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[clean]

(much of their income will be capital gains, which again, is taxed at 15%).

Capital gains (and dividends for that matter under the current code) come after the business has paid taxes.  Please dont flame my by claiming that "Businesses dont pay taxes".  I promise that they pay all that they are legally obligated to pay.  So those taxes are In Addition To the taxes already collected.  

In addition, capital gains can be timed.  Dont want to realize a gain, dont sell the security.  Charge too high a rate and revenue goes to zero.  

I dont have the numbers in front of me, but I seem to recall that companies paid higher dividends after the tax law changed so that dividends were taxed at the same rate as capital gains.  The alternative is to cut the dividends back to what they were before the change and increase stock buybacks.  Those that need money or want to realize their gains can take advantage of (time) the sale.

Of course there are other means available to people with means, and the greater their means and the greater the tax rate, then the greater thier tax liability could be and the larger the 'trickle down' to smart tax experts will be to protect the wealth and income (reduce the taxes) of the rich.

What would you do if they eliminated the deduction for home mortgages, or sales tax or property taxes?  If you take the standard deduction, then those changes wont matter.  Change the system and people will adapt to the change.  My point is, especially with capital gains and dividends, increasing the rates may in fact mean that the rich pay less in taxes than they do now.  They may have a lower declared income, but as someone pointed out, the top 1% will always have 1% of the top paid people in it no matter what the income is.  

The other side of the coin is that half the people dont pay taxes. So when people argue that the tax breaks go to the rich, I wonder what the alternatives are?  How do you reduce the taxes of people that dont pay taxes in the first place?  

I wonder what rich people drink, and if I would like it?  (jots note to remember to buy lotto ticket in hope of joining Mit and The Donald at the Club).

[clean]

pay less taxes than their assistants

Nope... Paid a lower RATE.  Paid gobs more in taxes.

Mit paid 14%, but paid more last year that I am likely to make in my lifetime. 

[mad_doctor]

pay less taxes than their assistants

Nope... Paid a lower RATE.  Paid gobs more in taxes.

Mit paid 14%, but paid more last year that I am likely to make in my lifetime. 

Ah, was that it...  the news that gets exported isn't always the best quality, clean, and my aging mind doesn't always recall the details.  Do I recall correctly that his lowly assistant still makes over $200K?

Nice to see you, btw ;)

[clean]

http://www.thejanedough.com/warren-buffett-assistant-salary/

this link claims between 200K and 500K. 

According to some, then, she is "rich".

[canuckois]

pay less taxes than their assistants

Nope... Paid a lower RATE.  Paid gobs more in taxes.

Mitt paid 14%, but paid more last year that I am likely to make in my lifetime. 

But that's the point, surely -- not how many dollars one pays to the government in any given year, but the fact that, proportionally, certain people lose a much smaller chunk of their money than others.  Buffet's argument is entirely valid; he paid more money to the government than his assistant, but that money represents a much smaller portion of his assets than it does for the assistant.  Thus, those who could afford to pay more, because they tend to have more, actually pay less than those who simply can't afford it.  The amount is irrelevant; it's the rate inequity that highlights how broken the system is.

[mad_doctor]

Suppose that instead of having lots of "rich" people, you had only one "rich" person with gobs of income, and instead of a middle class, everyone else was "poor" and paid no income tax (currently a little less than 50% of "taxpayers" actually pay no income tax).  You could run a government by taking a portion of this rich person's income - call him Warren Buffett, if that helps.  This will work only as long as nothing happens to good ol' Warren.  What if Warren decides to move to another country, or what if something diminishes Warren's income-earning capability?  You can't make up the deficit from "the poor", so one of a few other things must happen...

1)  Make no cuts in spending, and borrow to cover the deficit year-to-year
2)  Make no cuts in spending, and print the extra money you need to cover the deficit year-to-year.
3)  Cut spending to cover the deficit.
4)  Some combination of cutting, borrowing, and printing
(remember, in this scenario raising taxes won't accomplish anything, because you can't get taxes from "the poor").

Currently in the US, borrowing and printing is in progress.  There is also a middle class that may be taxed, and the numbers indicate the numbers of "the rich" are in decline.  It is also possible that borrowing may become more difficult very soon.  Continuing to print money is undesirable and infeasible in the long term.  With all the eggs in one basket, so to speak, increasing taxes is a large risk to take, since tax revenues are just about the only resource left to throw at the problem.  If something happens to the tax base, then what?

[clean]

it's the rate inequity that highlights how broken the system is. 
 

I understand the idea.  I also understand the implication.  I think that we learned from the Reagan tax cuts that we can lower the rate and actually increase collections.  (Again, almost 1/2 of the population pays 0 in income tax.  It is hard to get lower.)

In Mit's case or Buffet, if you like, they could simply adjust the timing of their sales,  Or hell, buy municipal bonds and pay no taxes at all.  Their earnings may fall, but after tax, they may be much better off. 

Honestly, I dont know how one would fix the tax system.  Maybe Herman Cain had the idea (though others surely had it before in the Fair Tax) with his 9,9,9 idea. 

Not to derail the drinking or the topic, look what that would do.  If you have a Roth IRA. you have paid the taxes already on every dollar contributed.  But if they change the code to 9,9,9 for instance, then you would pay a national sales tax on every dollar spent.  So you paid taxes in the first place with the promise that you would not pay taxes on the withdrawls, only to now pay a tax again on the money when spent  in your old age. 

The bottom line, I think, is that Taxes Suck.

[pigou]

Capital gains (and dividends for that matter under the current code) come after the business has paid taxes.  Please dont flame my by claiming that "Businesses dont pay taxes".  I promise that they pay all that they are legally obligated to pay.  So those taxes are In Addition To the taxes already collected.

And sales taxes are charged on money that has been taxed as income already.   

In addition, capital gains can be timed.  Dont want to realize a gain, dont sell the security.  Charge too high a rate and revenue goes to zero.

Actually, you can observe a decrease in revenue immediately before a rate increase goes into effect - and you would observe an increase in revenue immediately before a rate hike takes effect. But if you taxed capital gains as regular income (and not just for a few years, but rooted it in the tax code), you wouldn't observe a long-term change in transaction of securities. Relatively speaking, stocks would remain equally attractive to other types of investments - after all, bonds and interest on savings accounts would be subject to the same tax. The idea that people would just keep their money at home (thereby losing money to inflation rather than making an after-tax profit) is ludicrous.

What would you do if they eliminated the deduction for home mortgages, or sales tax or property taxes?

Obviously I'd live on the street, because who would want to own a house without that deduction? There was a housing market long before these kind of deductions were enshrined in the tax code. What matters far more is why, for example, the home mortgage deduction was created. It's part of the government's mobility budget (i.e. welfare program) which is supposed to help reduce inequality. The problem is that the mortgage deduction increases people's willingness to pay for a house, which in turn drives up the cost of houses. A windfall for people who bought their homes before the deduction, but increasing prices don't help low to mid-income households buy property.

When a program leads to the opposite of its supposed effect, I think it's worth reconsidering whether this is something the government should spend money on. For what it's worth, the "mobility budget" that has exactly this opposite effect (reducing mobility) makes up roughly $600bn of government spending. Speaking of ways to fix the budget deficit...

My point is, especially with capital gains and dividends, increasing the rates may in fact mean that the rich pay less in taxes than they do now.  They may have a lower declared income, but as someone pointed out, the top 1% will always have 1% of the top paid people in it no matter what the income is.

What's happening here? By what mechanism would raising the capital gains rate mean the wealthy pay less taxes than they do now? If you tax all earnings (no matter the source) as income, then there's no other asset class to shift to that would reduce revenue. Yes, companies could buyback stocks instead of paying out dividends - but someone has to sell those stocks, and they will be paying income tax. And when you do sell, you pay income tax on the realized gains, too.

The other side of the coin is that half the people dont pay taxes. So when people argue that the tax breaks go to the rich, I wonder what the alternatives are?  How do you reduce the taxes of people that dont pay taxes in the first place?

Half the people don't pay federal income taxes - that's not at all equivalent to you statement. Tax breaks could be given by lowering payroll taxes, which would benefit everyone with a job, or by lowering sales taxes, which would benefit everyone. That sales taxes are collected at the state level is not much of an administrative challenge, as the federal government could distribute the additional federal revenue to the states.

I wonder what rich people drink, and if I would like it?

They aren't any different from the rest of us. It's one thing to support higher taxes, even if it comes at a cost to you, and another to voluntarily pay more to the IRS. Warren Buffet paying an extra two percentage points isn't going to do anything for the country, but raising the income tax of the top bracket by two percentage points is going to fix much of the deficit. The former is a PR stunt, the latter is serious policy.

I think that we learned from the Reagan tax cuts that we can lower the rate and actually increase collections. 

Out of the 10 or so most recent tax cuts, only one time (during the Reagan administration) did revenues increase. However, that is a very naive analysis, as it simply compared tax revenue in one year with the year before, not accounting for anything else (e.g. economic growth). This is not how a proper counter-factual works, which economics very much is able to provide. But we don't even need econometrics: if you get 9 failures and 1 success, it's outright dishonest to ignore the failures and claim victory. Or, as xkcd puts it: http://xkcd.com/882/

With all the eggs in one basket, so to speak, increasing taxes is a large risk to take, since tax revenues are just about the only resource left to throw at the problem.  If something happens to the tax base, then what?

Are you suggesting the government should find revenues outside of taxes? Of course any form of taxation is going to depend on income of some sort. Sales tax revenue plummets when people lose their jobs and cut back on spending. Hedging against this would require the government to run a sovereign wealth fund that invested in products that are negatively correlated with economic growth. Probably not what you're imagining...

[qrypt]

I thought the problem with taxing the wealthy is that they don't like it very much. 

[clean]

[quoteWhat would you do if they eliminated the deduction for home mortgages, or sales tax or property taxes?
Obviously I'd live on the street, because who would want to own a house without that deduction?][/quote]

So if one can not itemize then rent (or get a big box).

Tax breaks could be given by lowering payroll taxes, which would benefit everyone with a job, or by lowering sales taxes, which would benefit everyone

Payroll taxes = social security?  And what about the retired people that are currently collecting payroll taxes... Send them back to work so that their income is increased and we can collect more taxes!  Perhaps not everyone benefits.

you wouldn't observe a long-term change in transaction of securities. Relatively speaking, stocks would remain equally attractive to other types of investments - after all, bonds and interest on savings accounts would be subject to the same tax.

I disagree.  When the cost of something goes up, people want less of it.  I believe that there would be a decrease in the number of transactions.  If the stock goes up 10%, but you have to pay 1/3rd of the gain in taxes vs 1/6, would you be so quick to sell?  And at present interest income is not taxed the same as dividends or capital gains.  .

Again, I think that if the price of taxes goes up, then people with large tax bills will change their habits, for lack of a better term, and exploit the tax code to reduce their tax obligations.  Simply assuming that they will pay the higher rate on existing income (that they wont adapt) is naive I think.

I didnt look over Mit's 150+ page tax return, but I bet that there were waysthat he could have defferred some income.  Perhaps in the future, there are losses that could be taken to offset ertain gains resulting in lower tax obligations. 

[clean]

Even a lowly college professor can make adjustments to cut taxes.
I can not itemize every year, but I pay my property taxes in Jan and December one year, and then none in the other so I can itemize every other year.  (There are no late penalties as long as I pay in January).  On average I pay less taxes than if I itemize every year.

We can decide to contribute to the Roth 403(b) or the regular 403(b).  IF we pick the Roth, we pay higher taxes this year, but none (under the current system... and if you believe that they wont screw it up) later.  We can lump charitable deductions in order to itemize... Make the same donations, but make them differently... Pay 2 full year's charity in one year and nothing in the next to itemize.  If you like, you can also contribute 16000 or so in a 457 plan (I dont remember the current cap).  That reduces your taxable income. 

Have a small business?  Use schedule C to time purchases of supplies or equipment, or recognize bad debts you may have.  Make a loan payment in December instead of January and write off the extra month's interest... same with the mortgage.  Prepay your cellphone bill. .. Delay collection of an account from December to January.   

You an have insurance payments designated pretax or post tax. 

You can use a health care savings account to pay for medical expenses with pretax dollars.

Hell, I know 2 couples that got married this year on 12/30 in part to save on this year's tax bill!  (One told me that was the reason they got married now, but will still have the 'church wedding' in June)


These are small planning tools that even a lowly college teacher can employ to reduce their tax liability.  Imagine what Mit's menions could come up with if there were multi millions on the line!!

With multimillions on the line, why wouldnt a(n evil) rich person seek out ways to legally avoid taxes.

IF I were in Mit's boat, and there was a threat to my income, I would cash out enough to live on (whatever that means in Mit's world) for five years and make sure that I had no taxable income at all for that period.  ... Dividends, Call the board of directors and tell them to stop paying them.  Sell stock?  Nope.  No capital gains, no dividends, interest only from municipal bonds....Caymen Islands accounts, here I come!

[pigou]

What would you do if they eliminated the deduction for home mortgages, or sales tax or property taxes?
Obviously I'd live on the street, because who would want to own a house without that deduction?]

So if one can not itemize then rent (or get a big box).

Small landlords would not be able to deduct the mortgage on their buildings either (although this depends on the legal structure of the property owner), which may increase rents as well. Regardless, allowing a mortgage deduction is not the natural state of the world but rather a state intervention - there should be a good reason for doing so.

Tax breaks could be given by lowering payroll taxes, which would benefit everyone with a job, or by lowering sales taxes, which would benefit everyone

Payroll taxes = social security?  And what about the retired people that are currently collecting payroll taxes... Send them back to work so that their income is increased and we can collect more taxes!  Perhaps not everyone benefits.

It also includes unemployment insurance, but that's irrelevant. The social security trust fund exists entirely for political reasons and has no economic meaning. Tax revenue raised through the 'social security tax' pays for general government expenditures in the same way as the income or capital gains tax. However, payroll taxes are regressive: you don't pay social security taxes on incomes above $100k and the unemployment insurance tax is also capped fairly low. There's absolutely nothing in the way of abolishing this tax and paying for social security through income taxes, for example (which could then be levied on all wage earners). That certain revenue is earmarked for specific expenditures is a notion completely unrelated to reality.

you wouldn't observe a long-term change in transaction of securities. Relatively speaking, stocks would remain equally attractive to other types of investments - after all, bonds and interest on savings accounts would be subject to the same tax.

I disagree.  When the cost of something goes up, people want less of it.  I believe that there would be a decrease in the number of transactions.  If the stock goes up 10%, but you have to pay 1/3rd of the gain in taxes vs 1/6, would you be so quick to sell?  And at present interest income is not taxed the same as dividends or capital gains.

But raising taxes on profits does not raise the cost - it reduces gains. It's not the same as charging a transaction fee, for example. More importantly, however, it is relative attractiveness that matters. If you tax capital gains as income, stocks still return more than bonds, so they remain most attractive. Savings accounts are negligible anyway, they generally don't even keep up with inflation at this point.

Again, I think that if the price of taxes goes up, then people with large tax bills will change their habits, for lack of a better term, and exploit the tax code to reduce their tax obligations.  Simply assuming that they will pay the higher rate on existing income (that they wont adapt) is naive I think.

I didnt look over Mit's 150+ page tax return, but I bet that there were waysthat he could have defferred some income.  Perhaps in the future, there are losses that could be taken to offset ertain gains resulting in lower tax obligations. 

You'd have to predict how behavior changes, and what the cost to this would be. If we tax all capital gains as income, what would happen? Well, equities remain the most attractive option, so it makes no sense to get out of them. Moreover, profits from the sale of a house would (under proposals I have heard of) also be taxed as income - so there's no flight into real estate.

Adapting a high sales tax (like the flat tax people want) can easily be shown to create terrible incentives. Just think of tourism: tourists would come to the US with their after-tax income and now pay 20% more on all goods and services. Now that leads to less demand... moreover, it would create incentives to vacation abroad, using your untaxed income to spend in countries with low sales taxes. That's all before we consider gray markets. In any case, the same doesn't apply if you implement a rule uniformly.

Finally, here, too, the "natural state of the world" is not to have a lower rate for capital gains. This is the government intervening by changing incentives (shifting from labor to investments) - one has to show that the effect is overall positive, not negative. However, what is the benefit of encouraging people to buy stocks? There isn't one: the stock market is a zero-sum game and aside from the occasional IPO (which more often than not is not open to regular investors anyway), companies haven't used the stock market to raise money in a very long time. We do, of course, need it to value companies and all - but that's easily done without preferential tax treatment (see countries that don't offer a preferential rate on capital gains).

Besides, why is the way it is now "best"? We could do what Switzerland does and not tax gains from the sale of stocks at all.

With multimillions on the line, why wouldnt a(n evil) rich person seek out ways to legally avoid taxes.

I don't think there's anything evil about minimizing the tax burden.

IF I were in Mit's boat, and there was a threat to my income, I would cash out enough to live on (whatever that means in Mit's world) for five years and make sure that I had no taxable income at all for that period.  ... Dividends, Call the board of directors and tell them to stop paying them.  Sell stock?  Nope.  No capital gains, no dividends, interest only from municipal bonds....Caymen Islands accounts, here I come!

I have no problem with him doing that. Of course, since he can't determine dividend policies of companies, he'd have to sell all his stocks - which means losing out on far more gains than he would be taxed on. Municipal bonds aren't as safe as one might think, and still have significantly lower returns than even corporate bonds - even after you slap a 35% tax on their returns.

This is a bit like refusing a raise because you don't want to get into a higher tax bracket. Be my guest... but have a plan for after those 5 years.

[walker_percy]

I plan to vote for the candidate who promises to tax the rich until they sweat blood, and to use the revenue to make my and my family's lives more comfortable. Anyone who has a problem with that should STFU and stop engaging in class warfare.

[prytania3]

Okay, so let me get this straight.  If we tax the rich too much, we run the risk of depending too much on the rich for revenue.  And if that happens and the rich are no longer available, that means we'll have to tax less-rich people more.  So to avoid that, the solution is ... to tax less-rich people more?

Wow, that was a good summation, Hegemony.

[prytania3]

it's the rate inequity that highlights how broken the system is. 
 

I understand the idea.  I also understand the implication.  I think that we learned from the Reagan tax cuts that we can lower the rate and actually increase collections.  (Again, almost 1/2 of the population pays 0 in income tax.  It is hard to get lower.)

But you can! You can get paid at tax time if you are poor enough--or at least you appear poor enough.