Why American Workers Pay Twice as Much in Taxes as Wealthy Investors
bloomberg.com
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I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual.
I think I was 25 when I incorporated my first corporation, not because I was a startup founder, but to reduce my taxes. I'll bet if you look around at the most wealthy people you know, almost all will have their own corporation or two.
I mean, just the fact that people pay taxes and then expense out of after tax money and corporations pay expenses and then tax on whats left should be enough to illustrate how corporations keep the rich ahead of the salaried population.
It can get worse as corporations can change their tax year. This means if you are someone who gets a large bonus at the end of the calendar year you can shelter the tax on it for an entire year. So you can have someone who earns a $100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes into the corporation and has a full year until November 30th before the tax is due. If you invest the bonus and earn 20% by next November you have earned enough money back to cover the corporate taxes due vs the salaried employee who pays the full 40ish% tax rate on the $500,000 bonus. Now, you'll have to eventually pay dividends to take the money out of the company but I think I've shown enough to prove just how far ahead the person with the corporation comes out ahead of the average person.
Until the tax law changes, smart people have corporations, the 99% don't.
Especially as Vancouver is trying to build its tech and entrepreneurial ecosystem, it's important to ensure that we aren't driving away or hindering small businesses to grow while also not letting huge corporations like TD, Telus, or Apple get the biggest benefits from the tax system the more money they have.
But the current Government and part of the media are attacking it on emotional grounds, like talking about how removing tax dodges that mostly only benefit the highest income earners is an attack on something used by "nurses and teachers trying to get ahead"...
I believe the example was that you may as a contractor (with your own company) receive a bonus to your corporation and be able to offset taxes for another 11 months compared to having the bonus paid out personally.
On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.
IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants I've talked with define as within 30% of average wage for your "profession".
You are saying if you ran a 1 man SAAS app and made 200k in a year, you would w2 yourself for 30k and take a 170k dividend?
I am not sure my accountant would like this plan. Taking say that 90k or 100k might be plausible, but 30% of the average wage?
(And at the 90k point.. FICA goes away past 110k anyway, so the savings is fairly minimal)
If you go on indeed or glassdoor, search what ever your main task is, and screen grab that average salary. Keep searching until you find one that works best for you.
Change your salary with each task by being an hourly w2 employee with different charge codes based on the task. Just make sure you track what work you are doing.
(IANAL/A)
You have to pay the big bucks for the guys willing to push the envelope. And that's not be ause they are better, it's because they have to make more money to offset the risk to their career.
I'm seriously considering moonlighting as a freelancer just to get access to this kind of setup. Of course, my daytime employer not having a 401k makes a big difference - with the combination of the profit-sharing and employee elective contribution, the first $22.5k annually would go directly into a tax-deferred retirement account. Partner up with different people to run unrelated businesses, and you can set up a profit-sharing plan with each to get separate "20% up to $56k/yr" buckets.
Anyhow, I'm kind of rambling. My point is that when you wear both the "employer" and "employee" hat, there's some really good options that open up that most employers don't offer because it's a wealth-transfer from employer to employee.
So while it might work for some - it is not a major "loophole" for top 0.1% (not even for top 1% i think)
Not a major loophole, but its a nice little bonus.
The dividend is taxed at 15% for incomes over $37,950.
"A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements."
https://www.irs.gov/businesses/small-businesses-self-employe...
Source: I'm a (former) tax lawyer.
I own my own company where I do contracting work for clients and the income goes to the company. I might have misunderstood or phrased myself badly above.
I'm still not convinced that this works, but that is how I read it.
And it is also enough for almost any profession. Even CEOs of small companies earn in that range.
In other words, the corporate veil will be pierced either way.
some assets can be depreciated over years. some small assets (like printer, laptop) - can be written off in one year... but amount you would save on it is negligible.
Money launderers will sell themselves electronics at a 5-10x markup on Amazon, for example, to get the cash out.
To get there you need to acquire Goods to Sell first.
Either way, it is not applicable to what parent was saying. What typically people mean in these situations is that "I can buy a car in the name of my corporation tax free, I can replace home AC unit in the name of corporation tax free" etc. And that is very wrong.
(I am here talking about accounting meaning of word "expense")
Unless you feel very comfortable with IRS regulations and annual changes in them, you have to pay a business CPA to run the numbers, and in many cases the added complexity is just not worth it.
Edit: (in the US)
1. https://www.thebalance.com/what-is-a-reasonable-salary-for-a...
But if you don't set your prices, because you're a one-of-a-million driver, then you're shit out of luck.
1) Start Business
2) Get Real Clients to buy your stuff
3) Deduct Expenses
4) Pay 40%* of whatever is left over to the Government
* The 40% number can go up and down depending on your income amount [and local tax commitments].
It would only work if you could relabel personal expenses as a business expense, which is what I think the parent was looking for (and which is a time-honored practice with its own dangers, of course, but is hard for the IRS to stamp out entirely -- you "lose" a "business" pen and keep using it for personal stuff; how does the IRS know?).
But, the 'deduct expenses' will help reduce taxes.
Company phone. Company pays your data plan. Deduct.
You register your company at home, okay you can make an office, you can then deduct some expense as facility operational costs. (Of course there are a lot of regulations for this, and you have to document how big the office is, and it can't be bigger than X% of the house, otherwise it'd be income tax hiding - because it'd be the company paying your rent or just giving you money to heat your bedroom, which is not a business expense.)
Company sends you overseas on work? Business expense. But if you go there for 2 weeks and then post beach photos on Facebook for every day, you're in big trouble.
The middle class is best served by collective bargaining to increase their wages and benefits, strong consumer protections, and access to affordable health care.
Up to about your first 5-10 million (depending on where you live) you need to play by the rules. After that, you can think about hiring a tax advisor to start scamming the system. But the downmarket financial advisors that serve people with a paltry million or two are mostly focused on selling high-commission financial products.
Health Savings Accounts are highly dependent on the circumstances of the individual. Many people with employer-provided health care plans receive minimal benefit from an HSA.
That being sad, you've made you point, in that there are portions of the tax code with deductions accessible to the middle class, like home interest deductions and deductions for charitable giving.
But the, "I'm going to start 12 shell companies and park my money offshore" kind of tax dodges are not really feasible until after your first ten million.
Not really. Sure, we need some form of association to hold property, and sometimes limited liability. Does it need to be the kind of corporations we have now, able to exercise all the rights of people but not taxed or held accountable like people? Nope. A deep reform in all of the laws defining what "corporation" means, and not just tax laws, is overdue.
I don't think that's right. If you look at the dividends in isolation, it looks like a low tax rate. But if you ask "what's the tax rate on capital income?", then you have to adjust for the fact that, before the capital can pay out anything, the investment must pay taxes on profits (35%), taxes on dividends (15%), and taxes on undistributed gains when selling (capital gains, 15-35%).
So, trace out the taxes on a $100 investment that miraculously pays for itself and throws off $200 in profits on top and pays $50 as a dividend. I exit the position. How much was I taxed at?
$200 profits -> $70 in corporate income tax. (35%)
$50 dividend -> $7.5 dividend tax. (15%)
$115 capital gain (it retained $115 of the $200 profits, raising its market price by that much) -> $17.25 capital gains tax (15%)
Total investment (capital) income: $200.
Total capital income tax: $94.75 (17.25 + 7.5 + 70)
Total capital income tax rate: 47.3% (94.75/200).
(That understates it since you can't deduct inflation.)
And keep in mind, investment is believed to have positive externalities!
Also you're dividing by 200 when you made 250.
My calculation with those two corrections give 27.6% which is lower 13%
20018.6% + 200(1-18.6%)15% + 5015%
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 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 make sense to tax for distributing the already-taxed profits, and yet people still think the 15% tax on the distributed part of the taxed profit is too low(!), specifically because they ignore the taxes it already had to pay -- that was the point.
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.
If you're a retailer and you buy 1000 widgets at $9 and sell them at $10, then pay $350 in income tax, is your effective tax rate 35% or 3.5%? Can you see the problem if the government demanded 35% of total revenue instead of total profit?
What you're no doubt complaining about is the fact that many of the deductions can be gamed. But that doesn't mean you can discount the legitimate ones.
One country taxes you 20% but you can't mark down the depreciation of the building you're using so you're taxed $200 of your $1000.
The other country taxes you 30% but you get to mark down the $500 depreciation of the building you're using as an expense so instead you record $500 profit. Which means you're taxed $150.
You can see how even though the statutory tax rate is higher in the first country the effective tax rate is lower in the second.
Different tax jurisdictions have different allowable expenses and deductions, which mean your recorded profit can be different between them. The U.S. has an especially high statutory rate, but also allows for many more deductions and expenses than other countries. The effective tax is how you take into account these differences in deductions and expenses between countries, and the U.S. has one that is in the middle of the pack.
Suppose two countries have exactly the same tax law. One of them is full of online retailers and the other is full of brick and mortar retailers. Maybe the second country has an oppressive package delivery monopoly. The brick and mortar retailers charge higher prices and have higher expenses (more employees, more real estate) and payroll and rent are deductible in both countries.
So the online retailers can make the same dollar amount of profit on lower revenue and expenses and as a result that country is considered to have a higher effective tax rate, even though their tax law is identical, because their economy is composed of a different type of companies.
And no two countries have the same economy, so you end up measuring something that can't usefully be compared with anything.
Effective tax rate as percentage of total income is a concept that originated in personal income tax, where it makes sense because the default is for expenses to not be deductible from personal income. But for business the default is the opposite. What expense is a business entity going to have that isn't a business expense? Which means that effective tax rate for a business is primarily a question of what percentage of revenue is profit.
But the US is quite horrible for small and medium sized companies who actually do pay the high nominal rates because they have no foreign subsidiaries to park profits in.
Also parking profits in different companies doesn't affect the average or marginal effective tax rates because effective and average tax rates are only computed using the profit. And parking cash in offshore subsidiaries doesn't get recorded as profit for the U.S. corporation.
You've argued that effective/average rates depend on the type company. But the amount you pay in taxes depends on what type of company too. So this is a feature not a bug. For instance how many buildings do you own, how much debt you have, how much and what types of equipment do you own. All of these things affect how much you pay in taxes so of course they affect average and effect tax rates but not nominal rates.
My point is corporations care more about average and effective tax rates because they are more representative of what they will pay than nominal tax rates.
Here is the paper which lists the methodology the CBO used. https://www.cbo.gov/system/files/115th-congress-2017-2018/re...
In which case they can't defer paying personal income tax to much the same effect.
> Also parking profits in different companies doesn't affect the average or marginal effective tax rates because effective and average tax rates are only computed using the profit.
They reduce their profits in the higher tax jurisdiction by paying more for products or services from a subsidiary in a lower tax jurisdiction, which lowers their effective tax rate because the cost paid to the foreign subsidiary is a deductible expense which reduces their tax burden.
> You've argued that effective/average rates depend on the type company. But the amount you pay in taxes depends on what type of company too. So this is a feature not a bug.
It is a bug if you are trying to compare effective tax rates between countries that have different types of companies, because you end up comparing company types instead of tax codes.
> My point is corporations care more about average and effective tax rates because they are more representative of what they will pay than nominal tax rates.
They obviously care about their own effective tax rate, but that may have little or nothing to do with what companies in other lines of business that represent the country's average are doing.
Moreover, they care about all the details of the tax code, and make decisions based on it. High property taxes cause companies to avoid/minimize owning real property, high income/profit taxes cause companies to avoid reporting profits in that country, high consumption taxes cause companies to conserve resources or acquire them offshore, etc.
They are independent variables. The statutory tax rate could be 35% and the average 15% and the company could pay 34% or 3% depending on the nature of their business.
It's not at all true that "before the capital can pay out anything, the investment must pay taxes on profits." Familiar examples are commodities, Bitcoin, REITs, Amazon in the 90s, carried interest. Hell, I have a friend who makes a living buying stuff at flea markets and reselling stuff on eBay - that's capital gains.
But below that there's a whole industry devoted to transforming ordinary income into capital gains, like the Ernst & Young Contingent Deferred Swap (which they landed in hot water for). This is the sort of malinvestment that differential taxation encourages.
Ok. Most, but not all, companies would pay VAT on z. 10% in the US, 20% in Europe. That reduces the income from z to, let's call it 85% z.
Then there's corporate tax. 35%. That makes it 55.25% z. The result of this is then used for dividends, which are then taxed at 15%. That makes it 46.9% z. So there's a tax rate for these investments of somewhere near 53% or so, and I bet it'll be more in practice.
Also, the odds of getting an IRS audit if you have a company go up 10-fold.
So the base taxes on corporate profits are higher than income taxes, no ? What am I doing wrong.
So simple!
And I imagine if there were a reliable way to earn 20% in a year even regular Joes would be taking advantage.
How do you put "the bonus into the corporation"?
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 estate (which generates rental income, which is taxed as ordinary income). There are tricks that can be played in real estate, of course, but there's also lots of ordinary income tax paid.
> I get to skip about $24,000 in payroll taxes that you and your employer must fork over each year.
"Payroll taxes" includes social security, which the worker will collect until he/she dies. It is also payable to the worker's spouse in certain circumstances. But you only get to collect social security to the extent you paid into the system. So if there's an economic downturn, the worker will have social security to fall back on in old age, where the investor will not.
The general point remains, but this is a highly stylized example designed to emphasize (hyperbolize) the author's point.
Which actually goes back to the t-shirt example. If we had to consider a real cow every time, nobody would want to study engineering ¯\_(ツ)_/¯
To clarify: Social Security benefits are calculated based on the 35 highest-earning years you report to the IRS, up to a maximum cap. You will _not_ "run out" of benefits at any point, but if you report under 35 years of earned income to the IRS, those zeros will play into the overall calculation of your benefit rate.
Medicare and social security payout more in benefits than you paid in: http://www.politifact.com/truth-o-meter/article/2013/feb/01/...
The example is citing someone who's pulling in $300k from dividends and capital gains each year from investments.
If there's enough of a downturn which would long-term imperil someone pulling in $300k off dividends, it may be big enough to impact social security itself, no?
Big money from some investment now doesn't mean big money forever from that investment.
You can diversify and hedge, but then you're bound to get average market rate, that's basically the rate of Treasury bonds.
But if you get 300K from that per year, good for you.
Not if you are wealthy. If your money might not last you have to shift to conservative assets. But if you have 10x what you need for the rest of your life you can keep investing aggressively.
I don't see why it can't be a two-pronged approach with both higher income taxes and wealth taxes. It's what was done in the 1950's, and there was still plenty of wealth then.
That time period was one of great prosperity that won't be repeated. Market returns were higher; most of the low hanging fruit has been plucked, and you can expect ~5% in equities returns. Its going to take far more capital now to get the same returns your grandparents had, which is why you see capital chasing returns across the world.
https://www.cnbc.com/2017/05/07/get-ready-for-dramatically-l...
"The leaders of Vanguard Group, overseers of some $4 trillion in client assets, have been advising investors to expect a typical 60 percent stocks/40 percent bonds portfolio to deliver two- to- three percentage points less in nominal annual returns than its long-term norm. (Since 1926, such an asset mix has returned better than 8.5 percent annualized.)"
"Other forecasts are even less generous. Research Affiliates, a quantitative and "smart beta" fund manager, projects that U.S. stocks might only offer one percent a year for the next decade, after inflation. This is based largely on the so-called Shiller P/E, a ratio of the S&P 500 index to its trailing ten-year average earnings, which is now above 29 and higher than any period aside from the run-up to the 1929 and 2000 market peaks."
"And with risk-free 10-year government debt yielding a skimpy 2.3 percent in the U.S. and far less elsewhere, all other financial assets have repriced for skimpier future returns as well."
The example they provide
> Farmer spends $50 on tractor repair from mechanic. Mechanic buys $40 of corn from farmer. Mechanic spends $10 on barn cats from farmer.
does not involve stuff made abroad, massive corporations with economies of scale eliminating the middleman, or foreign-owned entities.
Most of that velocity will end up in China invested into another skyscraper ghost town, a massive infrastructure project or a cryptocurrency mining farm.
(Which would get you to three million by the way)
[0] https://statisticalatlas.com/United-States/Household-Income
[1] https://www.quora.com/How-many-people-earn-200-000+-per-year...
I suppose this is a matter of your definition of "plenty of people".
Source: https://taxfoundation.org/capital-gains-rate-country-2011-oe...
And companies wont last with out access to capital trust me I have chaired share holder meetings caused by lack of capital
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.
Comparing your experience chairing shareholder meetings to tax policy is apples and oranges. Specifically, that because you've chaired a shareholder meeting, this somehow makes you an expert on the efficacy and outcome of changes to the tax code.
The theory of "investment fleeing" due to capital gain tax increases is, frankly, not proven by the data. We've had an increase in the capital gains taxes under Obama (2014) - yet investment continued across private equity, venture and general investment.
I'm not really serious, but perhaps something along those lines is an option?
It's the investor's job to make sure their investments are producing an adequate risk-adjusted return, not the government's job to help you get there.
If I have you 51% odds on a coin flip, that's a good bet. But if you only get paid out 60% when you win, it's a bad bet.
But I do think that's a different argument by a few degrees than the idea that capital gains taxes should be lower to somehow compensate investors for their risk.
What do people imagine rich people would do with their money instead, if capital gains were taxed like income? Stuff it their madrasses, and be at the mercy of inflation? Probably not.
We should be trying to discourage the accumulation of power as well.
More likely, we would heavily tax goods that poor people cannot afford. Things like dining out, travel, fashion, electronics, cars, and housing in excess of basic sq footage.
In Europe, most wealth is inherited, and power in concentrated in family dynasties.
If you have, say a $200K minimum threshold to start owing minimal annual tax, and a progressive scale after that, do you really think it would stop the next Bill Gates?
Why would anyone, including Pickety, want to prevent Bill Gates?
A person earning 40k per year isn't MUCH better off than the other. They are both broke, and only have money for the necessities. But if we only tax consumption. The person earning 10k will end up spending a larger percentage of their income in taxes than their counter part.
Now lets throw into the mix, me. I make a healthy 6 figure salary. Lets say I also only pay for what I use, and as a penny-pincher, I only get cheap housing, buy bread and cheese for my food, and tap water. I'm now paying the same taxes as the person earning an order of magnitude less than me.
Do you know many people with high incomes but super frugal lifestyles? If so, are they a rare counterexample, and not the norm?
Most every person I knows spends in line with income.
1. Rainy day fund, because you know one day the high pay may stop.
2. Retirement, because you know one day your ability to work may stop.
3. Estate planning, so that your family will be set up for a life that was better than the one you were given.
4. Investment capital, so you can turn your 100s of thousands into 10s of millions or more.
5. Startup capital for a future venture.
The difference between the middle class and the high-earners are that the high earners save their excess income.
1. You spend the savings, and pay consumption tax
2. You die, and pay the estate tax.
A consumption tax is always regressive.
in my opinion, for a clean treatment of value taxation, either corporate tax or capital gains tax must go.
I've seen the song and dance for a while now and hoped Obama was different. Promise enough to get elected and hope they forget about the promises after.
Trump is literally doing to same thing. NAFTA and NATO are obsolete, oh wait now that I'm in office I didn't mean what I said. They're important.
See http://money.cnn.com/2015/01/30/pf/taxes/obama-taxes-rich/in...
I don't know why we have a flat tax on investment income but a progressive tax on labor. The easy, and fair fix, is to progressively tax investment income.
I recommend Ken Fisher's "Debunkery" which covers a lot of economic what-ifs with hard data. Capital gains tax rates and treatment varied widely throughout the US history, yet collected revenues did not.
Yeah...look at Bitcoin, Bay Area real estate, tech stocks (Google, Tesla, Amazon, Apple, Facebook, Sales Force, etc.)...it would seem like 'assets' are kicking the asses of wages. People are getting rich buy & holding assets and with speculation than 'building and making things' (except for Tesla). And the low long-term capital gains taxes to boot just makes it all the sweeter.
Now obviously,doctors, coders, and lawyers can do very well too. To get to the stage where you can live off assets, you need income.
This seems to me to mean that if you are say Larry Page or Sergey Page and set your salary to $1 (like the do), your main motivation for the low salary might not be to signal that, as a large shareholder, you are aligning your interest with shareholders and thus won't take a salary (this is what I thought the $1 salaries in the Valley were all about, but it always seemed a little silly to me). Maybe your main motivation is that you make all of your income in capital gains and if you have less than $37,950 in "Taxable Income", you pay %0 in capital gains. $1 in "Taxable income" with $1 billion in capital gains and pay $0 in tax. You could make a bit more with a salary of $37,949, but that is nothing compared to your capital gains, and then people would be pointed to exactly what was happening.
This would be a much bigger loophole than covered interest being taxed at the long term capital gains rate. Although, now that I think about it, the two loopholes would work together. Own a hedge fund, take $1 in salary, make $1 billion in carried interest, pay $0 in taxes.
I sure don't want to believe this is the way it works. Links to an IRS.gov web page example that shows otherwise would be greatly appreciated.
For the purposes of your example, Larry and Sergei would pay no tax on the first 37,949 of capital gain income (thanks to the $1 salary), but regular capital gain rates on the next ~billion.
[0]: https://apps.irs.gov/app/vita/content/globalmedia/capital_ga...
The poster "livesoft" is one of the consistently insightful and funny posters I know.
This seems very much like presenting correlation without any semblance of causation. Specifically, "right after World War II" is a pretty significant variable to ignore. The financial impact of the war being over (and massive amounts of resources being re-allocated) may well have been large enough to counteract any other variables.
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).
It's pretty much foolproof. The tough part is being an owner-occupied landlord for a bit to get to the point where (6) is worth while. You also have to be in a hot market.
[0] https://www.thebalance.com/depreciation-recapture-3192979 [1] Internal Revenue Code section 1250(b)(3)
Man... too many benefits are given to those who own property.
It just basically becomes a snowball, you keep on upgrading properties.
Capital gains tax shouldn't exist. It should all be one income tax. You can carve out discounts or exemptions for things like sale of PPOR, sale of family business up to a certain point, if you want.
So... you take a loss on your taxes, probably spreading it out in some way so you don't pay taxes for a few years, if it's a serious enough loss. Right? Why does the rate need to be different?
Furthermore, I think you are misunderstanding the double taxation argument. The double taxation arises because the company has already payed tax on their profits.
Personally, I don't think taxes should be based on risk assessment.
The justification also breaks down when you recognise that capital gains taxes are the same for investments in any sector: If it's supposed to reward risk-taking, why tax investments in retail or insurance stocks the same as early-stage venture capital?
I don't believe capitalists take more risk or should get preferential tax treatment.
You don't seem to want to understand my point: Low taxes for investment benefits wealthy people disproportionately. Yes, lower income also get some benefit but the vast majority goes to the wealthy. Same for all the Republic "tax reform" proposals: A little tax cut for small incomes, large tax cut for high incomes.
Yes, I understand Saez disagrees. But he is hardly the final word on this. Hardly.
most 65 year olds who are wealthy at 65, weren't at 30. Just pointing out that if you support a policy because you don't think it will affect you, it very well might later on. But that's an aside point, not the main point.
In some cases. Investing in the stock market doesn't. It's just a somewhat randomized wealth redistribution system. If I invest $1M in IBM, IBM doesn't see any of that money. Nor do the investors in IBM. It might move the price of a fraction of a penny, but the money just goes to whatever person sold their stock.
So, some investment (private companies, municipal bonds, etc) leads to more economic activity, but not all investment. I'd be interested to see the breakdown.
Also, we have ways to encourage and provide benefits for people who are lucky enough to save for retirement. 401Ks, IRAs, etc... You don't need a lower capital gains tax, instead, provide more benefits for investments specifically set aside for retirement if you think not enough is being done.
You might argue that they'll just "waste" it on goods and services, but that's what keeps the economy moving so it's not really a waste.
Your life would be negatively impacted if everyone paying capital gains decided it was advantageous to avoid paying them, so you can't talk about adjusting that tax structure as if all of the same money would stay on the table. If it were less enticing to invest it, fewer would, and that changes the environment in complex ways. It's a big assumption that if you raise taxes, everything else remains pinned down and we can analyze that variable in isolation.
Maybe a better argument would be that successful investors use of money is better for everyone in society in the long run and that having lower taxes on earned income would just let more money be spent on "useless" things: longer vacations or fancy lattes.
https://en.wikipedia.org/wiki/Land_value_tax
We need to implement a land-value tax, if simply because taxing land does nothing to change the supply of land. Unless America decides to invade Mexico anytime soon, the value of land will not change.
I responded to another post in this thread with a link on Georgism as well (https://en.wikipedia.org/wiki/Land_value_tax).
I see Georgism occasionally advocated for on Hacker News but I really wish I would see more discussion on it. IMHO, it is the only sensible tax and the most fair tax that economists have thought up.
How do you encourage families to save for retirement? isn't a lower tax rate on investment income a way to do that?
If I’m not missing something you though was implicit somehow, that is some pretty remarkable logic.
My dad bought pcg_pe for $12 / share when they went into bankruptcy protection bc Enron/etc. When they came out of bankruptcy they had to back pay him all the missed dividends and now continue to pay $1.75/share/year. For his cost basis, its 15% return yearly. Not too shabby.
Politicians refuse to let you disarm them. Worse they are adept at convincing you they need more taxing power by playing you off each other, by preying on your jealously or creating it.
What is ignored about investment income taxing is that original income used to create the investment was taxed. Hence we are taxing it more than once and doing so forever. the alternative is they pull their investments/risks and put them into vehicles like bonds that government officials really want them in. don't think these articles come out of thin air, they are politically motivated to get you angry so you willingly give more power to the political class; they are the true one percent
Personally I think a lot of the issue is coming from lowering small business tax rates while cranking marginal tax rates federally and provincially.
How about changing the dramatis personae a little -- say, make the wage-earner a VP of product development at a soon-to-be-purchased startup (straddling both wage-earning and investing, maybe) v. Warren Buffett?
It's amazing to witness the compound effects of interest^H^H^H^H^H^H^H^H long term changes in tax policy, particularly when the advantage becomes the new normal and is then the basis for further changes. How many people look at tax legislation based on how much better it is than 50 years ago?
https://www.nytimes.com/2016/09/01/business/yesterday-outrag...
I think rates should be lowered and and tax avoiders/dodgers should not be allowed to bid on govt contracts.
Time Cook pays himself in options, which influenced by untaxed cash hoard.
https://www.cnbc.com/2017/05/02/apples-cash-hoard-swells-to-...
It places another barrier on hard working people trying to move from middle to upper-middle or upper class status.
Also, wealthy people are mobile, as are companies that don't have tangible assets. If you try to over-tax, they'll simply domicile everything elsewhere.
Labor can't run away as fast, so it's easier to tax more.
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).
I'm sure I'm grossly oversimplifying, so someone with more economics education please chip in!
> 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.
If all your spending is consumption, then all of that is taxable, and if much of your spending is to gain more income in the future (e.g. buying rent housing, or stock/control in companies) then that's tax-free - in essence it's a tax system that strongly facilitates a rich-get-richer, poor-stay-poor dynamic and increases inequality. And that's generally considered a bad thing for society.
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.
* 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.
This is where we need to eventually transition.
EDIT: Start small. All politics are local. Run for city council, or some other form of local government. Work towards change. Network. Expand your reach as you become comfortable in your role. My contact info is in my profile if you want a step by step guide.
You can run a local office campaign for under $1000.
So do you vote democrat to get more money and fail your religious obligtation? Or do you vote repblican to fulfill your religious obligation at the cost of some rich guys getting richer?
Not all people vote through an economic lens. Many othet lenses exist. Religion is just one of them. You could replace religion with gun rights. Or states rights. Same story.
I would guess for most people, no one party matches all their wants. So they need to prioritize.
In the cable system, if I want channel 1 from package A, and channel 2 form package B.. I can get mad they aren't in the same package.. but I can ultimately just buy the super package and for $200 a month get all channels.
How do I do that in politics? Get one view from party A and one view form party B? I can't. I have to pick my priorities and only get one. or maybe guess which party has more things I like.
We also, need to rank candidates: https://www.scientificamerican.com/article/ranking-candidate...
Your fringe group wants to reform the tax code. Awesome. Another wants to build a wall with Mexico. Another wants to ban immigration by non-whites. Another wants to take away voting for women. Another wants to legalize the right to carry AK-47s in public.
How do you get your "fringe" change through, but not other crazy changes through?
These fringe groups know their growth comes from mainstream voters trying to push some change, so if they push for crazy ideas, they'll lose those voters and the non-fringe groups can force new elections to "steal" them back.
My Western European country is currently being governed by a centrist party with support by two "far left" parties, including our national Communist party, and the demands they make are for a somewhat higher minimum wage, not an imposition of Marxism-Leninism.
But as demonstrated, a two-party system can (will?) eventually lead to polarization, causing one of the only two options in the system to become a fringe element, and unfortunately the only option the people have now are the democrats or a party of right-wing extremists who are anti-woman, anti-poor, anti-education, anti-science, and white supremacists, all while lying about anything they can to make people afraid of anything that will drive them to vote Republican.
In other words, a multi-party system might end up with fringe elements, but we've proven that the two-party system can not only do that but effectively force a huge number of people to vote for that fringe element.
Please, don't try and turn this into a whataboutism and argue how much worse one party is, that's the trite and cliche response we always here that never addresses root causal issues.
Rant about your comment aside, after long deliberation this is why I support the unparty movement, the people could get enough third party people in to take away the majority from both parties. Congress (and the rest of gov) needs to be reminded they work for the people. Right now, both parties work for themselves and those that corrupt/black mail/threaten them.
Be careful not to cause useless agurments. Both sides are at fault, of course, and it should be obvious that one side is currently more extreme than the other, just like the post above said. Such partisanship is a failure of the two-party political system that amplifies an us-vs-them mentality that people naturally get when under stress.
> this is why I support the unparty movement
I assume the unparty movement is a movement to completely remove parties, which wouldn't work in my opinion. It ignores the human tendency to form groups, and makes negotiations difficult if you don't have at least some centralization of power or method of organization. A multiparty system is a better balance IMO because it maintains natural human hierarchies while easing the adaptation of the government to changing demographics with different needs.
But then I see how coalition governments work in other places. I am not sure that is overall better? Better in some ways, but I think it has a lot of downsides also.
Think of a three party system with 45 / 45 / 10 of the votes.
The 10% party gets to see which of the big party will support their measures. The party that gives in can now have a combined 55% of the vote, and can then railroad through all the laws of both the 45% and the 10% party, totally ignoring the wishes of the other 45% party.
So effectively, a tiny 10% party now has more political say than a party that represents 45% of the population!
Isn't that exactly what we have in our current 2-party system, with factions forming coalitions against the other groups that they most disagree with?
Might the only difference be that, on one side of the Atlantic, the individual factions have explicit names while the coalitions go unlabeled, and on the other side of the Atlantic we explicitly name the coalitions while the factions they comprise go (mostly) unlabeled?
And, quite frankly, the places that need the most help probably don't have a lot of options at the local level.
Want to help me out? let me keep my damn money, let me decide what is right for me. you got an agenda? spend your own money toward it.
its also worth noting that almost all school funding does not come from these taxes. if you are so concerned about funding public services, demand Apple pay their taxes. they got 250 billion of the tax evaded stuff.
I'm interested in debating some of these points. (Honestly more interested in seeing others debate it.) However, if you are going to get emotional on points, realize that you are betraying that you likely haven't researched the points.
As an example, the claim that "almost all school funding" does not come from these taxes is not as true as "almost none of these taxes go to school funding." More, this belies the idea that you would be willing to have these taxes exist, if they went to schools. I am guessing this was not your intent. Though, I am also guessing you use this rhetoric to your advantage.
I experienced this first hand with Philadelphia's soda tax (to fund universal preschool), which has been a spectacular yet tragic failure thus far.
at least with the tax, it was 'said' to have been appropriated for it, but capitals gains simply do not go for schooling children. those are funded mostly local, please play your 'ALL'/'NONE' lawyer ball somewhere else.
Pulling nominally related stories up, and then referring to them as a "spectacular yet tragic failure" without citations does little to make me believe you. What makes it a spectacular failure? What makes it a tragic failure? Quickly scanning headlines, it looks like it isn't raising as much as some predictions, but 40 million is not nothing. Nor is a marked reduction in sugary soda consumption. I'd be curious to know if any health benefits can be seen in the city.
And again with the rhetoric. Telling me to take my "lawyer ball" elsewhere is showing that you don't intend on having conversation. So, are you?
We should fix the inefficiencies. Individuals have little over-arching notion or interest in what's best for a nation beyond their community or past their lifetimes.
I mean, at heart this is easy to agree with. We all want to think that there is waste. And there probably is a ton of it. The problem I have is the cost of fighting some waste is more expensive than it is worth. I realize this is about charity, but https://www.ted.com/talks/dan_pallotta_the_way_we_think_abou... is one of the few TED talks I actually still like. I'd be very interested in seeing rebuttals.
There is also the argument that corruption follows money. And that is certainly true. Doesn't do a lot to help the many people in underfunded locations of our nation.
Of course, the poor are getting screwed, I just don't think one of the ways they are getting screwed is income tax policy.
If you can't figure out why poor republicans don't vote in their own interest, perhaps it's your understanding of their interests that's flawed. Maybe they're not stupid; consider that maybe you don't know anything about their interests and motivations.
In short: if people keep doing something that you don't understand, maybe it's time to take a step back and admit that you don't understand it (instead of surmising that they must be idiots).