Logic and Taxes

[proxymoron]

+1 Unlike death or, um, taxes, logic clearly isn't eternal.

 

[cb91710]

I don't quite understand this. You don't really get "kicked" into a higher tax bracket the more you make - rather once your taxable income passes a certain threshold that portion of your income gets taxed at the higher rate. Say for example the threshold is 150K. The first 150k you makes gets taxed at the lower rate, only the amount over 150k gets taxed at the higher rate. Are you saying you decided the effective 3 percent pay cut on your income above the bracket threshold was enough to make you quit altogether or that you stopped taking on work that would put you above the bracket threshold?

Yes and no.

If that higher bracket subjects you to AMT, then you lose significant (and legitimate) business related deductions.
AMT is not something that will ever impact me, because my only deduction is for my mortgage interest and state/local taxes.

But he was retired, while operating as a consultant.
He had significant deductions for the business.
If his retirement income was $80,000, and his consulting work brought in $40,000, no problem.
However, if his consulting work brought in another $80,000, then AMT would eliminate most of the deductions, which would have the effect of being a much higher total tax rate on the entire $160k.

Yes, the effective hourly wage could indeed fall.

 

[ackvil]

Yes and no.

If that higher bracket subjects you to AMT, then you lose significant (and legitimate) business related deductions.
AMT is not something that will ever impact me, because my only deduction is for my mortgage interest and state/local taxes.

But he was retired, while operating as a consultant.
He had significant deductions for the business.
If his retirement income was $80,000, and his consulting work brought in $40,000, no problem.
However, if his consulting work brought in another $80,000, then AMT would eliminate most of the deductions, which would have the effect of being a much higher total tax rate on the entire $160k.

Yes, the effective hourly wage could indeed fall.

Thank you Rich. The AMT is what killed me. I failed to make that clear. This goes back a number of years so I don't recall all of the details. However, I do remember that I was not able to claim certain interest expenses, depreciation, medical expenses, state income taxes, and I could not use some loss carryovers. The result was that my taxes were significantly higher than prior years.

 

[cb91710]

Thank you Rich. The AMT is what killed me. I failed to make that clear. This goes back a number of years so I don't recall all of the details. However, I do remember that I was not able to claim certain interest expenses, depreciation, medical expenses, state income taxes, and I could not use some loss carryovers. The result was that my taxes were significantly higher than prior years.

OTOH, if you paid AMT, you're practically audit-proof for that year.

My buddy has been audited a number of times. They go back 3 years, if they find evidence of fraud, they can go back 5.
His audits are normally painless. If he pays AMT, they skip that year. The audit goes both ways. AMT was intended to disallow deductions that are commonly abused... during an audit, those deductions are verified and if they are found to be legit, the agent will issue a refund for the overpayment. This happened to him twice when rookie agents did the audits.

 

[goatee]

Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100 and if they paid their bill the way we pay our taxes, it would go something
like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.)

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." So drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free...but what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'. They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each
end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before...and the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man who was now paying nothing, along with the first four. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got
only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first five men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

i want to party with these guys!

 

[scottish steve]

I agree with many of the points raised in this thread and I'm very happy that it has maintained a respectful and thoughtful tone. It is quite hard to justify taking a higher percentage of a person's income simply because they've done well, but at the same time, even the US has a redistributive bias and few people would like to think they don't contribute more than their share. Bill Gates has done so much good recently, with his enormous charitable donations and I think this should be a model for other ubercrats. It was his choice- certainly he wasn't obligated to do it, but I would like to bet he feels more satisfaction in seeing the enormous benefit he has accomplished, than in the 5 or 10 years previously. One of the problems with having a very low income despite working hard is, it's quite easy to assume those on a much higher salary than you don't deserve it; "How can they make 25 times what I do, when I can hardly keep my eyes open after dinner because I'm so tired?". It's also very easy to assume, if you work hard and have a large income, that those who don't make very much money somehow deserve it; "I did it, so they're obviously lazy, stupid, dysfunctional or in some way to blame for their state in life.". Every one of us is aware of the dreadful states of existence a huge proportion of our fellow human beings have to suffer every day, but it's far too easy to ignore it or do nothing about it. I feel everyone could make a difference, not just the top earners, but less help is given than is needed, because, frankly, we are all a little bit selfish and more importantly, do not have to see the reality of child labour etc. My take on it is, not that taxes are too low on the highest earners, but that salaries are too high and the drain to the top is badly altering the complexion of our societies. In the 1970s in The UK, the average Managing Director's pay compared to the shop-floor worker was, I think ten times. We all know that the remuneration of the highest earners has increased many times more than that of the average worker. I think it now stands at 35 times. I believe there are very few instances in which this is just, especially if the tenure of those managers produce little increased profit or even a loss and especially if those profits came directly from the cutting of the benefits or even the jobs of those whom he was paid to manage. At the moment, managerial rhetoric seems to have only one Holy Truth; more money is better at any cost. I do not believe this is true. I believe a society which maintains the dignity of those on the lowest rung is a healthier, more productive place to live. I believe that the affirmation of human happiness and dignity should be the raison d'etre of our self-organisation.
So I feel all civilised countries should enact laws to give us caps on managerial pay, bonuses and share options, closure of tax-avoidance loopholes, electoral reform which makes buying a politician's favour of gratitude impossible, except with good works and/or argument and the framing of minimum working conditions regardless of immigration status.
Put simply, you can keep what's your gentlemen, as long as we can do the same.

 

[Stubblefield]

More tax dollars with this government=more tax money wasted. Every week there are new allegations of stimulus money wasted. It will not go where you think it will. Also, when a person earns a dollar, it is up to that person to spend it how they wish. Having the government decide how much money we need and how we spend it will be the end of the Republic, if we aren't already there.

Some seem to feel it is the moral and ethical to pay higher taxes. I, for one, disagree since I see so much government waste and useless government programs. I, for one, would rather give more to a charity that I approve of than to a government that spends funds so lavishly. As I said previously, I find it ironic that some individuals - such as Warren Buffett, Bill Gates, etc. - say they want to pay more in taxes, which they are free to do, and then take huge charitable deductions to minimize their taxes.

Might make a great related thread. How much do we waste on Military spending (my personal peeve), and how much do we give away in public and private entitlements?

Carry on.

 

[Doc4]

I believe a society which maintains the dignity of those on the lowest rung is a healthier, more productive place to live. I believe that the affirmation of human happiness and dignity should be the raison d'etre of our self-organisation.

So I feel all civilised countries should enact laws to give us caps on managerial pay, bonuses and share options, closure of tax-avoidance loopholes, electoral reform which makes buying a politician's favour of gratitude impossible, except with good works and/or argument and the framing of minimum working conditions regardless of immigration status.

Agree and disagree.

I'm totally on board with the general concept of making sure the lowest rung on the ladder is above the 'water' line in the ceptic tank ... and to those out there who can't muster the altruism to agree, well, look at it this way: it prevents revolution, rioting and anarchy.

I don't like the idea of 'flat-top laws' that would say no one can earn more than $insert-number-here ... it's a complex problem that isn't fixed with simple solutions. The approach needs to be far more nuanced than that ... but generally I think it would be good for society to work toward bringing the two ends of the spectrum closer together, rather than seeing how far the top end can go without caring what happens to the bottom end.

 

[Mako72]

OTOH, if you paid AMT, you're practically audit-proof for that year.

My buddy has been audited a number of times. They go back 3 years, if they find evidence of fraud, they can go back 5.
His audits are normally painless. If he pays AMT, they skip that year. The audit goes both ways. AMT was intended to disallow deductions that are commonly abused... during an audit, those deductions are verified and if they are found to be legit, the agent will issue a refund for the overpayment. This happened to him twice when rookie agents did the audits.

Sounds like Govt Blackmail... Pay a little more and you get protection from the IRS, pay a little less and we will see what we can find.

That is part of why I think so many see a Flat Tax(used generically) of some sort with no deductions or loopholes as attractive. Our tax system is realy set up to reward any number of people or groups while ensuring that it punishes others. Its guaranteed to anger somebody, right or left, at how it can be used and abused.

Jay

 

[cb91710]

Sounds like Govt Blackmail... Pay a little more and you get protection from the IRS, pay a little less and we will see what we can find.

That is part of why I think so many see a Flat Tax(used generically) of some sort with no deductions or loopholes as attractive. Our tax system is realy set up to reward any number of people or groups while ensuring that it punishes others. Its guaranteed to anger somebody, right or left, at how it can be used and abused.

The problem with the flat tax is it would be a huge benefit to the wealthy, and absolutely hammer the poor.
Over the past 15 years, my income has ranged from $40k to $85k, and my effective tax rate after deductions (mortgage interest, and we had one child here until 2000) has been in the range of 10% to 14%.
Cain's 9-9-9 would put my rate at around 15% due to the sales tax.
Below my income level, effective tax rates are lower, even without deductions, and as mentioned, a high percentage of taxpayers (I heard 53%, but others here have indicated it's closer to 40%) pay no federal income tax.
9-9-9 and any other flat tax could not eliminate SSI, Medicare, and the other taxes that are pulled from our paychecks (that everyone pays regardless of income or deductions).
Those above my income level would receive a huge tax break. Regardless of Warren Buffet running his mouth about paying a lower percentage than his secretary (his secretary probably makes $200k and probably rents an apartment and has no children), the vast majority of "the wealthy" pay a higher percentage than the "flat tax" would impose.

Okay, so the new POTUS is able to institute a flat tax.
First time people file their returns under the new system, there will be an outcry from advocates for the working poor, and along will come Congress to the rescue, making modifications to the tax code that will begin to bring deductions back into the picture.
The "99%" will discover that their "flat tax" isn't what they thought it was and we'll be taking rapid steps back to a progressive system.

 

[scottish steve]

Agree and disagree.

I'm totally on board with the general concept of making sure the lowest rung on the ladder is above the 'water' line in the ceptic tank ... and to those out there who can't muster the altruism to agree, well, look at it this way: it prevents revolution, rioting and anarchy.

I don't like the idea of 'flat-top laws' that would say no one can earn more than $insert-number-here ... it's a complex problem that isn't fixed with simple solutions. The approach needs to be far more nuanced than that ... but generally I think it would be good for society to work toward bringing the two ends of the spectrum closer together, rather than seeing how far the top end can go without caring what happens to the bottom end.

I meant as a multiple of the lowest-paid worker. I have no problem with a CEO earning 10 million dollars a year if every one of his employees can live decently. This is also difficult to quantify, but to be able to say, support a spouse and 1 child reasonably and drive a modest, small car plus live in clean, sanitary accomodation on only 1 income earned over not more than 45 hours per week. I have a big problem with the CEOs of multinational drinks corporations making tens of millions of dollars a year, while employing children to cut sugarcane with machetes for $1 a day.

 

[Mako72]

The problem with the flat tax is it would be a huge benefit to the wealthy, and absolutely hammer the poor.
Over the past 15 years, my income has ranged from $40k to $85k, and my effective tax rate after deductions (mortgage interest, and we had one child here until 2000) has been in the range of 10% to 14%.
Cain's 9-9-9 would put my rate at around 15% due to the sales tax.
Below my income level, effective tax rates are lower, even without deductions, and as mentioned, a high percentage of taxpayers (I heard 53%, but others here have indicated it's closer to 40%) pay no federal income tax.
9-9-9 and any other flat tax could not eliminate SSI, Medicare, and the other taxes that are pulled from our paychecks (that everyone pays regardless of income or deductions).
Those above my income level would receive a huge tax break. Regardless of Warren Buffet running his mouth about paying a lower percentage than his secretary (his secretary probably makes $200k and probably rents an apartment and has no children), the vast majority of "the wealthy" pay a higher percentage than the "flat tax" would impose.

Okay, so the new POTUS is able to institute a flat tax.
First time people file their returns under the new system, there will be an outcry from advocates for the working poor, and along will come Congress to the rescue, making modifications to the tax code that will begin to bring deductions back into the picture.
The "99%" will discover that their "flat tax" isn't what they thought it was and we'll be taking rapid steps back to a progressive system.

Like I said, I was just using the term generically. But I agree and that is why our current tax code is a nightmare, because everyone who moaned and groaned got their loophole. We have deductions for children, deductions for homes, deductions for green cars, home farming deductions, union dues deductions, etc. And I am not even familiar with all the business tax deductions! Unfortunately I don't think we can fix the mess of a tax code we have, and I just say this as a guy who does his own taxes.

Jay

 

[Doc4]

I meant as a multiple of the lowest-paid worker. I have no problem with a CEO earning 10 million dollars a year if every one of his employees can live decently. This is also difficult to quantify, but to be able to say, support a spouse and 1 child reasonably and drive a modest, small car plus live in clean, sanitary accomodation on only 1 income earned over not more than 45 hours per week. I have a big problem with the CEOs of multinational drinks corporations making tens of millions of dollars a year, while employing children to cut sugarcane with machetes for $1 a day.

I think that, broadly speaking, you and I agree on the proportionality issue. I would look at it more as a society-wide issue rather than within one corporation, so that we can get rid of the extreme examples of poverty and wealth.

I have no simple solutions to accomplish this ... it is, after all, a complex problem.

 

[kwk285]

The best thing concerning our poorly written tax laws is the fact that it treats every one differently. It is a tax code that is so tough to understand the the Secretary of the Treasury is incapable of paying his taxes properly.

The reason why I think it is so wonderful is that my Wife's CPA business will always have a lot of business. Her business increases everytime our government simplifies the tax code. She has clients from Boeing, Microsoft, Medical offices that have no clue on how to properly pay their taxes.