One of the most important things to understand about tax discussions is that there are two broad classes of "rich" -- high paid salaried employees vs. wealthy investors.
When you see claims like "the top 20% of people pay most of the taxes", that's mostly the high paid salaried employees. Cardiologists making six figure salaries pay high tax rates, and there are a lot of doctors and lawyers and engineers in the population, so they pay most of the taxes.
When you see claims about rich people paying low tax rates, that's corporations and wealthy investors hiring accountants to minimize their taxable income.
The distinction is really important because it means the problem isn't marginal rates, it's the complexity of the tax code which allows people with large fortunes to game the system. A simple VAT with some kind of dividend/UBI to make it more progressive would eliminate most of those games. It would also mean that individuals wouldn't have to file tax returns at all, which would save hundreds of millions of man hours every year.
Because it would seem to me that consumption of low-income earners will trend toward below-the-median while consumption of the wealthy will trend toward above-the-median, giving you an additional handle to make this taxation progressive.
IMHO it’s easier to construct a “fair” tax system on the income side than on the expenditures side, provided you count all income equally. Currently income from labor is usually taxed higher than income from investment, and that’s not fair.
The difference can be explained by this completely made up example: A steel mill buys iron ore for $1 a kilo and makes steel of that. A nail factory buys steel for $1.50 a kilo and makes nails of that. A distributor buys those nails wholesale for $2 a kilo. A hardware store buys those nails from the wholesaler for $2.50 a kilo. A contractor buys those nails from the hardware store for $3 a kilo. The subcontractor bills $3.50 a kilo for those nails. The general contractor bills you $4 a kilo for those nails.
With VAT you/the general contractor/all businesses involved pay taxes on a total of $4.
With a transaction tax, it would be paid on $17.50.
But the above is a simplified example. In the real world there are probably a lot more businesses (each specializing in their own niche) and therefor transaction involved in getting that nail into your wall.
If you have a product that goes from mine to mill to factory to wholesaler to retailer to consumer, the tax is paid five times. But if the same company owns the mine as operates the retail store, it's paid only once.
That's an insurmountable advantage for vertically integrated companies, so no others remain and tax-wise you end up with the same result as sales tax or VAT (i.e. the tax is paid on the total final value) except that you've needlessly destroyed every non-vertically integrated business.
That is the problem that VAT solves, by giving longer supply chains the same tax treatment as vertically integrated corporations.
We have a marginal tax system so effective rates should be higher for those that make more. Them paying lower tax rates (like Buffet said) is them having more loopholes in the system.
A lower tax payment is a different thing.
So, for example, if someone makes most of their money on dividends, then they pay capital gains tax, and it appears like they are unfairly paying a lower rate than everyone else. ...but that's not a fair comparison because it's a different sort of income, with a VASTLY riskier risk profile. Taxing it at the income rate wouldn't make sense.
In the past, in the US, capital gains wasn't taxed at all because it was considered double taxation (since the investment was already taxed). ...and in some other countries, there is no tax on capital gains.
I've seen people claim that country XYZ has higher tax rates than the US, but then when you look closed, they have zero capital gains taxes.
Yes, earning the money with labor is vastly riskier. Telling a financial advisor where to put money incurs no risk to your life.
Compare that to being a welder, tree feller, home builder, where your health or life is a daily concern.
I really don't understand why those who go out and work hard every day have to pay more in tax (as a percentage) than those that just sit on the couch and watch their wealth grow.
PS: Either lower taxes on capital gains or allowing people to deduct losses is reasonable in the name of risk, but we do both.
Or just use a consumption tax, which is largely the same thing but a lot less complicated.
Yes, I've come to this conclusion too. The long-standing argument that capital gains rates should be low is about what happens, for example, if your gain on an investment exactly matches inflation: you'd pay taxes on it, but you haven't made any profit in real dollars. The right fix for that is not to divide your paper gain by some amount before taxing it; it's to subtract the loss due to inflation. In times of low inflation, as we have now, this won't make much difference, but if inflation picks up again at some point, it will make quite a large difference.
Of course, such a plan raises the question of exactly what inflation estimator one should use. I'm not enough of an expert to have a strong opinion, but the T-bill rate [0] seems like a reasonable first cut, since it's a good estimator for the risk-free rate of return. Paper gains from holding T-bills would thus not be taxed at all.
Whatever the inflation estimator used, the more important (and likely more controversial) aspect of the proposal is that gains beyond that amount be taxed as ordinary income. The argument is one of simple fairness: once the inflation problem is handled, how can one justify doing otherwise?
[0] https://www.investopedia.com/terms/t/treasurybill.asp -- Okay, I see there isn't just one rate, since the rate depends on the maturity interval, but we can go with the highest one, which is the one for the 52-week bill. This creates the oddity that holders of shorter-term bills will actually get a tax credit, but it will be small; I think we can live with this.
This means you don't get an interest free loan from the government to continue to invest in an asset just because you haven't sold yet.
Having the government give people de facto interest free loans of their own money in order to continue to investing it is also optimal anyway, because the government borrows at an interest rate significantly lower than the average market rate of return. They actually come out ahead by lending the money to investors who are then collecting taxable interest on it, because the tax on the interest can be more than the rate the government pays to issue bonds in the meantime, not even counting the overall economic benefit of stimulating investment (i.e. more/better jobs for people who are themselves paying taxes).
One thing that complicates the above is that the US does tend to run a larger deficit than Canada.
Ah yes, the riskiest activities of them all: investing in fortune 500, government bonds, index funds and inflating real-estate prices. They all count as capital gains.
RB2 Is the form you fill out if an employer goes bust, to get some cash from the government.
The risk of investing is, in the large, "my £10,000 might be worth £9,500 tomorrow", not "tomorrow I might lose my job through no fault of my own and suddenly have to make a major lifestyle change".
The same thing can be said about every tax ever. Every time you tax money as it changes hands, that same money has changed hands before and was probably taxed then.
> They have constructed a historical database that tracks the tax payments of households at different points along the income spectrum going back to 1913, when the federal income tax began.
It may be reading the book for the full detail on methods and results. I plan to.
But they don't. That's the point. Your conventional wisdom is wrong.
The USA has a large number of regressive taxes, which tax the poor more heavily than the rich. These have been steadily expanded. And it has one, only one, progressive tax - the federal (not state) income tax - which has been steadily made less progressive in recent years to the point where overall taxation is at best flat and more likely slightly regressive.
Citation needed. Saying the US has "only one" progressive tax is a bit ridiculous. The income tax is by far the largest tax almost anyone pays. It's certainly the largest tax I, and everyone I know, pay. And that only increases as you get richer.
Correct. Which is why income is such a miniscule fraction of the 1% (and above's) earnings. It's all out there in the open. Pick any CEO in the top-100 corporations. Look at their income. Then look at their overall earnings. The bulk falls under capital gains due to stock. Then there is deferred compensation, where taxes are lowered even MORE if you agree to postpone being paid. There are so many clever ways for the very very rich to avoid taxes it boggles the mind.
So go ahead and keep talking about the income tax, they've got you distracted.
> However, the day Cook was awarded his multi-year payday Apple immediately withheld and sold 656,117 of Cook’s shares to cover his tax bill. All told, Apple sold $70.9 million in Cook’s stock at a price of $108.03, equivalent to or 52.1% of Cook’s total $135 million performance award.
You’re talking about a relatively small number of investors who derive most of their income from capital gains. (Capital gains account for just about 6% of total personal income.) It just so happens that many prominent examples (Trump, Buffet, Romney) happen to fall into that group. But even among CEOs, professional like Jack Welch (who pays over 30%) will take a lot or most of their compensation as ordinary income.
The top is about 3.5 millions people. Being one of the top-100 CEOs is very, very different from being a random one percenter.
Warren Buffet is probably the easiest person to look at here. A quick google says that [0] he made $11m in 2016, and on that he paid $1.85m in federal income tax, and he claims a large portion of the remainder was paid in state tax. Even ignoring his state taxes, yes he paid a marginal rate of 16%, but he still paid more in income tax than the average 1%er's salary. I'm certainly not a right wing advocate, but the spin associated with the "rich are not paying enough tax" doesn't really help the conversation much.
[0] https://fortune.com/2016/10/10/presidential-debate-donald-tr...
The amount he made in 2016 is the point of contention. Sure he made 11m in income, but for that same year, BRK.A increased a staggering 25% in share price. Even if Buffet owns a 1% of BRK.A, that represents a paper gain of 4 Billion dollars.
Now, sure, he might not have sold any stock so that won't count against his capital gains tax, but to me, its a bit deceptive to say that Buffet only made $11M.
(California is not one of those states, due to Proposition 13, which is also very controversial and is argued to be one of the causes of California's rising housing costs)
When it comes to "if the rich are being taxed enough", you bring up a good point - if my home rises in value I pay more - however Buffet makes several billion in paper gains, and his taxes are largely unchanged.
* FICA, which is strongly regressive at the higher end.
* Sales taxes, which are also strongly regressive since (citation needed) the poor likely pay more of their income on taxable goods. ("There's only so much filet mignon you can eat," according to a government professor I once had.)
* Property taxes.
* Fees.
The estate tax is very progressive, at 40% for estates over $11.4m, and 0% for estates worth less.
Try sales taxes. The poor aren't excluded from them, yet someone who is poor is far more likely to spend a larger percentage of their income on them than anyone with enough income to save and invest.
The wealthy pay in absolute terms, more dollars, but they pay a lower rate than others.
However, if you look at the data in this chart, you can see it's not true any longer. The actual combined rate paid by most Americans is between 22-28%. (It's on the lower end for the poorest Americans, and for the wealthiest as well) Fundamentally, the total taxes paid is flat.
I think most people think that the taxes paid chart looks like what it did in the late 70s/early 80s. In that chart, the poorest Americans pay about 20%, and the richest about 45%. That's where we should be, instead of where we are now.
By undisclosed I mean negotiated. When you are trying to get somebody to spend a ton of money to open a business, donate to charity, bring a bunch of jobs, etc is there a negotiation that happens to provide lower tax options to encourage that spending?
As I posted elsewhere in these comments:
Everyone expects a discount on goods and services when purchase in bulk.
Why should taxes be any different?
Some would argue that taxes are different because of the issue of fairness in society, and for the fortunate who have vastly more than needed to survive, more should be expected to help everyone else. This is in the self interest of the wealthy, as economic growth is actually stunted by inequality.
There are other ways to balance fairness other than progressive taxation, but those too are often anathema to ruling economic policy makers.
Perhaps I should have prefaced by previous comment with “playing devils advocate”.
There's so many technically correct but misleading definitions it's very hard to know what the "real truth" is in these discussions.
There’s at least one perspective where this makes sense:
Everyone expects a discount on goods and services when purchased in bulk.
Why should tax be abt different?
2011: The rate is mostly flat, especially above the 80-90%ile. The 99.99%ile pays the highest.
2018: The 99.99%ile pays the highest, the Top 400 appear to be paying a lower rate than almost anyone.
Somewhere between 2003 and 2011, the 0-10%ile began paying more than the immediately higher percentiles.