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Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

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Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#221

Post by gnicholas »

rgbrenner wrote: post #175
gnicholas wrote: post #94

> You owe the IRS about $38,500 more, assuming each of us pays the maximum with no special deductions. This also assumes the investor has no interest income, which would be unlikely. For a younger person with a big nest egg, this wouldn't be a huge chunk of their assets. But as you age you'd want to shift into less-risky assets, like interest-bearing ones. Also, investors would probably be diversified into real estat…

But you only get to collect social security to the extent you paid into the system Medicare and social security payout more in benefits than you paid in: http://www.politifact.com/truth-o-meter/article/2013/feb/01/...

I was trying to avoid saying "you only get benefits if you paid in", which oversimplifies the situation. If someone paid in for decades, they'll get more SS than if they paid in for 2 years. Basically, I meant "to the extent" to mean that it scales with participation. Thanks for the link — interesting details.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#222

Post by vasilipupkin »

_m8fo wrote: post #167

One thing a middle class friend of mine does is the following: 1. Buy house 2. Rent out rooms 3. Deduct all expenses that you'd have to pay anyway, utilities, internet, etc. as "business expenses". 4. Depreciate house 5. Renovate the house and depreciate the new fixtures/additions/etc. 6. Reappraise the house after a certain time and refinance. 7. Take money out after refinancing and buy more property. Go back to (1)…

when you sell those properties, you still have to pay all the taxes. Depreciating doesn't save you from having to pay tax, it just defers the tax liability to the future.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#224

Post by AnthonyMouse »

PeterisP wrote: post #187
31reasons wrote: post #177

Can't we just have Sales tax only. People who buy more will pay more taxes. You can exempt certain items like food, education, healthcare. Why do we need complicated income tax model? In the Sales Tax Only model, wealthy investors can invest as much money as they like but they will only be taxed if they liquidate their stocks and buy a fancy car or a yacht. I am trying to understand why we need Income tax at all?

A sales-only tax (i.e. taxing consumption) means that the burden of taxation is disproportionally shifted towards the poor. A poor person consumes almost 100% of their income; a very poor person consumes more than 100% of their income (by going into debt), an upper-middle class person consumes much less than 100% of their income (they get savings, some investments, and big expenses like student loans and mortgage don…

> A poor person consumes almost 100% of their income; a very poor person consumes more than 100% of their income (by going into debt), an upper-middle class person consumes much less than 100% of their income (they get savings, some investments, and big expenses like student loans and mortgage don't count for sales taxes), and a very wealthy person consumes just a small part of their total income, as most of their spending is essentially buying control of means of production and control of other people, which is not consumption and not affected by sales tax.

This is the common refrain, but it doesn't hold up to scrutiny. Even upper middle class people spend almost all of their income, and what they don't spend goes into tax-deferred retirement accounts. And tuition and student loan and mortgage interest are tax deductible.

Even the super rich don't pay income tax on the money they don't spend because they keep it in offshore tax shelters.

Moreover, income tax can't reach existing wealth (a dollar you already had isn't income), and income tax is collected even when the money is used to pay existing debt, so the working poor are taxed when they earn what they already owe to the credit card company.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#225

Post by pcurve »

jgalt212 wrote: post #60
pcurve wrote: post #3

Makes my blood boil reading this, especially how poor republicans who have the most to gain through tax reform are consistently voting against their interest.

You're the wrong way around on this. The poor pay very little income taxes. It's the upper middle class getting screwed to the benefit of the oligarchs. Of course, the poor are getting screwed, I just don't think one of the ways they are getting screwed is income tax policy.

Even though they're not paying a lot tax, they are getting screwed because if tax burden is shifted from upper middle to rich, the former would spend more of freed up money than latter on more variety of productive goods and services, which would benefit the poor more.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#226

Post by _ptgt »

mrb wrote: post #141
walshemj wrote: post #68

Earlier quoted context omitted.

If there is no difference between income and capital taxation people wont invest in companies. And companies wont last with out access to capital trust me I have chaired share holder meetings caused by lack of capital

« If there is no difference between income and capital taxation people wont invest in companies. » Nonsense. What alternatives do people have? Putting money in a lousy US savings account with a 1% annual interest rate? By comparison the US stock market's average annual return has been 7%. Hence even if income tax rate were the same as capital gains tax rate, the stock market would still give you returns 7× higher.

The problem (started by GP, tbf) is that "investing in companies" is not a binary choice. A given amount of capital is economically more productive in riskier bets in most real-world cases (i.e. bets on tech advances drive the economy forward but are risky). However, higher investment taxes tilts the investment decision towards less risky (and less productive) investments. Think of investing in 1997 Amazon vs 1997 Walgreens: the more your upside is taxed, the more attractive Walgreens is going to look (in 1997)

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#227

Post by nieksand »

PeterisP wrote: post #187
31reasons wrote: post #177

Can't we just have Sales tax only. People who buy more will pay more taxes. You can exempt certain items like food, education, healthcare. Why do we need complicated income tax model? In the Sales Tax Only model, wealthy investors can invest as much money as they like but they will only be taxed if they liquidate their stocks and buy a fancy car or a yacht. I am trying to understand why we need Income tax at all?

A sales-only tax (i.e. taxing consumption) means that the burden of taxation is disproportionally shifted towards the poor. A poor person consumes almost 100% of their income; a very poor person consumes more than 100% of their income (by going into debt), an upper-middle class person consumes much less than 100% of their income (they get savings, some investments, and big expenses like student loans and mortgage don…

A couple of random thoughts as a former WA state resident...

* WA omits groceries, prescriptions, and rent from sales tax. So many of the actual necessities in life are already not impacted.

* No personal income tax drastically simplifies and shrinks the tax bureaucracy. According to the Seattle Times, the city's goal of taxing high earners will cost "10 million to $13 million to set up, plus $5 million to $6 million per year to manage and enforce". That isn't counting the overhead costs on the citizens themselves. This is all money that could more productively flow elsewhere.

* There seems to be an assumption that income taxes will drastically reduce the sales tax. But from my memories of living in both CA and NY don't really bear that up. If anything, these states all have problems with spending too much... more tax revenue is like giving alcohol to an alcoholic and just makes the problem worse.

* Income taxes give politicians another tool for pandering to special interests. In NY, one of my exes got a fixed tax deduction for classroom supply expenses because she was a teacher. That's neat, but there was no such tax-payer candy for my own professional expenses. And back then her salary quite a bit higher than mine. Not fair.

* (bonus!) We often tax things that we wish to disincentivize, such as cigarettes. If you accept the premise of anthropogenic global warming, then perhaps we should drastically jack up sales tax instead to reduce consumption, keeping the omitted categories above.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#228

Post by AnthonyMouse »

joshklein wrote: post #185
31reasons wrote: post #177

Can't we just have Sales tax only. People who buy more will pay more taxes. You can exempt certain items like food, education, healthcare. Why do we need complicated income tax model? In the Sales Tax Only model, wealthy investors can invest as much money as they like but they will only be taxed if they liquidate their stocks and buy a fancy car or a yacht. I am trying to understand why we need Income tax at all?

It's been over a decade since I studied the literature on this, but the dead weight loss caused by a tax at the point of transaction is larger; a case can reasonably be made that transactions that would otherwise occur did not due to tax. Income tax removed before you receive your paycheck into your bank account has been demonstrated in psychological studies to be less onorous, and cause less behavior change (you don…

> It's been over a decade since I studied the literature on this, but the dead weight loss caused by a tax at the point of transaction is larger; a case can reasonably be made that transactions that would otherwise occur did not due to tax.

> Income tax removed before you receive your paycheck into your bank account has been demonstrated in psychological studies to be less onorous, and cause less behavior change (you don't ask for a lower paycheck because you don't like tax).

Another way of putting this is that sales taxes encourage saving and income taxes encourage borrowing. Lo and behold, the average American is up to their eyeballs in debt and a large fraction of income is going to interest payments instead of actual spending. It is hard to see why this should be considered a good thing.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#229

Post by drpgq »

I found this example interesting as a Canadian, as currently there's a big tax battle over people incorporating to avoid high marginal tax rates and take advantage of relatively low small business tax rates, plus income splitting (which normal employees don't have in Canada). In Canada the emergency room physician would be incorporated.

Personally I think a lot of the issue is coming from lowering small business tax rates while cranking marginal tax rates federally and provincially.

Re: Why American Workers Pay Twice as Much in Taxes as Wealthy Investors

#230

Post by JamesBarney »

SilasX wrote: post #211
JamesBarney wrote: post #192

Earlier quoted context omitted.

That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%. Also you're dividing by 200 when you made 250. My calculation with those two corrections give 27.6% which is lower 13% 200 18.6% + 200 (1-18.6%) 15% + 50 15% 37.2 + 24.42 + 7.5 = 69.12 / 250 = 27.6% Marginal Tax rate for 38k-90k = 40.8% 90k-110k = 43.8% 110k - 190k - 28% 190k- 420k - 33%

>That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%. That's with journalist accounting where they reject valid expenses to "prove" that the tax rate is lower. >Also you're dividing by 200 when you made 250. No -- the investment paid for itself (the 100) then earned 200 (the amount above what I invested), then paid 50 out of that as a dividend. It looks strange because it doesn't…

Oh whoops I messed up with the 250. You're right it should have been 200.

The 18.6 number doesn't come from journalists though but from the CBO. And these numbers are in line with similar studies by other entities.

I'm sure you agree that its not just how much your taxed on profit, but also how much profit you had to record that matters.

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