"The Rich Should Pay Their Fair Share"

[ERD50]

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.

-ERD50

 

[devans0]

I like the opposite way, tax corporations that pass the taxes on and drop our taxes to 0%.

 

[meierlde]

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?

 

[kujo]

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.

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

 

[ERD50]

Originally Posted by ERD50
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.

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.

-ERD50

 

[samclem]

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.

 

[Midpack]

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)...

 

[ERD50]

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.

-ERD50

 

[DoraM]

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?

 

[ERD50]

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.

-ERD50

 

[scrabbler1]

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.

 

[Texas Proud]

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'....

 

[Lisa99]

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.

 

[REWahoo]

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".

 

[Midpack]

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...

 

[Lisa99]

Not trying to be contentious, simply clarifying the definition of "free".

You're absolutely right! But that is why their taxes are so high...to fund all of the government programs.

 

[ziggy29]

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.......

 

[Westernskies]

..looks like I picked the wrong week to quit sniffing glue.

 

[kujo]

Who's taxes are so high. The rich. I don't think so. Taxes are at the 50 - 60 year low for the wealthy. Our Wealthy have the lowest tax rate in basically the world. So who's who's taxes are so high.

to fund all the government programs? If you remove all the governement programs except Military, Social Security, Medicare, and the debt, there would probalby only need to be a 1% income tax. If we understand that Social Security and Medicare should be self sufficent, that leaves the military and the debt causing the bulk of our need for taxes.

If you start to derode these other government programs, are you going to reduce the FBI, the air trafic controlers, the security at our airports, at our boarders.

Are you going to get rid of unemployment (which is also a special tax paid for mostly by corporations, not the rich) insurance.

So I really don't believe that our rich is paying for all these unessarary programs and that they are paying too much.


During the late 90's we had a higher income tax and we had a very healthy economy. Rich were making more money in the market place to cover any extra taxes they might of been paying. We were actually having a budget surplus.

But early in the 00's it was decided that if we lower the taxes at the upper level of income, this would create more jobs and a even stronger economy reducing the debt even more. Of course we call can see that this did not work and help lead us to the situation we are in today.

If we are truely insterested in reducing the debt, we first must concentrate on increasing employment.

I find it funny calling the rich Job Creaters. I have in that position and if you give me more mony I can not spend it on anything else, and there are more people in much better positions then I am. If the gain more in the market place are they going to buy things. NO. They will put it in the stock market. Will this cause the economy to get stronger. NO. It might cause stocks to go up, but not because the companys are actualy doing something productive. This will end up creating a bubble and ultimately lead to yet another crash.

You're absolutely right! But that is why their taxes are so high...to fund all of the government programs.

 

[FinanceDude]

And for those of you ready to call me a thief, I've lived in Texas since 82, and my wife was born and lived there all her life.

You're not a thief, you're just smarter than some of us.........

 

[ERD50]

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.

I pretty much agree, but I think we need to take a fresh view of some of that.

I think that those past 'empires' toppled because the 'have nots' were really suffering. Today, I understand that the average 'poor' person has cable, several color TVs, X-Box, etc. Of course, some people are genuinely hurting.

IOW, I'm not so sure that the distribution of wealth is as important as how well-off the lower class is. Just the other day, and extremely liberal friend of ours was getting all worked up over a family that she knows is on the 'free lunch' program at school (which also waives most fees), and she was talking about how this family just came back from a tropical vacation, sits outside the school in the new, huge SUV guzzling gas while their A/C is running and they are gabbing on their cell phone, waiting to pick up their kid. Even though we are at near opposite ends politically, we both agreed this hurts getting help to the people who really need it.

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

 

[FinanceDude]

We were actually having a budget surplus.

Based on projections of unsustainable stock market and GDP growth, but I digress..........

 

[Midpack]

Great post, great perspective Ziggy, as usual...

 

[FinanceDude]

Because if we reach a critical mass of folks who feel they have little or nothing to lose.......

Two words:

Egypt
Syria

 

[ERD50]

During the late 90's we had a higher income tax and we had a very healthy economy. Rich were making more money in the market place to cover any extra taxes they might of been paying. We were actually having a budget surplus.

But early in the 00's it was decided that if we lower the taxes at the upper level of income, this would create more jobs and a even stronger economy reducing the debt even more. Of course we call can see that this did not work and help lead us to the situation we are in today.

This comes up time and time again. It is not cause/effect, there were/are other factors at play that outweigh tax rates. The economy boomed in the 90's - do you seriously think that if we lowered taxes then, that economic rise would have halted?

We need a sticky FAQ on this one....

-ERD50