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Keith Wilson
02-04-2010, 01:16 PM
Here's a hypothetical case I posted on another thread:

Mr. X works an ordinary job and has taxable income of \$60K/year after all deductions. Mr. Y has a considerable inherited fortune and a very well-paid job; his taxable income is \$250K/year from his investments and \$250K in wages.

Mr. X pays about \$11K in income tax, and \$9400 in Social Security/Medicare taxes, (including the employer's share) for a total of about 34% of income. Mr. Y pays about \$68,000 in federal income tax. He pays Social Security only on the first \$106K of wages, or \$16,800. His capital gains are taxed at 15%, or \$37,500. His total federal tax bill is \$122,300, which is certainly a lot of money - but it's 24.5% of his income. (income tax numbers here (http://www.moneychimp.com/features/tax_brackets.htm))

Let us say both these gentlemen live in Seattle. Including all state taxes, Mr. X will pay about \$6000, and Mr. Y around \$15,000 (source here (http://www.itepnet.org/whopays3.pdf))

Mr X's total taxes are \$26,400, or 44% of his income.
Mr Y pays a total of \$137,600, which is 27.5% of his income.
Mr Y is being taxed at a rate about 60% that of Mr. X. Mr Y makes more than eight times as much money.

None of this involves any kind of clever or creative accounting, it's just the tax code as it's written.

Is this right?

Kaa
02-04-2010, 01:18 PM
The first problem is that you're trying to measure the tax code by moral yardsticks :-)

Kaa

Keith Wilson
02-04-2010, 01:22 PM
The first problem is that you're trying to measure the tax code by moral yardsticks What do you suggest?

Kaa
02-04-2010, 01:26 PM
What do you suggest?

I would suggest:

(1) Considering that everyone has his own moral yardstick and they differ GREATLY.

(2) Understanding that there are real-life limitation on what's possible for a tax code -- for example the majority of the money HAS to come from wealthy people, because that's where the money is.

(3) Accepting that the tax code is a result of the political process and the political process, besides being the art of the possible and the skill of horsetrading at the pork barrel :D reflects the distribution and the balance of power in the society.

(4) Realizing that the particular structure of taxes has a LOT of consequences for the socio-economical development of the society, so optimizing for the consequences might be a better idea than sticking to some abstract idea of fairness.

Kaa

Popeye
02-04-2010, 01:27 PM
maybe cowboy x could switch to a different letter , like O

Keith Wilson
02-04-2010, 01:29 PM
Sure (although moral yardsticks vary less than you might think in most cases) but I'm asking people their opinions based on what they believe to be right and wrong, for whatever reasons they may choose.

hokiefan
02-04-2010, 01:30 PM
Well, Mr Y is doing it all wrong.

If he has that much work income, why is he taking so much capital gains on his investments. Defer them and let the gain compound pretax.

Or, if he has that much capital that \$250K is the least he can take in capital gains, why the heck is he still working?

My \$0.02 for what its worth.

Cheers,

Bobby

Keith Wilson
02-04-2010, 01:32 PM
If he has that much work income, why is he taking so much capital gains on his investments? He has a serious cocaine habit? Or worse yet, he owns a big old wooden schooner? :D Yes, I realize that Mr. Y has some options and could probably pay less tax. That would make the case more problematic. I tried to keep it simple.

Tom Montgomery
02-04-2010, 01:46 PM
http://image.examiner.com/images/blog/wysiwyg/image/anarchy_flag.jpg

All taxes are theft!

Popeye
02-04-2010, 01:55 PM
what if mister x stayed home and payed a bit more attention to missus x , got her a fruit drink and put her up on a pedestal

would this solve his fiduciary problems ?

Kaa
02-04-2010, 01:59 PM
I buy 1, 2, and 3.... but not 4. If, for example, you actually believed in the thoroughly discredited 'trikle-down' theory, then you could make an argument (certainly a morally bankrupt one) that we shouldn't tax the wealthy at all, and instead just raise the taxes of the middle class to compensate.

"morally bankrupt" -- no, you didn't buy 1.

"shouldn't tax the wealthy at all" -- no, you didn't buy 2.

:D

'Fairness' isn't so abstract that we can't, or shouldn't, factor it in to policy. The classic reason throught the millenia for violent revolution has been wealth inequity. Only a fool couldn't see that, taken to an extreme, massively disaparate economic inequity is very bad for the country.

Which of the two long words in "optimizing for consequences" you don't understand?

Kaa

hokiefan
02-04-2010, 02:20 PM
Just change the argument from 'capital gains' to dividends. I'm not in Mr. Y's class, but I earn far more from dividends than I do from capital gains... because I rarely trade.

Still begs the question, why the heck is he working. If he had big dividend payers at 5%, that backs into capital of \$5,000,000. I'd be long gone from the working world.:D

Cheers,

Bobby

seafox
02-04-2010, 02:21 PM
just by using the term regressive you are controling the debate. their should not be any tax on productivity. why do you want to destroy productivity? to the extent taxes are needed a simple tax on new goods is both the simplest, fairest, and least damaging to the economy. it is also an honest tax because it reminds people every day exactly how much goverment costs.

to adress the example each consumes about the same and should pay about the same. please explain why if I earn aq doller and take the 75 cents left over after I pay taxes and risk it investing in a company that creates jobs why I should have to pay taxes on money that comes back. but I do have to agree with mr Bernstein, that capital gains are different from dividends.
at the very least captial gains should be measured in constant dollers. if I buy property doe say a doller and 20 years later I sell it for two "dollers " that can buy no more than the single doller of 20 years earlyer where is the gain?

Kaa
02-04-2010, 02:22 PM
Still begs the question, why the heck is he working.

Maybe he likes his job. Y'know, there are people who like their work and prefer to stay and do it rather than retire and veg out.

Kaa

hokiefan
02-04-2010, 02:25 PM
Maybe he likes his job. Y'know, there are people who like their work and prefer to stay and do it rather than retire and veg out.

Kaa

I understand that. And given the fact that I have to work for a living, I am blessed with a good, enjoyable job. But fact is, there are boats to be built and fish to be caught. There wouldn't be much vegging out, especially since my wife can more than fill any time that I can't.:D

Cheers,

Bobby

David G
02-04-2010, 02:28 PM
Keith,

Do you mean --
right = factually correct, or...
right = morally correct? or...
right = functionally correct?

On the first, I'll assume you've done your ciphering correctly.

On the second, it's a large topic - which we would have no chance, I suspect, of getting universal agreement.

On the third, I think - if you did a comprehensive overview of research on the topic - that most folks would conclude the we do better when the income and asset distribution curve is flatter.

By better, I mean better social cohesion and stability. I also mean economically. Fewer boom/bust cycles. Moderate, but sustainable, growth. Less irrational exuberance. Less anger, frustration, and despair. Less turmoil and confusion. Less room for cynical political demagogues - from either extreme - to ply their trade.

With a flatter curve, the upper income folks are quite comfortable. They have enough extra to both feel secure in their place in society, and rewarded for their thrift, enterprise, etc. And they're able to feel this without developing a false (some theologicians would say perverse, or even "evil") sense of superiority which distances them from most of their neighbors, and serves to fracture the social matrix.

With a flatter curve, the middle class is comfortable enough to live without squalor, but poor enough to be motived to better themselves. ie. they are more entrepreneurial.

With a flatter curve, the poor end of the spectrum is not so poor as to be inclined (for the most part) to resort to criminality for a quick fix. They are not so far removed from the rest of society as to feel abandoned and hopeless. There's more of a sense that - thru hard work, and a bit of help from family, friends, and society - one can overcome the obstacles one is born into or has put themselves behind.

So, how do we achieve a flatter income/asset distribution curve? Tax policy is a major tool. Progressive income tax is a proven mechanism. People of good will can argue and compromise on the exact numbers and percentages that are required at any given time. I would argue that - at the moment - we need to increase progressivity.

This sort of approach, of course, throws a snowball in the kisser of the folks who are absolutely sold on the notion that laissez-faire capitalism is the best, indeed the only, path to prosperity as a nation. And, at this juncture, we have a large number of folks who subscribe to this notion - including a large proportion of conservative lawmakers. This is unfortunate, because there's a larger picture. Laissez-faire capitalism is a marvelous system, but it's not sufficient unto itself to achieve a consistent prosperity. I've sketched the mechanism before:

From the link --

To elaborate: market capitalism is a very efficient system for fostering innovation, accumulating capital, and developing economies. This powerful engine is driven by a particular side of human nature: the ceaseless dynamo of human need and human greed. Don't think I'm condemning. I'm not. For the most part market capitalism does a great job of channeling this drive into productive avenues.

However, it is also true that - left unchecked - market capitalism has some built-in destructive tendencies. Historically, the continued accrual of more & more capital & power into fewer & fewer hands has led to an inefficient funtioning of the economy. More speculative bubbles. More oscillations. Eventual instability. One example is the Great Depression. Hoover was an absolute True Believer in the notion that "The business of America is business". He thought the rich getting richer and the poor getting poorer was good for the country. He was not the only one. The process began before him. He was just the Final Fool before the fall in that particular episode of the drama.

Kaa
02-04-2010, 02:39 PM
I would totally reject that notion.

So it seems you were confused. You didn't buy (1).

...it would be entirely possible to raise more than enough from the middle class by taxing them very heavily

It seems you were VERY confused. You didn't buy (2) either.

Oh, I understand perfectly well what 'optimizing for consequences' means... but long before we get to the point where 'optimization' needs to be done before the 'consequences' kicks in, heeding the notion of 'fairness' would be a lot more effective, a lot earlier.

It seems you continue to be very confused, since it's clear you do NOT understand what does "optimizing for consequences" mean.

Kaa

Kaa
02-04-2010, 03:15 PM
No, I accepted 1, 2, and 3 with qualifications.

:D

You said that moral yardsticks differ GREATLY.... I would totally reject that notion.

Interesting qualification, that.

My biggest 'bitch' with your analysis is your argument that 'fairness' is too abstract to apply to tax policy.

Leaving the size of bitches aside, it's worth pointing out that I did NOT make that argument:

...optimizing for the consequences might be a better idea than sticking to some abstract idea of fairness.

Now, pay attention. Do you see the structure of the sentence? It says "A might be better than B". It does not say that B doesn't exist, or that B doesn't work, or that B is completely hopeless, or any of such things.

Really, Norman. Can't you at least add *some* pepper to all that fly****? :D

Kaa

Keith Wilson
02-04-2010, 03:18 PM
Do you mean --
right = factually correct, or...
right = morally correct? or...
right = functionally correct?As far as I know the numbers are factually correct for the hypothetical facts as presented, or pretty close. I meant either morally or functionally correct; take your pick. They're closely connected, since functionally correct would mean that it achieves some end - but then we need to decide which end we should try to achieve. Excellent points, BTW.

. . . it would be entirely possible to raise more than enough from the middle class by taxing them very heavily, while relieving the wealthy of their tax burdens entirely. France before the revolution, except there wasn't much of a middle class. The aristocracy was mostly exempt from taxes.
optimizing for the consequences might be a better idea than sticking to some abstract idea of fairness.Sure; I'm OK with that. So how do we decide which consequences we want to optimize for? ;)

Keith Wilson
02-04-2010, 03:26 PM
(Corrected for spelling)
Just by using the term regressive, you are controlling the debate.No. Understand that I'm using "progressive taxation" and "regressive taxation" in the technical sense. We have to call them something, and that's the conventional terminology. We could just as well call them "type A taxation" and ""type B taxation"
To address the example, each consumes about the same and should pay about the same. Well, aside from the fact that someone with an income of \$500K is likely to consume quite a lot more than someone with an income of \$60K , you would then pick "No, their taxes should be more regressive"?

Kaa
02-04-2010, 03:41 PM
Sure; I'm OK with that. So how do we decide which consequences we want to optimize for? ;)

In theory, you pick a number of metrics for the desirable state of the society, forecast them for each proposed tax scenario, and then combine them through what you think is a proper fitness function.

In practice, you have a food fight in Congress and whatever slime- and pork-rind-covered creature crawls out at the end, you get.

Kaa

Keith Wilson
02-04-2010, 03:45 PM
OK, fair enough. How about a Gini coefficient of 25, with median income being about what it is now? Pass the pork rinds. :D

It appears we have three anarchists among us.

hokiefan
02-04-2010, 03:59 PM
In theory, you pick a number of metrics for the desirable state of the society, forecast them for each proposed tax scenario, and then combine them through what you think is a proper fitness function.

In practice, you have a food fight in Congress and whatever slime- and pork-rind-covered creature crawls out at the end, you get.

Kaa

Such cynicism, just wow!!! :eek:

Probably amazingly close to the truth too. :D

Cheers,

Bobby

David G
02-04-2010, 04:09 PM
Keith,

Leave it to the engineering types to drag out the algebra ;)

The Gini coefficient is a reasonable first approximation. There are some structural issues that would need to be worked out by the wonky sorts, eg. it might need to be a blended number that includes a Gini for income and one for wealth. One also needs to decide how finely one is going to slice the overall numbers before one sets a firm target for a coefficient value.

But those are just details. Overall I think your number is a bit ambitious... but admirable.

Now then... how does one go about selling Kaa's methodology to policymakers - as salable to the general public??? If one were designing a system from scratch... maybe. Set into the present political context, it strikes me as so idealized as to be unworkable <sigh> Pass them pork rinds over this way, if you would... and who brought some beer?

David W Pratt
02-04-2010, 04:14 PM
You can turn the "moral yardstick" around. Mr. Y supports 4x as many services for his neighbors as Mr. X.
Now who is doing the heavy lifting?

Keith Wilson
02-04-2010, 04:16 PM
Overall I think your number is a bit ambitious... but admirable.
Probably ambitious. I picked 25 because it's a roundish number, and a little little higher than the figures for Sweden and Denmark. I'd be ecstatic if we managed to get to 30.
Mr. Y supports 4x as many services for his neighbors as Mr. X.On more than 8x the income.

David G
02-04-2010, 04:28 PM
Probably ambitious. I picked 25 because it's a roundish number, and a little little higher than the figures for Sweden and Denmark. I'd be ecstatic if we managed to get to 30.

Last I looked we were above 45... and the number had been fairly steadily rising since the 60's. Part of the Pendulum Swing I referenced in my link back in post #19. We really are overdue for a reversal.

OK... I went and looked. In 2008 we were at 46.6 which was down from an all-time high of 47 in 2006. We edged slowly up through the mid-30's up to the lower 40's in the 1950's thru the 1970's. Looks to me like the target should be more like 35.

But you didn't answer how you thought we could sell the notion.

Kaa
02-04-2010, 04:31 PM
FYI

Gini indices for the United States (http://en.wikipedia.org/wiki/United_States_of_America) at various times, according to the US Census Bureau (http://en.wikipedia.org/wiki/United_States_Census_Bureau):[6] (http://en.wikipedia.org/wiki/Gini_coefficient#cite_note-5)[7] (http://en.wikipedia.org/wiki/Gini_coefficient#cite_note-6)

1929: 45.0 (estimated)
1947: 37.6 (estimated)
1967: 39.7 (first year reported)
1968: 38.6 (lowest index reported)
1970: 39.4
1980: 40.3
1990: 42.8
2000: 46.2 [8] (http://en.wikipedia.org/wiki/Gini_coefficient#cite_note-7)
2005: 46.9
2006: 47.0 (highest index reported)
2007: 46.3
2008: 46.6

(Wikipedia)

Western Europe is generally in the 25-35 range.

Kaa

Keith Wilson
02-04-2010, 04:33 PM
Read it and weep.

http://www.payvand.com/news/07/apr/Income-Inequality-US.jpg

Kaa
02-04-2010, 04:38 PM
Read it and weep.

Why weep?

You don't happen to think that the income inequality determines the well-being of a society, do you? Mongolia or Tanzania, for example, have lower Gini index than the US.

What you should care about is raising the floor, not capping the top.

Kaa

Keith Wilson
02-04-2010, 04:43 PM
You don't happen to think that the income inequality determines the well-being of a society, do you?Not alone, no. For a given income level, maybe yes; it's one major factor, at least. However, I completely reject the argument (rarely expressed directly, often lurking in the background) that more inequality is necessarily good for economic growth. Too much concentration of wealth at any income level is very hard on democracy. But merely capping the top would be stupid, and wouldn't benefit anyone.

Kaa
02-04-2010, 04:47 PM
However, I completely reject the argument (rarely expressed directly, often lurking in the background) that more inequality is necessarily good for economic growth. Too much concentration of wealth at any income level is very hard on democracy.

Depends on your starting base. If you have an equal-income society and your tax system punishes any success by keeping the society equal-income, you're not going to get much, if any economic growth.

Kaa

Keith Wilson
02-04-2010, 04:49 PM
Sure; but that's an extreme case, a Gini coefficient of near zero.

Kaa
02-04-2010, 04:56 PM
You seem to treat egalitarianism as a virtue in itself. Income inequality is bad because it's bad.

Consider a society with the Gini index of X. Let's say next year everything stayed exactly the same except a few guys were fabulously successful and had off-the-chart incomes -- so that the Gini index became, say, X+1. According to you that's bad. But who exactly suffered any harm?

Kaa

Keith Wilson
02-04-2010, 05:06 PM
You seem to treat egalitarianism as a virtue in itself. Income inequality is bad because it's bad.I do; or rather, I think that too little of it is bad. More is not necessarily better beyond a certain point.

In your example, the good or harm depends on what those guys did with their money. But again, that's an extreme case. The Gini coefficient is a rough measure at best.

You seem to treat economic freedom as a virtue in itself; being able to do whatever you want with your property is good, and any restriction on it is bad, whatever the effect it may have.

Kaa
02-04-2010, 05:16 PM
In your example, the good or harm depends on what those guys did with their money.

Why does it depend? Let's say they paid their taxes and invested the net proceeds into a mix of bonds and stocks. So..?

You seem to treat economic freedom as a virtue in itself;

Why, yes, I do. I treat freedom as virtue in itself and consider economic freedom to be part of it.

...any restriction on it is bad, whatever the effect it may have.

Nope, because there are trade-offs. I would accept that some restrictions are justified in order to prevent worse consequences.

Note that I'm not saying that income inequality is always good. I'm saying that it's the wrong primary metric to judge the well-being of a society.

By the way, keep in mind the difference between income and wealth. If I were very wealthy, I would have no objections to punitive taxes on high income -- I get barriers to entry, less competition, less nouveau riches to worry about... :-)

Kaa

Torna
02-04-2010, 05:16 PM
Latecomer here. It's an interesting scenario, but I happen to think that you should re-do the original numbers without social security.
If Y ever gets anything in social security, it's likely to be on-par with what X gets. Thus, if we were to move SS out of the gov's purview and pretend that both X & Y are being good doobies and investing in their own private IRAs, we're left with the taxes issue:

___Income____Taxes _____% of income
X = \$ 60K ____ \$17K______ 28
Y = \$500K____\$121K______ 24

While it still appears regressive, it's not as blatant as the original proposition. The income ratio of 8.3 stands unchanged, but their tax ratio has moved from 5.2 up to 7.1
And, again, the only change here has been to ignore their gov't mandated retirement accounts.
-leif

Keith Wilson
02-04-2010, 05:21 PM
But Social Security isn't a retirement account. Mr. X and Mr. Y pay into Social Security, and the money immediately goes out to their parents or grandparents. Barring major changes, when they retire, their children or grandchildren will pay for their benefits. I set up the example to account for every dollar that goes to the government.

Kaa
02-04-2010, 05:22 PM
I set up the example to account for every dollar that goes to the government.

How about double taxation of dividends? :-P

Besides, if you claim completeness, in real life there are lots of tax credits that the \$60K guy will be able to take, but the \$500K will be phased out of based on his income.

Besides, there is AMT.

Kaa

Keith Wilson
02-04-2010, 05:25 PM
Why does it depend? Let's say they paid their taxes and invested the net proceeds into a mix of bonds and stocks. So..?In that case, no problem. But let's say they wanted to be still richer, decided they were paying too much tax, and put their money into political action to remedy the situation. Democracy depends on some degree of equality.
. . . in real life there are lots of tax credits that the \$60K guy will be able to take, but the \$500K will be phased out of based on his income.That was 60K taxable income, after all deductions and credits. But still, you're right, and as several people have pointed out, Mr. Y is paying way more tax than he would need to if he structured things differently. It is, after all, a simplified example.

Kaa
02-04-2010, 05:33 PM
That was 60K taxable income, after all deductions and credits.

That's misleading, then. Under the same circumstances the \$60K AGI guy can deduct a lot more than the \$500K AGI guy. For example, the \$60K guy can deduct all his mortgage interest, but the \$500K guy cannot because of AMT.

For a fair comparison you shouldn't compare AGIs, you should compare gross income before deductions and credits.

Kaa

Keith Wilson
02-04-2010, 05:37 PM
Why, yes, I do. I treat freedom as virtue in itself and consider economic freedom to be part of it.OK, we have liberté, egalité et fraternité - they're all good, and like many good things, they're somewhat contradictory. You can't have complete liberty and equality simultaneously. Tough.

Balance is important.

. . . you should compare gross income before deductions and credits.
Valid point. It makes the calculations more complicated, though. And Mr. X pays Social Security/Medicare tax on 100% of his gross; that was actually an error in my numbers

Keith Wilson
02-04-2010, 05:48 PM
That was my point exactly. Regressive taxation is a bad idea IMHO.

Actually, taxable income of \$60K after deductions isn't "scraping by", it's somewhat above average. Mr. X is doing OK, although he's not rich by any means.

hokiefan
02-04-2010, 05:57 PM
It's not scraping by, admittedly.. as long as you're not trying to put a kid or two through college, or paying for an expensive medical treatment for which you had no insurance (because your job doesn't offer it, and you couldn't risk the out of pocket expense of a crappy policy, nor the high premiums of a decent policy).

Gotta remember though. At \$60K AGI, he's probably making \$70-75K gross. Almost 2/3 of the US population don't want to hear him whine.

Cheers,

Bobby

C. Ross
02-04-2010, 06:05 PM
Keith

In several threads you have combined a discussion of progressive/regressive tax policy with discussion of income inequality.

You are also fond of pointing out that "no one" in the US is a socialist.

Unless you want to be the American Outlier Socialist, these two topics are completely unrelated. Income inequality in the US today (compared to the US 40 years ago, or to Europe) is caused by excessive earned income at the top and lagging wages at the bottom. You could radically reform tax policy and not move the Gini index a whit.

If the goal is to reduce inequality by raising wages at the bottom, hey, we completely agree. I think it would be extremely tricky to restrain earned wages on the top without limits on executive and highly skilled professional pay. (Or, Mr. Socialist in the Wings, you could tax the bejeebers out of the them.)

What are you really getting at in these threads?

Keith Wilson
02-04-2010, 06:26 PM
Unless you want to be the American Outlier Socialist, these two topics are completely unrelated. Income inequality in the US today (compared to the US 40 years ago, or to Europe) is caused by excessive earned income at the top and lagging wages at the bottom. You could radically reform tax policy and not move the Gini index a whit. Well, now that's the most interesting post in a while. I'll have to think about that. Do you have a source for detailed information on the reasons for the change in the US Gini index?

You're right, dammit. I keep pointing out that overall tax rates and the distribution of taxes are not connected, and here I am mixing up issues of tax distribution and income inequality. There's a slight connection, but not much, unless one wants to go to ridiculous levels of taxation at the high end (and I don't).

My original point was to show that under certain circumstances the US tax code taken as a whole can be regressive. This was to counter the conservative talk about how the top 10% are paying 60% of the taxes, or something like that - not pointing out that they're considering federal income taxes only . However, I got sidetracked. Income inequality really is a separate issue; not unimportant, but only very loosely connected. It's embarrasing, but thanks for pointing it out.

hokiefan
02-04-2010, 06:32 PM
Well, now that's the most interesting post in a while. I'll have to think about that. Do you have a source for detailed information on the reasons for the change in the US Gini index?

You're right, dammit. I keep pointing out that overall tax rates and the distribution of taxes are not connected, and here I am mixing up issues of tax distribution and income inequality. There's a slight connection, but not much, unless one wants to go to ridiculous levels of taxation at the high end (and I don't).

My original point was to show that under certain circumstances the US tax code taken as a whole can be regressive. This was to counter the conservative talk about how the top 10% are paying 60% of the taxes, or something like that - not pointing out that they're considering federal income taxes only . However, I got sidetracked. Income inequality really is a separate issue; not unimportant, but only very loosely connected. It's embarrasing, but thanks for pointing it out.

And it is entirely possible for the overall tax system to be regressive, and the top 10% to still pay over 60% of the taxes. Cause they could very well make well over 60% of the money. There are some astoundingly rich folks out there.

Cheers,

Bobby

C. Ross
02-04-2010, 06:35 PM
My original point was to show that under certain circumstances the US tax code taken as a whole can be regressive. This was to counter the conservative talk about how the top 10% are paying 60% of the taxes, or something like that - not pointing out that they're considering federal income taxes only.

Well, you're right. Federal income taxes and almost all state income taxes are progressive. Taxation can be regressive once you include sales taxes, capped Social Security taxes, deductions, and things like completely legal municipal bonds or U.S. savings bonds which generate tax-free income.

Or, the thing I'm pondering, which is to take the 2010-only opportunity to convert some of my regular IRAs into a Roth IRA. I'd have to pay taxes on it this year at the earned income level (ouch!), but once paid, every stinking nickle that came out of it would be tax free. Bwa-ha-ha-ha!

(And, by the way, even if you include state taxes and FICA, the top 10% does pay a disproportionate share of taxes. This should surprise no one. It should scare the crap out of the top 10% because taxes are going to go up - a lot! - on those over \$250K a year because it's the only way you can really raise any revenue.)

John Smith
02-04-2010, 07:13 PM
Sure (although moral yardsticks vary less than you might think in most cases) but I'm asking people their opinions based on what they believe to be right and wrong, for whatever reasons they may choose.

If 10% of the people own 90% of the money, they should pay 90% of the taxes.

If I were running things, I would do it this way (we can argue about the cutoffs, but this is for the idea)

The first 20k of income would have no taxes taken. Payroll taxes would kick in at that point. Income taxes would kick in at 30k. SS taxes would continue for ALL income. Income tax would be bracketed.

In the end, Warren Buffet's taxes would be the same percentage of his income as his secretary's are of hers, or possibly a bit more.

The reason I would do this is to allow the lower/middle income people to have as much spending money as they can, so they can live a decent life. This would result in the money they spend working its way up to the Warren Buffet's of the nation.

Keith Wilson
02-04-2010, 09:37 PM
Well, I looked around a bit, and I found a couple of distributional analyses of federal taxes. Here's quite a complete one from the Brookings Institution. (http://www.taxpolicycenter.org/UploadedPDF/411943_distribution_federal.pdf) The situation is considerably better than I had thought, and on average a lot better than my hypothetical case. All federal taxes taken together are indeed progressive; there are income tax credits for the poorest taxpayers which offset the effect of the payroll tax. For some reason excise taxes are left out of the table below; they would tend to make it somewhat less progressive, I think, although not much. They assume that the corporate income tax is borne by recipients of capital income (interest, dividends, capital gains, etc.), which seems kind of odd to me, given the standard claim about corporate taxes being passed on to consumers. Here's the info, source here (http://www.taxpolicycenter.org/taxtopics/currentdistribution.cfm):

http://www.taxpolicycenter.org/numbers/Content/GIF/T09-0357.GIF

http://www.taxpolicycenter.org/taxtopics/images/currentlaw3_6.gif

C. Ross
02-04-2010, 10:08 PM
The MA income tax rate is a flat 5.3%.

MA should get its act together.

Some years back, you could have converted 25% per year over 4 years, to soften the tax bite.. I don't know if you can still do it that way.

There's a one-year window to make the conversion, and you can pay the tax over two years. It is interesting.

Sorry, but I'm gonna tap you on THAT one. An increase of the top bracket from 35% to 39.6% is not 'a lot', in ANYONE's dictionary... and for people making \$250K a year or more (actually \$337K or more), it's barely a pimple on the tax bill.

Of course it's not "a lot" but we're just getting started. It is impossible to shelter the middle class from taxes and increase revenue significantly without going a lot higher than 39.6% on the top, and eliminating the cap on Social Security taxes. The legacy deficit, plus the doubling of debt we'll see between 2009 and say 2013 makes it impossible not to increase taxes significantly.

Heck, I'm a fiscal conservative and I would vote to raise taxes if I thought the checkbook could be cooled off. The cost to my children of not raising taxes is just not worth it.

High C
02-04-2010, 10:39 PM
.....An increase of the top bracket from 35% to 39.6% is not 'a lot', in ANYONE's dictionary....

That's an increase of almost 14%. I expect most people's dictionaries would define that as a pretty big increase. Of course, you're the guy who still insist that the \$\$\$ thousands in cuts enjoyed by middle class families from the 2001 tax cuts "don't mean squat".

High C
02-04-2010, 10:39 PM
Keith, congrats on finding some quality data. :)

Keith Wilson
02-04-2010, 10:52 PM
The other studies were accurate too, as far as I can tell. I've found several other "tax incidence studies" - that's apparently what the states usually call them, instead of a distributional analysis - which have numbers close to the national study. For example, compare the numbers from the state of Texas for general sales tax incidence (http://www.window.state.tx.us/taxinfo/incidence/table1_49.html) with the national study (page 108) (http://www.itepnet.org/whopays3.pdf); they're quite close. Every state study I've seen confirms that the national study is reasonably close.

High C
02-04-2010, 11:01 PM
The other studies were accurate too, as far as I can tell....

While some parts of those studies may well have been accurate, how do you get past the claim that our poorest people spend 8 to 9% of their income on sales tax??? Don't you see how this is impossible? No one could possibly spend anywhere near that on sales tax. Even half that percentage seems impossible.

It casts the whole data set in great doubt.

How can you continue to have faith in those studies in light of the glaring errors? :confused:

Keith Wilson
02-04-2010, 11:08 PM
how do you get past the claim that our poorest people spend 8 to 9% of their income on sales tax??? Don't you see how this is impossible?I don't make this stuff up; here's the data from the state of Texas's report on sales and use tax. One has to assume that the state's own tax department knows what they're talking about. Perhaps they assign a portion of tax collected from businesses to individuals? Perhaps there are other taxes included besides retail sales tax? Every state study I looked at was similar, and I doubt every state revenue department makes the same "glaring errors".

Decile . . . Family Income . . . Tax as a Percent of Total Income
Decile 1: less than \$10,250 . . 10.7%
Decile 2: \$10,250 to 17,876 . . 5.0%
Decile 3: \$17,876 to 25,056 . . 3.8%
Decile 4: \$25,056 to 32,312 . . 3.5%
Decile 5: \$32,312 to 40,431 . . 3.3%
Decile 6: \$40,431 to 51,146 . . 3.1%
Decile 7: \$51,146 to 64,577 . . 2.8%
Decile 8: \$64,577 to 82,950 . . 2.5%
Decile 9: \$82,950 to 114,409 . . 2.4%
Decile 10: \$114,409 and over . . 1.6%

Keith Wilson
02-04-2010, 11:19 PM
we're not going to make much of any dent in the national debt for years or even decades, under the best of circumstances.The traditional solution is to inflate one's way out of it.

High C
02-04-2010, 11:19 PM
I don't make this stuff up; here's the data from the state of Texas's report on sales and use tax. One has to assume that the state's own tax department knows what they're talking about.

Decile . . . Family Income . . . Tax as a Percent of Total Income
Decile 1: less than \$10,250 . . 10.7%
Decile 2: \$10,250 to 17,876 . . 5.0%
Decile 3: \$17,876 to 25,056 . . 3.8%
Decile 4: \$25,056 to 32,312 . . 3.5%
Decile 5: \$32,312 to 40,431 . . 3.3%
Decile 6: \$40,431 to 51,146 . . 3.1%
Decile 7: \$51,146 to 64,577 . . 2.8%
Decile 8: \$64,577 to 82,950 . . 2.5%
Decile 9: \$82,950 to 114,409 . . 2.4%
Decile 10: \$114,409 and over . . 1.6%

Come on, Keith. That's not the data I've been questioning and you know it. I've asked you about those sales tax figures several times, and can only conclude that you are now dodging the question with clumsy sleight of hand because you're too proud to admit that the data you have such faith in is nonsense.

IT IS NOT POSSIBLE for ANYONE to spend 8 to 9% of their income on SALES TAX. Yet you have posted this multiple times and continue to ignore this obvious flaw. Your blind faith in these data sets indicates that you are NOT THINKING.

Why?

High C
02-04-2010, 11:24 PM
No, it's a 4.6% increase in the rate....

LMAO! Mister engineer doesn't know the difference between percent and percentage points. :D

39.6 is 13.14% more than 35. If you don't understand that, you should send your engineering degree back to the school that issued it. :rolleyes:

Keith Wilson
02-04-2010, 11:29 PM
I've asked you about those sales tax figures several times, You are very obviously not looking at the original data. The Louisiana numbers I quoted in the thread were totals including several kinds of taxes, not just retail sales to individuals. It's on page 58 of the report. Look it up.

High C
02-04-2010, 11:39 PM
You are very obviously not looking at the original data. The Louisiana numbers I quoted in the thread were totals including several kinds of taxes, not just retail sales to individuals....

Oh for crying out loud. I'm looking at the figures you posted.

From your post #148 on my "Brace Yourselves" thread:
"Income group - Percent of income paid in sales and excise taxes
Poorest 20%, below \$15K - - 9.0%"

From your post #202, this was MN data:
"Decile - Percent of income paid in sales tax
1st - 8.3%"

THINK about those figures.

High C
02-04-2010, 11:45 PM
Educate me, then....

Maybe ljb5 could explain percentages to you...if you ask nicely. LMAO!

Keith Wilson
02-05-2010, 09:30 AM
Beware of people who think they have The Answer.

HighC, the national study and two state studies the state revenue departments (MN and Texas) give similar numbers. Here are two other state studies which also have similar incidence numbers for sales tax - Kansas (page 62) (http://www.ksrevenue.com/pdf/kstaxincidencestudy.pdf) and Wisconsin (page 45) (http://www.revenue.wi.gov/ra/txinc04a.pdf). The Kansas study particularly is very complete, and explains their methodology in way more detail than most of us would be interested in. I don't know precisely how they calculated the numbers to which you took exception, nor exactly what taxes they included. However, it's so unlikely that five studies by five completely independent groups would come up with similar numbers while making what you claim is an obvious error, that I'm quite sure you're wrong. I'd guess that the first study lumped several smaller taxes together under "sales tax" (gas tax, cigarette tax, utility taxes etc.), and that's why the actual amount paid can be higher than the retail sales tax rate.

Now perhaps you've discovered an egregious error in all incidence studies of sales tax which for many years all the economists working on them have missed, but I don't think it's likely.

elf
02-05-2010, 10:15 AM
I see the state of Texas taxes clothing. How heathen.

As far as I can tell the only exempt items are food (presumably not restaurant food), prescription drugs and OTC drugs. That means the state collects sales tax on electricity, automobile fuel, clothing, telephone services.

I see the sales tax on gasoline is 38% for gas and 44% for diesel.

Logically, if a family of even a single person with an income around \$10K spends only 40% of that for housing (I wonder where in Texas one can find a rental for \$300/mth. except maybe a single room), that leaves them 60% for everything else. We're talking \$6,000/yr for everything else here.

And just what will that everything else be? Food, clothing, and car fuel. Now I don't know where in Texas one can eat on \$2,000 a year (here in MA it costs me about \$100/week without eating out more often than once every two weeks), but that leaves \$4,000 to keep the truck running and keep clothing on ones back. So if it costs a couple bucks a gallon to fill up the old truck which gets 10 mpg and consumes around \$40 every time you fill it up (one can hardly assume a person living on \$10K a year has a new truck and their mileage isn't much better anyway) and 38% of that is Texas sales tax that's 38% of \$2,000. \$760 for Texas sales tax on fuel for the truck.

Now to summarize:

Gross income \$10K.
\$760 of it is sales tax on gasoline.
Hmm. 10% of \$10K is \$1000.

And our hypothetical single person still has to clothe himself and pay the electric and phone bills. And the electric bill includes air conditioning.

bob winter
02-05-2010, 10:20 AM
Interesting proposal, Norman. When I have a week or two of free time, I will read it in some detail.

I have worked in pubic accounting, which cearly hinges on the existance of taxes, for years. If there is a "fair" tax system somewhere in the world, I have yet to hear about it.

My own personal view would be to simpifly the system. How I would do this, I will keep to myself since I don't want a lot of abuse.

elf
02-05-2010, 10:24 AM
We all want a fair and simple system of taxation. The solution hinges around the definition of fair.

Any sales tax that produces such patent inequities as all the current systems does not appear fair to me.

High C
02-05-2010, 10:24 AM
...HighC, the national study and two state studies the state revenue departments (MN and Texas) give similar numbers. Here are two other state studies which also have similar incidence numbers for sales tax...

You can post all the lengthy pdfs you want, but you're still ducking my question.

The sales tax rate where you live in MN is 7.625%. The highest sales tax rate I could find in MN is 7.875% in Duluth.

You have posted "official" data from the MN dept of revenue that says MN's lowest decile pay 8.3% of its income on sales taxes.

Please explain how this is possible.

George.
02-05-2010, 10:28 AM
He has a serious cocaine habit? Or worse yet, he owns a big old wooden schooner? :D

Maybe I need to switch to cocaine... :eek::D

Keith Wilson
02-05-2010, 10:31 AM
Maybe I need to switch to cocaine... :eek::D It would probably be cheaper, but less fun - :D But note I said old wooden schooner; Dalia's not old.

02-05-2010, 10:48 AM
Mr X's total taxes are \$26,400, or 44% of his income.
Mr Y pays a total of \$137,600, which is 27.5% of his income.
Mr Y is being taxed at a rate about 60% that of Mr. X. Mr Y makes more than eight times as much money.The %ges would be reversed over here. I am surprised about the high % mr X has to pay.
(although we have very progressive income tax, capital gain is not taxed heavily in NL either)

Keith Wilson
02-05-2010, 10:51 AM
HighC, I keep posting explanations and studies which support the initial numbers, and you ignore them and act as if you've discovered a basic error which the revenue departments of at least four states have missed. One more time: I think that that they combine several smaller taxes together under the heading of "sales tax" (it could be business use taxes, alcohol taxes, gas tax, cigarette tax, utility taxes etc.), and that's why the actual percent paid can be higher than the retail sales tax rate for low income levels.

bob winter
02-05-2010, 10:57 AM
'Simple' systems are extremely seductive; witness the 'Fair Tax', 'Flat Tax', 'VAT Tax', and similar proposals. The problem is that 'simple' and 'genuinely fair' or 'good for the country' are not synonymous.

My fantasy system is simpler, but not simple... maybe one or two pages on the 1040, not 10+. The real reason I spent time describing it was because it makes a substantial break with the way we view investments and capital gains... something I've never seen anywhere else, but seems to make sense to me, because it encourages long term investment and thrift, and at the same time, has many of the characteristics of a consumption-based tax, which has some merit.

What the hell, a bit of abuse is good for the soul.

First, I would eliminate all commodity taxes, both hidden and otherwise. They are regressive in nature and should not be tolerated.

Second, I would tax corporations at the same rates as individuals, on a progressive basis.

Third, I would eliminate the taxation of dividends on the assumption that the tax has already been paid at the corporate level and it should therefore flow to the shareholders exempt of additional taxation.

Lastly, I would eliminate the use of the tax act as a vehicle for social policies. If the government finds a need for social programs, let it carry them out outside of the tax act.

This leaves the thorny question of the taxation of capital gains. Before Canada's present tax legislation came into force, capital gains were not taxed. As things in Canada presently exist one half of capital gains are merely added to income and taxed at whatever the marginal rate of the individual, or corporation, or trust happens to be. My problem with capital gains is that often they are a tax on inflation, in the case of long term holdings. If I ever figure that one out, I will let you know.

High C
02-05-2010, 10:57 AM
MN collects \$.404/gallon tax on gasoline.

That's not a sales tax, it's an excise tax. The MN figures I'm challenging are clearly for sales tax only.

The Louisiana data set does combine sales and excise taxes together and comes up with a 9% figure.

Think about it. To spend 9% of your income on a 9% sales tax, you'd have to spend 100% of your income on taxable items!

THINK!

Kaa
02-05-2010, 11:19 AM
You obviously didnt read the link nor do you know much of anything about the fair tax.

Carry on with your useless arguments.

LOL.

I vaguely remember some complaints about snarkiness... You don't recall who was offended by it, by any chance? :D

Kaa

High C
02-05-2010, 11:24 AM
The page I got that \$.404 figure from states that the \$.404/gallon "include[s] Federal excise taxes 18.4 cpg for gasoline and 24.4 cpg for diesel. cpg = cents per gallon"....

So when you subtract the excise tax from .404 figure, you get a sales tax \$.22 per gallon, a sales tax rate of about 8%.

Right back where we started. Even if you lump sales and excise together as the Louisiana data set Keith posted does, you get a figure barely over the sales tax rate.

For that figure to be accurate one would have to spend every cent of his income on taxable items.

I'm done arguing with math illiterates. It's no wonder you guys have such bizarre notions of what's going on. Norman doesn't understand percentages. Keith looks at charts and studies without thinking about what he's looking at. And Garbanzo is just full of blind rage and class envy.

Carry on with your silly selves. :rolleyes:

Keith Wilson
02-05-2010, 11:25 AM
HighC, are actually reading what you're arguing with? Where did you get 9%? From the MN report
Sales Tax on Consumer Purchases

In agreement with other incidence studies, this analysis finds the consumer portion of the sales tax to be regressive, especially at low-income levels. (The sales tax on business purchases is discussed below in the business tax category.) Higher income households spend a smaller portion of their income on items subject to the sales tax. This is partly due to their higher savings rates and partly to the mix of consumer goods and services they buy. Hence, tax burdens as a proportion of income tend to decline as one moves up the income scale. For 2006, the effective state and local consumer sales tax rate for the bottom decile was 5.4 percent, compared to the rate for the top decile of 1.1 percent (see Table 2-4). Effective tax rates for the second through ninth deciles, representing 80 percent of all taxpayers, declined continuously from 3.2 to 1.6 percent.

Look here, page 45. (http://www.revenue.state.mn.us/legal_policy/other_supporting_content/2009_tax_incidence_study_links.pdf) The total sales tax figure for each decile includes a portion of the tax paid by businesses.

As was shown in Figure 2-1 above, business taxes accounted for 22.8 percent of the total tax burden on Minnesota residents. Business taxes include the following:

Corporate franchise tax
Sales tax paid on business purchases of capital equipment and other intermediate inputs (emphasis added)
Motor vehicle registration tax paid on vehicles owned by business
Mortgage and deed taxes on business property
Solid waste management taxes on services to business
Excise tax on motor fuels purchased and used by business
Local gross earnings taxes

Although the legal impact of each of these taxes falls on the business entity, each is partially shifted to consumers (in higher prices) or in some cases to labor (in lower wages). Only a portion of business taxes are borne by capital owners as a lower rate of return on their investment. Part of the burden of each of these taxes is also shifted to nonresidents. This study estimates the degree to which such shifting occurs and then allocates the estimated burden to Minnesota households based on each household’s sources of income and patterns of spending. (An explanation of tax shifting and the method of estimating the incidence of business taxes is included in the Appendix B.)

bob winter
02-05-2010, 11:28 AM
Norman, if the tax has already been paid at the corporate level, I see no justification for taxing it at the indivual level. In Canada, the taxation of dividends can become pretty complex. I will stick with ordinary dividends. In Canada dividends are grossed up and there is an animal known as the dividend tax credit. The grossed up amount is included in taxable income and the divident tax credit is deducted from the final amount of tax owing. The basis, in theory, is to compensate the individual for taxes paid at the corporate level. In paractice, it does not work all that well but it is better than nothing.

I will have to go back and take a look at your proposal on capital gains. If it involves taxing unrealized gains, I have serious problems with the notion since an unrealized gain, at a point in time, could very well never be actually realized.

Keith Wilson
02-05-2010, 11:43 AM
I'm done arguing with math illiterates.Nobody can reasonably call me a math illiterate, although I've forgotten all I once knew about differential equations and how to do Laplace transforms.. HighC, with all respect, you're acting like a fool. You don't bother to look at the sources of the data I'm quoting, you don't bother to read the explanations they provide, you don't appear to want to understand what's going on and the effect of various taxes, and you cling to your silly one-calculation example like a drowning man to a log. The numbers include more than just retail sales tax paid by individuals.

bob winter
02-05-2010, 12:25 PM
I'd tend to agree with you... except that everyone is multiply taxed. After paying my federal tax on my income, and my state income tax, I take my dollars to the gas station, and pay not just a sales tax on the gas, but a federal excise tax on it, as well as a state excise tax on it... before I leave the gas station, I've been taxed twice by the Feds, and THREE times by the state.

That's the beauty of my tax proposal... you're NEVER taxed on unrealized gains. In fact, you're not even taxed on realized gains, as long as those gains are reinvested!

Instead, you're taxed at a preferential rate on money you invest... and taxed at a preferential rate on money you take out of your investments to spend. The growth of your investment is never taxed, as long as it's invested. If you invest for a long period of time, and then withdraw money, you end up paying less on what you withdraw than if you hadn't invested it.

My first point was to eliminate sumptory taxes. This would naturally include excise taxes. The thing that irritates me about gasoline is not only do you pay sales tax at the retail level but the tax is applied on the exicse taxes as well. Of course, governments are run by politicans and the more taxation they can keep out of the eye of the taxpayer, the happier they are.

The tax on money invested and taken out of investments might well have merit.