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Your real tax rate: 40%

articles.moneycentral.msn.com

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Re: Your real tax rate: 40%

#41

Post by _delirium »

tbrownaw wrote: post #8
dschobel wrote: post #6

Someone enlighten me, how can the author talk about a marginal tax rate for the entirety of ones income? Isn't a marginal rate by definition the rate which applies to earnings above a specific benchmark (thereby providing no disincentive to cross it)?

If your marginal tax rate is approximately constant, then it will also approximately equal your overall ratio of tax/income. So even though the article doesn't seem to be particularly careful with the difference, it doesn't really matter in this case.

The numbers don't add up to the macro numbers, though--- the governments at all levels added together pull in about 25-30% of U.S. GDP in taxes, not 40%.

One thing throwing off his numbers is that he assumes all income to be ordinary income, whereas a large proportion of Americans' income, especially at the high end, get classified as capital gains or qualified dividends, which are taxed at lower rates. I believe Warren Buffett calculated that his real tax rate was 18%, for example.

Re: Your real tax rate: 40%

#42

Post by Elite »

run4yourlives wrote: post #28

The main issue is that we're still taxing income, instead of taxing consumption. We (no matter the country) could save billions in administrative costs simply by moving all tax to point of sale style VATs. (As a sidenote this does not mean that something like the FairTax proposal is a good example of this concept.)

I'm no fan of excessive taxing, but if you shifted the source of all current tax revenue to consumption based transactions, this would cripple the poor and middle class.

For much of the lower/middle class, a significant, sometimes 100% of their income goes to consumption. For the wealthy, consumption as percent of income can be very small.

Re: Your real tax rate: 40%

#43

Post by [deleted] »

mattmcknight wrote: post #37
ojbyrne wrote: post #26

Earlier quoted context omitted.

SS and FICA are very regressive. It's interesting that the lowest rates roughly correspond with the median income - as if the rates were tailored to get the lowest rates to the majority of the voters, while screwing (relatively) much smaller groups at the ends of the scale.

It's not so much regressive as it is "supposed" to be a penion insurance plan separate from the rest of your taxes. There is a cap on benefits, so there's a cap on what you contribute to it, not unlike the cap on contributions to a 401(k) or IRA. Of course, we never got our lockbox so the upcoming generation of retirees elected governments that spent that retirement money on other stuff now wants to raise taxes so th…

[deleted]

Re: Your real tax rate: 40%

#44

Post by cperciva »

frankus wrote: post #36
patrickgzill wrote: post #27

Earlier quoted context omitted.

Canadians also pay much more for gasoline than Americans. Of course, not all of this is in taxes. To check this: find a "gas buddy" site for a place in Canada, then find one for the nearest US city/town close to it (to control for price disparity due to shipping). Multiply cost per liter by 3.6 to get equivalent US Gallon; then adjust it by current exchange rate. Example: lowest for Vancouver, BC: http://www.vancouve…

Go down to Seattle and it's probably $2.50. We Bellinghamsters have been getting screwed for years (at least relative to the Seattle metro area). There's an odd effect where a high-price area spills over into the neighbo(u)ring areas. I haven't quite figured out an explanation.

There's an odd effect where a high-price area spills over into the neighbo(u)ring areas. I haven't quite figured out an explanation.

Price gouging.

Re: Your real tax rate: 40%

#45

Post by ebiester »

btilly wrote: post #10
cperciva wrote: post #2

Canada is quite similar: In 2006, from $14k up to $88k the combined Federal+BC income taxes, payroll taxes, and sales tax credits worked out to a flat rate of 26% plus or minus $250. (Above $88k the rate goes up, but mostly due to a cap on the amount which can be "hidden" in retirement funds.) Graduated tax rates plus low-income tax credits equals a flat tax.

Really? Effective US tax rates are about a third higher than Canadian rates? I find that difficult to believe, but I'd be greatly amused if it was true.

The US is less competitive than it likes to believe in the tax wars, when all is included. We just spend an incomparable amount on military instead of social services.

Re: Your real tax rate: 40%

#46

Post by mixmax »

If you think that's high you should be happy you don't live in Denmark.

"The large public sector (30% of the entire workforce on a full-time basis) is financed by the world's highest taxes. A value added tax of 25% is levied on the sale of most goods and services (including groceries). The income tax in Denmark ranges from 42.9% to 63% progressively, levied on 4 out of 10 full-time employees. Such high rates mean that 1,010,000 Danes before the end of 2008 (44% of all full-time employees) will be paying a marginal income tax of 63% and a combined marginal tax of 70.9% resulting warnings from organisations such as the OECD"

Oh and if you want to buy a car you'll be hit with a 180% taxation of your new car on top of the 25% valueadded tax.

source: http://en.wikipedia.org/wiki/Economy_of_Denmark#Tax_Burden_a...

Re: Your real tax rate: 40%

#47

Post by leelin »

Very cool, it seems the researchers took into account all sorts of things like state sales tax, state income tax, corporate tax, welfare / handout type programs, and spending + savings habits.

From what I can tell the key inflection points in the graph come from four issues.

1.) How much can one contribute to retirement accounts to avoid paying income tax that year?

2.) Where are the key discontinuous cutoff points in the tax system? (social security maxes out, certain payments to the needy disappear, etc)

3.) What is the typical marginal propensity to consume?

4.) How much wealth has one accumulated by a certain age in life, which can be invested, which is only taxed at lower capital gains / dividend rates?

My thoughts on the first are mixed. Yes, we don't pay taxes this year on money we stash into a non-roth 401k, but I hope they aren't doing the bad accounting of treating that as 0% tax... we will eventually pay SOME tax when we withdraw on it, just not this year.

The second point is very valid... there is a magic range around $110-$160K income right now where your marginal tax rate from paying social security is almost 12% lower than the guys making $80K-$110K. In the US, you and your employer each pay 6.2% of your earned income to social security, but it caps at $110K (the rationale being you won't get credit for more than that at retirement, so they won't take more).

The final points are a bit bogus in terms of providing us guidance, but they are more of the author's observations from the data they studied. Poor people consume more as a percentage of their income and hence pay more sales tax each year. Wealthier people buy more, but less as a percentage of their income, so they pay less sales tax, and save more over time which can be turned into investment income.

http://people.bu.edu/kotlikoff/Does%20It%20Pay%20to%20Work%2...

Re: Your real tax rate: 40%

#48

Post by CWuestefeld »

waqf wrote: post #31
CWuestefeld wrote: post #12

Earlier quoted context omitted.

The "marginal" think really does throw this off. The "marginal rate" means the amount you'll be taxed for the next dollar you earn. So this tells us little about the rate that each person already paid for the amount below the margin, the "body" of earnings, if you will. Actually, the more I think about it, the more I think that the idea of a flat marginal rate is a good thing: that means there's little disincentive t…

A flat marginal rate with a curved average rate certainly is impossible: http://en.wikipedia.org/wiki/Fundamental_theorem_of_calculus

The theorem only works for continuous functions. Tax rates are anything but continuous. They have sharp elbows (e.g., AMT), and some taxes wink into existence and back out again within a finite range (e.g., EIC).

I'm not sure that these exceptions are sufficient to allow it to work out, but I'm pretty sure that this rule isn't the impediment.

Re: Your real tax rate: 40%

#49

Post by gchpaco »

randallsquared wrote: post #34
mcknz wrote: post #29

It's not like the entire tax goes into a black hole -- it would be interesting to see what the return is on the average tax rate: how much benefit is derived from state, federal, and city services (roads, water, security, libraries, parks) and benefits (unemployment, social security, disability).

It's not like the entire tax goes into a black hole It's arguable that we'd be better off were that so... part of the tax burden is all the people employed by those taxes who don't actually contribute anything to society on net (that is, whose jobs wouldn't be done at all on the free market)... in this way, taxes can have something like double their cost in harm, potentially.

Citation, please.

Re: Your real tax rate: 40%

#50

Post by _delirium »

mixmax wrote: post #46

If you think that's high you should be happy you don't live in Denmark. "The large public sector (30% of the entire workforce on a full-time basis) is financed by the world's highest taxes. A value added tax of 25% is levied on the sale of most goods and services (including groceries). The income tax in Denmark ranges from 42.9% to 63% progressively, levied on 4 out of 10 full-time employees. Such high rates mean tha…

The people who do live in Denmark seem pretty happy about doing so, though (http://www.sciencedaily.com/releases/2006/11/061113093726.ht...). One reason might be that they're fairly wealthy to begin with, so it's taking a large percentage out of a large pie (Denmark's per-capita GDP is ~DKK 375,000 = ~$62,000). The social safety net is also rather strong as a result of the government's large amount of income, and it's popular, partly because nearly everyone uses parts of it--- free education, free adult education, free health care, free child-care, pensions, job retraining, etc.
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