets students. What a crock! So, while I reported a low tax bill for 2007, my kids 1040s ran up a larger bill, specifically for attending college. Please explain.

Second - GTG, I know you just love to throw 'class warfare' in every chance you get, and paint anyone right of center with a broad straw-man colored brush, but NO, that isn't it. Many of us are saying that just about everyone needs some skin in the game. And that includes us.

I also don't see why the govt should subsidize anyone for having kids. Kids are a personal choice, and take up more resources. I think it should be the opposite, and taxes should be increased for larger families if anything.

edit/add:

GTG - In what part of this post did I mention or even imply 'freeloading welfare queens'? Please don't put words in my mouth, it does not add to the discussion.

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And I think that is ridiculous. A person with an AGI of $84,000, and living the comfortable lifestyle I do should be paying more than that to support what needs to be done in this country. No, I'm not giving it back, as I've paid far more than what I consider my fair share in other years. I don't know the details exactly, but a friend of mine who lives a pretty high lifestyle says he did get a credit this year. I'd guess that his AGI exceeds what I reported here. He also thought that this country cannot do this - it is crazy.

-ERD50

[ERD50]

Quote:

Originally Posted by donheff This doesn't strike me as nonsensical. A family of six, three kids in college. $4,500 in aide.

Just to be precise, that is two kids in college (3 semesters total), and one other kid (HS age) for $4,500 in tax credits. I don't know what a 3/6 combo would result in.

-ERD50

[Rustic23]

Taxes are Taxes? With this logic all money collected by the government is the same. So therefore the national parks fee is the same as taxes, Never mind that the person paying derives pleasure from it. SS is called a tax. However you are purchasing a future benefit., those that do not pay do not get the benefit. So if you are talking about people paying taxes lump all those campers in the national parks in there too.

[harley]

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Originally Posted by Rustic23 Taxes are Taxes? With this logic all money collected by the government is the same. So therefore the national parks fee is the same as taxes, Never mind that the person paying derives pleasure from it. SS is called a tax. However you are purchasing a future benefit., those that do not pay do not get the benefit. So if you are talking about people paying taxes lump all those campers in the national parks in there too.

I've got no problem with this definition. You can call a use fee a tax if you want. The difference is that no one will show up with guns to put you in jail if you refuse to go camping at Assateague National Seashore. Try not filing a tax return for a few years and see what happens. But based on usage I do think that all money collected by the government is the same.

Back to the main issue of the thread, after reading all the posts I think the best idea I've seen from a national perspective is the one where all taxes, including SS, Medicare, employment, FIT, etc are all collected once/year. Everyone would realize they do have skin in the game, and might demand more accountability of their elected officials. If they don't, then that's OK because they (we) consciously made the choice. Awakened Democracy at work.

The second best suggestion is how to pay $24 on an $80K income. I want that, but need to do it without any more kids. A few thousand dollars/year isn't worth doing that again.

[haha]

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Originally Posted by charlie Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained the same. My tired old brain just does not understand how paying tax twice on the same money is not a bad thing. Thanks and Cheers, charlie

Charlie, it seems to me that it would be the same as a sudden x% increase in prices accross the board. We could just forget that the increase came from the VAT, it is still an increase paid by anyone who spends money, whether he pays income tax when me makes a Roth Conversion or pays it when he makes a withdrawal from a TIRA to spend the money or for RMDs.

Ha

[meierlde]

Note that the whole Roth thing assumes you want to leave money to heirs. If to charity its better to use a regular IRA or 401k as the charity does not carry estate tax or tax in respect of decedent costs. Yes you will have RMD's past 70.5 but then the money can pay some taxes.

[winger]

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Originally Posted by Gone4Good It seems to me the key to this is children. The child care credits are very large relative to the tax liability of a moderate income family. Add in 401(k) and other exclusions and you can get very little tax liability at relatively high income levels.

It may have been a good idea to encourage large families years ago. Seeing the problems of the world today, aren't we over that?

[samclem]

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Originally Posted by winger It may have been a good idea to encourage large families years ago. Seeing the problems of the world today, aren't we over that?

It's always "interesting" to look at the tax code and try to figure out the reasoning behind it (like trying to look at the underlying messages in Moby Dick or a modern painting--likely there are none). With that said, I don't think the tax deductions for families with kids are there to encourage people to have more children. More likely, the deductions are there because raising kids costs money, and there is a perceived net social benefit in assuring families have enough money to see to basic needs before the government starts taking any of it. I think the same philosophy underlies the personal exemption and maybe the standard deduction. In my opinion, we'd be better off as a society by reducing both of these and instituting a very low rate for those at the bottom of the income spectrum. Should a married couple with no kids really owe nothing to keep the federal government going until they've earned $18K?