Progressive Nature of Tax Code

[FIRE'd@51]

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.

IF this is what he's doing, his methodology is bogus. Unless his secretary is self-employed and contracting her services to Buffett, she's not paying that part of the FICA tax - the company is, and it's a tax deduction for the company. Incidentally, this was the historical justification for taxing up to 50% of SS benefits (Clinton raised it to 85% in 1993). In fact, one could argue that the employer part of the FICA tax (which, after all benefits the employee ultimately) should actually be added into the denominator along with company-provided health insurance, pension contributions, matching 401k deposits, etc. which would result in a lower (not higher) rate of tax on income, since these items are really part of one's overall compensation.

 

[MichaelB]

I'm just astounded that people think the US can keep going down the Reaganomics/Bushonomics supply-side road. Clinton had the top rate at 39% and we had a surplus. Now it's at 35% and there's an $800 billion deficit. But damn.. make those lucky $15k bastards pay 35% like me.. WTF? Pay up the 4% difference. Tax the damn Walton/Hilton heirs, etc.; they didn't work for that money.. ya got billions and billions right there. Which they accumulated by paying their workers so little that Wal*Mart even counseled them on how to get food stamps and Medicaid!!! argh.

I'm not sure what people believe. Probably that they can continue to live the "American Dream' of a materially wealthy existence without really increasing the value of their skills or productivity, or that lower cost labor overseas is somehow not really their problem, or that they can demand lower prices for the goods they consume while demanding higher wages, or that our aggregate deficits will all be resolved through growth. The most mind boggling belief - that the US has engaged in sound economic policy by "alone in the world making the sacrifice to offset net saving elsewhere by producing a trade deficit to sustain consumption and therefore stimulate the global economy, which otherwise would suffer". Get it? It's a policy and a sacrifice.

The really scary part is not what the people believe, but instead what the leadership believes. For that, read Ayn Rand. Extreme Laissez Faire, individual rights over all other. Those that can, should - and without restraint. Greenspan, Goldman Sachs people everywhere - it's not going to change, it's going to get worse.

I would make a political comment about the upcoming elections, but that would be a real Pandora's box. Clearly, I need a break.

Michael

 

[Hamlet]

I don't think its bogus. Every employee is really paying the employer half of FICA-- it is just out of wages that don't exist because of the FICA tax.

If employers didn't have to pay their half of FICA, they would be able to pay higher wages, and the market would drive them to pay those higher wages.

But then, there are no taxes that I consider more evil than FICA, so I may be biased

IF this is what he's doing, his methodology is bogus. Unless his secretary is self-employed and contracting her services to Buffett, she's not paying that part of the FICA tax - the company is, and it's a tax deduction for the company. Incidentally, this was the historical justification for taxing up to 50% of SS benefits (Clinton raised it to 85% in 1993). In fact, one could argue that the employer part of the FICA tax (which, after all benefits the employee ultimately) should actually be added into the denominator along with company-provided health insurance, pension contributions, matching 401k deposits, etc. which would result in a lower (not higher) rate of tax on income, since these items are really part of one's overall compensation.

 

[Pete]

The rich seem to be doing just fine and they don't seem to lack motivation. Stats show they keep pulling away. I know some of those super rich. They tell me not to worry about their taxes. Most of their money is offshore.

 

[ziggy29]

I'm just astounded that people think the US can keep going down the Reaganomics/Bushonomics supply-side road. Clinton had the top rate at 39% and we had a surplus. Now it's at 35% and there's an $800 billion deficit.

And I'm astounded that people drink the partisan Kool-Aid and believe it's as simple as who -- and what party -- is in the White House.

First, the problems are related to *spending*, not revenue. I believe supply siders are somewhat vindicated in that the preponderance of the evidence shows that tax cuts do rev up the economy, and create more taxable economic activity which can, in fact, increase revenue.

The problem is that SPENDING is out of control.

Secondly, to some degree economics are cyclical, and tax policy influences behavior. Clinton benefited from a strong economy and a rising dot-com bubble that generated unbelievable (and unsustainable) amounts of capital gains revenue. That was a fortunate accident, IMO -- not at all related to a president's tax policy. Also, a lot of taxes were paid in 1998 to 2000 from previously more generous Roth conversion rules. Again, this was an unsustainable source of revenue.

So as satisfying as it may be for some to make it political, and to associate surpluses and deficits with particular political parties and particular tax policies, I don't see it that simplistically. The bottom line is that budget deficits and surpluses are a function of revenue and spending, and the tendency is for too many people to ignore the spending side, which (IMO) is where the problem is. We tend to focus on tinkering with the revenue side even as we ignore the expenditures side as it barrels out of control.

My personal belief is that tax rates should be left alone for a long time, whether they are slightly "too high" or "too low" according to the Laffer Curve or other perceived 'optimal' target. I think the economic cost in individuals and businesses making suboptimal economic decisions for tax reasons -- and not making long-term investment decisions for fear of future tax law changes hurting them -- far exceeds a delta in revenue by tweaking the rates. I believe you'd see a lot of economic activity develop just by making it clear that the decisions we make about our finances *today* won't screw us in 5-10 years because of tax law changes.

It is *spending* policy, not *taxing* policy, which is in greater need of discussion and reform.

 

[eridanus]

My own thoughts on this are somewhat different than yours, in that what they can afford to pay is really not relevant. Seems to me that (as a previous poster pointed out) that differences such as these have trhe potential to discourage the most productive workers from staying in the workforce.

Does anyone know of a billionaire that stopped working just to avoid paying taxes? Not counting characters in fictional Ayn Rand novels.

 

[Pete]

I am a leech on this giant economic beast. I am smart enough to know the beast must survive.

Concentration of wealth makes the beast weaker. The funnest most active part of the monopoly game is the beginning when all are equal. The game becomes very stale in the end.

We must find a way for all of us to run this economic race feeling free from unnecessary burden. But we must cross the finish line together.

 

[Hamlet]

People appear to be confused about rich and RICH. The rich people on this board are "working class rich". They pay high marginal income tax rates (35%+state+medicare). They may also get hit by AMT.

RICH people get the bulk of their income from dividends and capital gains that are taxed at 15%+state.

In general, I'm opposed to higher taxes. I would prefer a much smaller government to the one we have. I would like us to cut spending.

However, given that the majority of Americans seem to want their bread and circuses, I think that its a mistake to continually run massive budget deficits.

If no one is willing to cut spending, taxes will have to be raised at some point. I don't think a higher marginal income tax is reasonable. We are already pushing up against 50%(35+state+medicare), and there is something unwholesome about having the government get more of someone's work than they get.

That leaves taxing the poor/middle class more, which isn't going to happen politically.

Or dividends and cap gains could go back up to 20%. I would suspect that that is going to happen.

 

[stephenandrew]

I'm just astounded that people think the US can keep going down the Reaganomics/Bushonomics supply-side road. Clinton had the top rate at 39% and we had a surplus. Now it's at 35% and there's an $800 billion deficit. But damn.. make those lucky $15k bastards pay 35% like me.. WTF? Pay up the 4% difference. Tax the damn Walton/Hilton heirs, etc.; they didn't work for that money.. ya got billions and billions right there. Which they accumulated by paying their workers so little that Wal*Mart even counseled them on how to get food stamps and Medicaid!!! argh.

If I am not mistaken, tax revenues under the Bush cuts resulted in the government bringin in record levels of revenue (I don't know that for sure, but believe it to be true--perhaps someone can validate this or correct me if I am mistaken.) I am right, it would seem to me we have a spending problem, not a revenue problem.

 

[CitricAcid]

stephenandrew, I believe that is incorrect, and even if it were correct, GDP grows over time (real GDP AND nominal GDP) so a higher tax revenue would be offset with a higher spending which also grows based off of real and nominal GDP.

I would say more on this topic, but ziggy said everything I have to say about the topic.

Oh, and the Laffer Curve is pretty much overstated as an example of why lowering taxes raises revenues. If marginal tax rates were at 99% and were lowered to 98%, I would expect a greater tax revenue as your income effectively doubles, which would boost the economy. Where the point where tax revenue is the greatest on marginal levels would probably be around 75-80%. Yet, this does not mean that it is best to just get the most revenue (and tax at 75-80%), it would be more advantageous to cut spending AND taxes to keep the economy growing.

 

[ikubak]

I'm just astounded that people think the US can keep going down the Reaganomics/Bushonomics supply-side road. Clinton had the top rate at 39% and we had a surplus. Now it's at 35% and there's an $800 billion deficit. But damn.. make those lucky $15k bastards pay 35% like me.. WTF? Pay up the 4% difference. Tax the damn Walton/Hilton heirs, etc.; they didn't work for that money.. ya got billions and billions right there. Which they accumulated by paying their workers so little that Wal*Mart even counseled them on how to get food stamps and Medicaid!!! argh.

President Reagan signed tax cuts into law, which stimulated a doubling in total tax revenues (from five hundred billion to one trillion dollars) during the period from 1980 to 1990. However, during this period the national debt more than tripled (from $908 billion in 1980 to $3.2 trillion in 1990). Spending was out of control then and it is now. The budgets submitted by congress during the mid to late 1990s held spending in check much better than today.

Income tax revenue in 2007 was at its highest ever in the the US. In my opinion, the spending side of the equation is the problem.

 

[MichaelB]

If I am not mistaken, tax revenues under the Bush cuts resulted in the government bringin in record levels of revenue (I don't know that for sure, but believe it to be true--perhaps someone can validate this or correct me if I am mistaken.) I am right, it would seem to me we have a spending problem, not a revenue problem.

We need a new poll

Do we have a spending problem
Do we have a revenue problem
Do we have a fairness problem
Do we have all three
Is it all just an illusion and I like it like this

 

[stephenandrew]

If I am not mistaken, tax revenues under the Bush cuts resulted in the government bringin in record levels of revenue (I don't know that for sure, but believe it to be true--perhaps someone can validate this or correct me if I am mistaken.) I am right, it would seem to me we have a spending problem, not a revenue problem.

LOL--I want to apologize, my last sentence should have read, "If I am right, it would seem we have a spending problem." The way I wrote my post really came across wrong. Again, my apologies.

 

[Texas Proud]

I'm just astounded that people think the US can keep going down the Reaganomics/Bushonomics supply-side road. Clinton had the top rate at 39% and we had a surplus. Now it's at 35% and there's an $800 billion deficit.

Just for a bit of truth in this debate... and I am not saying most of what you have is wrong... but Clinton never really had a surplus. If you took out the excess SS payments, he was always in a deficiet... just not as bad as others and it was going in the right direction...

But he also had the 'peace dividend' that helped him do it... cut the defense budget to get there... I don't think his domestic programs were cut... but I could be wrong...



OHHH, and just to throw in one of my pet peeves.... I still have never figured out that if someone in a previous admin put in a ridiculous high growth rate for some program... and the new prez said, instead of a 10% increase, let's increase it only 3%.... and get accused of CUTTING the program.... that math does not add up for me....

 

[Abreutime]

The National Budget, Debt & Deficit :: MarkTAW.com

Here's a bunch of cool graphs, showing revenue and government spending (real and nominal, gross and as % of GDP). What I am struck by is the steady upward trend of spending. It is soooo difficult to cut a program that already exists, and that's what scares me the most about our current budget trends. Is government going to continue to increase spending indefinitely, at a rate far exceeding the rate of inflation? The idea of creating a series of increasing entitlement programs bothers me, since government at its root is not about entitlement. Government should not be one's primary provider of goods and services, and I'm afraid more and more people will come to rely on government in the coming decades. It's not a sustainable model, nor do I want this to be the future of US govt.

 

[ladelfina]

I like the sound of that: "peace dividend".
On "sin" taxes I made no argument for or against them; I merely pointed out that they affect people with lower incomes disproportionately even if you take out class or other demographic factors. For the same six-pack and Marlboros the poor guy pays more of his income in taxes than the rich guy. (The REALLY rich guy can get cheap Cuban rum and cigars smuggled in tax-free, most likely..).

The merely "well-off" in the middle do share a disproportionate amount of the burden, but as opposed to those higher up on the scale rather than lower down. It serves those in the top 1% to have 99% of the people fighting each other for 50% of the pie rather than to see the situation with clarity.

 

[ikubak]

The merely "well-off" in the middle do share a disproportionate amount of the burden, but as opposed to those higher up on the scale rather than lower down. It serves those in the top 1% to have 99% of the people fighting each other for 50% of the pie rather than to see the situation with clarity.

Your numbers are a little off.

The top 1% earn 21.2% of the nation's income. That leaves the other 99% to fight over the other 78.8%. The top 1% earn 21.2% of the income and pay 39.4% of the income tax burden and the amount of the burden has been rising for years. Back in 1995, the top 1% shouldered 29% of the burden...1990, 23.8% of the burden, 1985, 21.2% of the burden, 1980, 17.4% of the burden.

And if you think the merely "well-off" in the middle share a disproportionate amount of the burden, consider that the top 1% pay more in income tax than the bottom 90%. I am not one of the top 1%, but I feel grateful to them for the large portion of the Federal Income Tax bill that they do pay.

 

[NW-Bound]

It serves those in the top 1% to have 99% of the people fighting each other for 50% of the pie rather than to see the situation with clarity.

I am suspicious of that too, but don't know how to prove it. I would say it is not the top 1%, but the top 0.1%. For example, look at the meager IRA deduction allowed for the self-employed or small private companies. Then look at the higher 401k for the average worker. But that pales compared to the deferred compensation for executives of corporations. How about special privileges that our honorable Congress members create for themselves?

 

[Texas Proud]

The National Budget, Debt & Deficit :: MarkTAW.com

Here's a bunch of cool graphs, showing revenue and government spending (real and nominal, gross and as % of GDP). What I am struck by is the steady upward trend of spending. It is soooo difficult to cut a program that already exists, and that's what scares me the most about our current budget trends. Is government going to continue to increase spending indefinitely, at a rate far exceeding the rate of inflation? The idea of creating a series of increasing entitlement programs bothers me, since government at its root is not about entitlement. Government should not be one's primary provider of goods and services, and I'm afraid more and more people will come to rely on government in the coming decades. It's not a sustainable model, nor do I want this to be the future of US govt.

You are right in the cutting of a program. But it is even worse than you think. Most programs are on auto-pilot. They get their increase by law. SS and medicare and others like this are mandates. The true amount of the budget that Congress fights about is a small percent. I am sure one of the die hards here can find that number.... but even if they cut 100% of spending for ALL these programs it would not make much of a dent... they need to cut some of the mandated programs to fix the problem.

 

[Independent]

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.

It wouldn't bother me if the under $15,000 group paid zero FIT. If they did, the ratio of taxes between the over $200k and the under $15k would be infinite. So "900 times" is not scary.

I think the real story here is that AGI is so skewed. When you have 3% of the population earning 30% of the AGI, almost any "progressive" tax system will give them 50+% of the tax.

Remember, we are only talking about the individual income tax here. And "AGI" doesn't necessarily include all income.

 

[Independent]

Your numbers are a little off.

The top 1% earn 21.2% of the nation's income. That leaves the other 99% to fight over the other 78.8%. The top 1% earn 21.2% of the income and pay 39.4% of the income tax burden and the amount of the burden has been rising for years. Back in 1995, the top 1% shouldered 29% of the burden...1990, 23.8% of the burden, 1985, 21.2% of the burden, 1980, 17.4% of the burden.

And if you think the merely "well-off" in the middle share a disproportionate amount of the burden, consider that the top 1% pay more in income tax than the bottom 90%. I am not one of the top 1%, but I feel grateful to them for the large portion of the Federal Income Tax bill that they do pay.

You give a trend for "share of the tax burden", but you don't give a trend for "share of nation's income". Does your source have that as well?

 

[unclemick]

Hmmm - they never mention the SS tax burden at lower incomes do they. The fishermen, shrimpers/crabbers when I lived down in LA always paid way more except for the few big operators on their first dollar in SS.

When I think about filing single - even in ER - I can really get out the old soapbox.

And then, and then there is sales tax, state income tax, and property tax and new found fee's for this and that.

Dog Catcher - hmmm maybe ok - but a stinking fee to hold a garage sale!!! O come on!

heh heh heh - where did I put that soapbox? .

 

[haha]

The merely "well-off" in the middle do share a disproportionate amount of the burden, but as opposed to those higher up on the scale rather than lower down. It serves those in the top 1% to have 99% of the people fighting each other for 50% of the pie rather than to see the situation with clarity.

You've been too long in Italy. Return to The Land OF The Sky BLue Waters, and cut out this communist BS.

Ha

 

[mb]

Your numbers are a little off.

The top 1% earn 21.2% of the nation's income. That leaves the other 99% to fight over the other 78.8%. The top 1% earn 21.2% of the income and pay 39.4% of the income tax burden and the amount of the burden has been rising for years. Back in 1995, the top 1% shouldered 29% of the burden...1990, 23.8% of the burden, 1985, 21.2% of the burden, 1980, 17.4% of the burden.

.

To make your numbers meaningful you should also provide the % of the nation's income that the top ten percent earned historically. It may be that their tax burden is going up only because their share of the income is going up? The ratio is probably more significant.

MB

 

[ladelfina]

mb is correct.
(I apologize for having exaggerated figures for general illustration above.)

Mr. Greenstein’s organization will release a report today showing that for Americans in the middle, the share of income taken by federal taxes has been essentially unchanged across four decades. By comparison, it has fallen by half for those at the very top of the income ladder.

Because the incomes of those at the top have grown so much more than those below them, their share of total income tax revenue has risen despite the reduced rates.

The analysis by the two professors showed that the top 10 percent of Americans collected 48.5 percent of all reported income in 2005.

That is an increase of more than 2 percentage points over the previous year and up from roughly 33 percent in the late 1970s. The peak for this group was 49.3 percent in 1928.

The top 1 percent received 21.8 percent of all reported income in 2005, up significantly from 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income.

The top tenth of a percent and top one-hundredth of a percent recorded even bigger gains in 2005 over the previous year. Their incomes soared by about a fifth in one year, largely because of the rising stock market and increased business profits.

The top tenth of a percent reported an average income of $5.6 million, up $908,000, while the top one-hundredth of a percent had an average income of $25.7 million, up nearly $4.4 million in one year.

http://www.nytimes.com/2007/03/29/business/29tax.html?_r=1&oref=slogin

Maybe it's too simplistic to look at the last peak in income disparity in 1928 and draw conclusions from that, or maybe not...

This is a trend that was present even before the Bush cuts:

If the AFTER-TAX income of the top tier keeps rising, while for most it stays flat.. it's pretty hard to argue that taxes on the first group are too onerous or disproportionate, and that they are holding these earners back somehow.