Perspective on Income Taxes

[Midpack]

I've gotten used to it, but voluntarily paying lots of extra taxes for Roth conversions since 2019 has been hard to stomach. But I know it's the right thing to do.

Looking back at our effective tax rates makes it clear I have nothing to whine about...

I also distinctly remember doing my first tax return as a retiree in 2012 and thinking - this can't be right! But it was right.

We made less than $40K in 1982, Federal taxes were WAY more confiscatory then! Looks outrageous to me today.

Thought others might have similar records or recollections - I'd forgotten.

 

[Car-Guy]

Looking back at our effective tax rates makes it clear I have nothing to whine about...

Other than the waste within and unfair tax system (IMO), I guess I have nothing to whine about either. IIRC, by some estimates, 57% of households paid no income tax last year up substantially from the years before..

 

[Gumby]

Other than the waste within and unfair tax system (IMO), I guess I have nothing to whine about either. IIRC, by some estimates, 57% of households paid no income tax last year.

Would you rather be poor enough not to pay federal income tax? Not me. I have always felt that if I'm paying big taxes, it's because I'm making big money. I like it better that way.

 

[Car-Guy]

I don't think that makes it fair. I think the entire system is messed up. Personally, I think of it as a success tax.

 

[Aerides]

I remember being at the bracket of paying almost nothing in my 20's when I was making...in the 20's. Except it didn't feel like paying nothing. I still paid, in every check, then had to file and wait for a refund around tax time. And back then that meant a paper file and wait for 2 months, or go pay H&R a chunk of it to get it back sooner. Guess which I did....And while it evened out, it didn't help me for weekly/monthly budgeting. It just went to overdue bills and debt at the time.

My Mum likes to complain how "they were told" to do 401ks because their income and tax bracket would be lower in retirement but that's not what happened. Sure it's not, because both she and Dad have multiple pensions, plus SS, plus RMD's, plus other taxable capital gains.

Life is rough!

 

[38Chevy454]

Other than the waste within and unfair tax system (IMO), I guess I have nothing to whine about either. IIRC, by some estimates, 57% of households paid no income tax last year up substantially from the years before..

When more than 50% pay nothing, it becomes a problem where too many with their hand out receiving vs too few with their wallet out paying. Our system does penalize success to some degree. I don't have the exact numbers, but when 90% of taxes are paid by the top 10%, it seems problematic to me.

 

[Surewhitey]

When more than 50% pay nothing, it becomes a problem where too many with their hand out receiving vs too few with their wallet out paying. Our system does penalize success to some degree. I don't have the exact numbers, but when 90% of taxes are paid by the top 10%, it seems problematic to me.

Not problematic for the milk money mafia... Better pay up.

Similar to rewarding hard work with more work, right?

 

[Car-Guy]

When more than 50% pay nothing, it becomes a problem where too many with their hand out receiving vs too few with their wallet out paying.

+1, however, without going into detail, "I'm okay" with helping those who really tried and just couldn't make ends meet...

 

[Gumby]

There was a time in my life when my marginal tax rate was 39.1% federal and 6.85% state, so I'm running short on sympathy for all those who are being "penalized for success".

 

[Midpack]

PLEASE don’t turn this thread into political commentary on income taxes, that was not the intent.

 

[audreyh1]

I just remember mid-80s I think, SS taxes raised and FRA dates pushed out for us younger folks, long-term capital gains tax raised to 28%, and surprise surprise - many of us younger engineers earners were hit with a 31% tax bracket that went back down again for higher income levels. This wasn’t shown in the tax tables, but applied as some excess something or other for a certain earnings window.

 

[Car-Guy]

PLEASE don’t turn this thread into political commentary on income taxes, that was not the intent.

My bad/misunderstanding for starting the drift.... It's just a hot button for me....

 

[pacergal]

Would you rather be poor enough not to pay federal income tax? Not me. I have always felt that if I'm paying big taxes, it's because I'm making big money. I like it better that way.

This was my Dads way of thinking, and he didn't start making "bigger" money until in his 50's, but he never complained about paying taxes. There were times his tax bill was higher than my income.

 

[COcheesehead]

I don't think that makes if fair. I think the entire system is messed up. Personally, I think of it as a success tax.

I wrote out a check that was almost every penny I had in savings to start a company 30 years ago. It eventually became very successful. I paid in taxes what most people would love to have as income. I paid a lot in taxes. I never thought it was fair. I took the risk. The government took the money.

Now in retirement I do everything legally in my power to reduce our taxes. I have over six figures in yearly income, yet we pay little to no taxes. I think turnabout is fair play.

 

[Yipper]

Definitely not trying to make this political so please just comment on the idea of abolishing the income tax for a consumption tax like the bill that will be introduced in the current house session. Acknowledging the impossibility of this bill passing in this congress, it's not too far fetched to think this could surface again in a few years when the party balance is different.

https://www.thestreet.com/politics/...bolish-the-irs-how-that-would-hit-your-wallet

 

[Yipper]

There was a time in my life when my marginal tax rate was 39.1% federal and 6.85% state, so I'm running short on sympathy for all those who are being "penalized for success".

I remember my dad paying close to 50% federal at one time and while he was NOT happy about it, we were living a very good life at that time.

 

[Gumby]

.... I took the risk....

I do have this one small quibble with your statement. It's not you in particular, but I have heard many people say over the years, in effect, "I took the risk, therefore I deserve the money." Taking risk, in and of itself, is not particularly deserving of anything. There are good risks and bad risks, socially useful risks and those that are not. For example, I could go to the roulette wheel at our local casino and put it all down on red. I have a 47.35% probability of doubling my money and a 52.65% probability of losing it all. Suppose fortune shines on me. I took a big risk and have now doubled my money, but I have not created a job or supported the community or done anything particularly praiseworthy. I just took a risk. Anyone else could take the same risk.

You enjoyed success because you took a risk and because you thought big, worked hard, planned well and executed your plan. Your efforts employed people, provided valuable goods/services, and supported the community. That's why you should be praised, not just for the risk taking.

By the way, I see nothing wrong with taking all legal steps to minimize your taxes. That's what I have always done.

 

[COcheesehead]

I do have this one small quibble with your statement. It's not you in particular, but I have heard many people say over the years, in effect, "I took the risk, therefore I deserve the money." Taking risk, in and of itself, is not particularly deserving of anything. There are good risks and bad risks, socially useful risks and those that are not. For example, I could go to the roulette wheel at our local casino and put it all down on red. I have a 47.35% probability of doubling my money and a 52.65% probability of losing it all. Suppose fortune shines on me. I took a big risk and have now doubled my money, but I have not created a job or supported the community or done anything particularly praiseworthy. I just took a risk. Anyone else could take the same risk.

You enjoyed success because you took a risk and because you thought big, worked hard, planned well and executed your plan. Your efforts employed people, provided valuable goods/services, and supported the community. That's why you should be praised, not just for the risk taking.

By the way, I see nothing wrong with taking all legal steps to minimize your taxes. That's what I have always done.

I agree with your thoughts. The risk in and of itself was not the value to society. The jobs created, health insurance paid for, 401ks supported, etc, were the greater benefit.

 

[audreyh1]

Just cut it out already with the knee jerk hot button reactions folks! We will never get out from under it!

Unfortunately this thread is already buried as far as I can tell.

 

[Midpack]

I remember my dad paying close to 50% federal at one time and while he was NOT happy about it, we were living a very good life at that time.

 

[Gumby]

Definitely not trying to make this political so please just comment on the idea of abolishing the income tax for a consumption tax like the bill that will be introduced in the current house session. Acknowledging the impossibility of this bill passing in this congress, it's not too far fetched to think this could surface again in a few years when the party balance is different.

https://www.thestreet.com/politics/...bolish-the-irs-how-that-would-hit-your-wallet

I have several objections

1. It would be regressive and support dynastic wealth. We all consume roughly the same amount (say, +/- 50%) in obtaining the basics of life, to include food, shelter, clothing, transportation. Yes, one can buy luxury goods and services, but you can only eat one meal at a time and wear one set of clothes. Lower income people who spend all their income for the basics would pay consumption tax on every bit of it. Upper income people would have money, beyond their spending needs (even if elevated due to a taste for luxury), that would grow untaxed for generation upon generation.

2. It could cause deflation. If spending is taxed, an expected response is that people will try to spend less. They will put off purchases if they can or substitute less expensive goods. Prices will fall as demand falls, which encourages people to further put off purchases in the expectation of lower prices. Once that mindset becomes entrenched, it is very hard to break and recession ensues. I believe this is called the paradox of thrift - while thrift is good for us individually, if everyone is thrifty it harms the economy.

3. It would be particularly hard on current retirees who have lived their entire working life under an economic regime that taxes income, and so have already been taxed once on all their current savings (leaving aside IRA's etc. for the sake of this argument). Now, when they spend that money, they would be taxed again? That does not seem all that equitable to me.

 

[COcheesehead]

I have several objections

1. It would be regressive and support dynastic wealth. We all consume roughly the same amount (say, +/- 50%) in obtaining the basics of life, to include food, shelter, clothing, transportation. Yes, one can buy luxury goods and services, but you can only eat one meal at a time and wear one set of clothes. Lower income people who spend all their income for the basics would pay consumption tax on every bit of it. Upper income people would have money, beyond their spending needs (even if elevated due to a taste for luxury), that would grow untaxed for generation upon generation.

2. It could cause deflation. If spending is taxed, an expected response is that people will try to spend less. They will put off purchases if they can or substitute less expensive goods. Prices will fall as demand falls, which encourages people to further put off purchases in the expectation of lower prices. Once that mindset becomes entrenched, it is very hard to break and recession ensues. I believe this is called the paradox of thrift - while thrift is good for us individually, if everyone is thrifty it harms the economy.

3. It would be particularly hard on current retirees who have lived their entire working life under an economic regime that taxes income, and so have already been taxed once on all their current savings (leaving aside IRA's etc. for the sake of this argument). Now, when they spend that money, they would be taxed again? That does not seem all that equitable to me.

The law of unintended consequences.

 

[Yipper]

I have several objections

1. It would be regressive and support dynastic wealth. We all consume roughly the same amount (say, +/- 50%) in obtaining the basics of life, to include food, shelter, clothing, transportation. Yes, one can buy luxury goods and services, but you can only eat one meal at a time and wear one set of clothes. Lower income people who spend all their income for the basics would pay consumption tax on every bit of it. Upper income people would have money, beyond their spending needs (even if elevated due to a taste for luxury), that would grow untaxed for generation upon generation.

2. It could cause deflation. If spending is taxed, an expected response is that people will try to spend less. They will put off purchases if they can or substitute less expensive goods. Prices will fall as demand falls, which encourages people to further put off purchases in the expectation of lower prices. Once that mindset becomes entrenched, it is very hard to break and recession ensues. I believe this is called the paradox of thrift - while thrift is good for us individually, if everyone is thrifty it harms the economy.

3. It would be particularly hard on current retirees who have lived their entire working life under an economic regime that taxes income, and so have already been taxed once on all their current savings (leaving aside IRA's etc. for the sake of this argument). Now, when they spend that money, they would be taxed again? That does not seem all that equitable to me.

You make excellent points which I definitely don't disagree with. I wonder if this is coming from greed, disdain for IRS (same thing perhaps), looking to be a 'rebel' or something else.

I also have to believe there would be a deluge of lobbying on something like this akin to the ACA experience. So many entrenched interests in the status quo to avoid a huge battle.

On the other hand - it feels like the current system for collecting revenue for the common good is a bit too complicated and could be simplified.

 

[pb4uski]

Definitely not trying to make this political so please just comment on the idea of abolishing the income tax for a consumption tax like the bill that will be introduced in the current house session. Acknowledging the impossibility of this bill passing in this congress, it's not too far fetched to think this could surface again in a few years when the party balance is different.

https://www.thestreet.com/politics/...bolish-the-irs-how-that-would-hit-your-wallet

Since there would not be any exemptions in place a national sales tax would hose the poor and middle class and greatly benefit the rich. Very unfair.

So if the rate was 30% the family with two working spouses that earn $60,000 a year and spend their take-home pay living paycheck to paycheck, they would buy $46,164 of stuff and pay $13,846 in national sales taxes ($60,000/(1+30%)*30%).

Under the current program they pay $8,026 in payroll and income taxes and keep $51,974 to spend, so their spending capacity is $5,810 greater. Even a "several thousand dollar" rebate would still result in a significant tax increase for that hypothetical family and 5% reduction in thier consumer spending.

Yeah, right.... that dog don't hunt. It would also kill consumer spending and the economy along with it. Bad idea.

 

[Montecfo]

To me a national sales tax only makes sense if you abolish the income tax. Which is doubtful for sure.

Just like sales tax, exempt food, drugs, health care etc to make it less regressive.

It gives everyone skin in the game, and no massive bureaucracy is needed to administer it. In fact, one can be largely eliminated.