Growing Divide Between Rich and Poor

[Penumbra]

Many sources seem to indicate that in the United States, there is a growing gap between the wealthiest and the poorest of people.
Wealth And Inequality In America
Wealth And Inequality In America
Wealth And Inequality In America
Wealth And Inequality In America
Wealth And Inequality In America
(A select set of charts, out of a larger set. Click the first one to start looking through them all, or select one of the other four for particularly concise charts.)


-What, in your opinion, are the primary causes of this?

-Where, in your opinion, does this end? Does it continue like this until things result in collapse or revolution? Or does it eventually stabilize with a wide gap that is non ideal but doable?

-How, in your opinion, should this issue be most practically, fairly, and appropriately addressed?

 

[Alceste]

Many sources seem to indicate that in the United States, there is a growing gap between the wealthiest and the poorest of people.
Wealth And Inequality In America
Wealth And Inequality In America
Wealth And Inequality In America
Wealth And Inequality In America
Wealth And Inequality In America
(A select set of charts, out of a larger set. Click the first one to start looking through them all, or select one of the other four for particularly concise charts.)


-What, in your opinion, are the primary causes of this?

-Where, in your opinion, does this end? Does it continue like this until things result in collapse or revolution? Or does it eventually stabilize with a wide gap that is non ideal but doable?

-How, in your opinion, should this issue be most practically, fairly, and appropriately addressed?

The cause is regressive taxation. I.e. the poor pay a greater proportion of their income in tax than the rich.

Unaddressed rich-poor gaps inevitably lead to the breakdown of social order and ultimately revolution.

The solution is progressive taxation: the rich should pay a higher proportion of their income in tax than the poor.

 

[Revoltingest]

The cause is regressive taxation. I.e. the poor pay a greater proportion of their income in tax than the rich.

Source?

 

[Penumbra]

The cause is regressive taxation. I.e. the poor pay a greater proportion of their income in tax than the rich.

True.

Many people I talk to don't seem to think this is the case, because it's disguised. The tax brackets on income are indeed progressive, but when social security is taken into account, along with extremely low taxes on stocks and other forms of investment income (from which wealthier people draw a majority of their wealth), they end up paying a significantly reduced tax rate.

I also think it has to do to some extent with the fact that some people know how to play the system and some don't. Some people understand the power of compounding returns and others do not, so one group grows wealth exponentially and one group does not. And those that know how to play this game become more and more rewarded as they get richer because their taxes shrink relative to their income and wealth.

 

[Penumbra]

Source?

Why Buffett pays less than his secretary - Conor Clarke - Politics - The Atlantic
http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States
http://ssa-custhelp.ssa.gov/app/ans...ecurity-tax-rate-and-maximum-taxable-earnings

Essentially, the reason is that dividend and capital gains tax, on numerous types of investments, are in the ballpark of 15%. In addition, things like social security cap out at a certain point, meaning that as income grows and that stays static, it represents a smaller and smaller percentage of the income.

 

[fallingblood]

I would argue that it partly is due to a self-fulfilling prophecy. People get into their heads that they can't rise above where they are. So they become happy, or content in doing what they are doing. In turn the leads to the idea that they are doing as good as they can do, so there is no reason to try anything else.

I also think some people simply are not willing to take the risk when available. For me, it was a huge risk to invest all my time into pursuing a career in entertainment. I took some very large risks, some paid off, others flopped, but it turned out for the most part a benefit.

For others, it is a lack of education.

For others it is being raised into a cycle of poverty. One is born into poverty, and that is all they know. I've seen this to be true on many of the reservations in this area. They are brought up to think they can never have better so they don't try.

It really can't be broken down into one simple thing.

 

[TJ73]

It is also very expensive to be poor. When you don;t have financial power you are subjected to very expensive means of securing goods and services. If you need to borrow and you are poor your credit will often reflect this and you pay greater interest. If you have an emergency you may have to borrow with very unfavorable terms. You will probably never have an opportunity to let you money make more money for you as it is always in use and accruing more debt.
When you are poor you have no other resources but you own labor and being poor plays havoc on your health. Good, healthy food is very expensive and poor quality, processed food is cheap. Although there is access to some free health clinics and the emergency room, the wait is impossible and many people will wait until it is too late and their health is badly affected.
Without your labor you have nothing. Even with excellent skills and great ideas, without money power you can never achieve any financial independence. You have lesser chance of gaining assets like a home to use as leverage.

 

[Penumbra]

I would argue that it partly is due to a self-fulfilling prophecy. People get into their heads that they can't rise above where they are. So they become happy, or content in doing what they are doing. In turn the leads to the idea that they are doing as good as they can do, so there is no reason to try anything else.

I also think some people simply are not willing to take the risk when available. For me, it was a huge risk to invest all my time into pursuing a career in entertainment. I took some very large risks, some paid off, others flopped, but it turned out for the most part a benefit.

For others, it is a lack of education.

For others it is being raised into a cycle of poverty. One is born into poverty, and that is all they know. I've seen this to be true on many of the reservations in this area. They are brought up to think they can never have better so they don't try.

It really can't be broken down into one simple thing.

The three main reasons I attribute it to are:

-Regressive tax structure
-Some people know how to play the game better
-Increasingly complex technology requires increasingly more specific and lengthy degrees. Automation is becoming more and more advanced. Thus, unskilled labor is apparently less in demand.

 

[Penumbra]

It is also very expensive to be poor. When you don;t have financial power you are subjected to very expensive means of securing goods and services. If you need to borrow and you are poor your credit will often reflect this and you pay greater interest. If you have an emergency you may have to borrow with very unfavorable terms. You will probably never have an opportunity to let you money make more money for you as it is always in use and accruing more debt.
When you are poor you have no other resources but you own labor and being poor plays havoc on your health. Good, healthy food is very expensive and poor quality, processed food is cheap. Although there is access to some free health clinics and the emergency room, the wait is impossible and many people will wait until it is too late and their health is badly affected.
Without your labor you have nothing. Even with excellent skills and great ideas, without money power you can never achieve any financial independence. You have lesser chance of gaining assets like a home to use as leverage.

What do you propose is the most appropriate set of solutions for this dilemma?

 

[Pegg]

True.

I also think it has to do to some extent with the fact that some people know how to play the system and some don't. Some people understand the power of compounding returns and others do not, so one group grows wealth exponentially and one group does not. And those that know how to play this game become more and more rewarded as they get richer because their taxes shrink relative to their income and wealth.

most employees have a cap on their earnings while their employers do not

and for employers, they can claim a lot more on their tax then an everyday employee can, so the employers have a greater capacity for earning then regular employees do.

 

[Sunstone]

Revolution. Either through the ballot box or in the streets, but revolution now. Before we become a society stratified into just two classes, rich and poor, like Guatemala.

 

[Revoltingest]

Why Buffett pays less than his secretary - Conor Clarke - Politics - The Atlantic
Capital gains tax in the United States - Wikipedia, the free encyclopedia
http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/240/~/2011-social-security-tax-rate-and-maximum-taxable-earnings

Essentially, the reason is that dividend and capital gains tax, on numerous types of investments, are in the ballpark of 15%. In addition, things like social security cap out at a certain point, meaning that as income grows and that stays static, it represents a smaller and smaller percentage of the income.

A quick perusal of the links didn't actually show any info about how much the poor pay in taxes.
(I doubt that Buffet's secretary is poor.) All the info about tax rates doesn't address the real world
net effect after deductions, tax credits, & other assistance.
Note: the article on capital gains tax doesn't deal with it's flip side....the limited deductability of
capital losses. They tax you when you make the money, but you sometimes can't deduct losses
when you have'm. It gets complicated, which is why I'm curious about data regarding effective
tax rates on different economic classes.

Interesting that revolution is mentioned. Today I had a debtor make an interest payment with a Springfield
Supermatch M1A rifle with a 4-14x56 range finding scope, bipod, bayonet & a dozen 20 round magazines.
(People don't have much money around here anymore....have to barter a lot.) It will shoot sub-minute of
angle groups...tis a full blown sniper rifle. He's an ex postal worker who used it only for deer hunting.
Count me in as ready for conflagration!

 

[Penumbra]

A quick perusal of the links didn't actually show any info about how much the poor pay in taxes.
(I doubt that Buffet's secretary is poor.) All the info about tax rates doesn't address the real world
net effect after deductions, tax credits, & other assistance.

It's not just about the very poor. It's about the highest 1% or 10% compared to everyone else.

 

[Penumbra]

Offhand, the things I think should be implemented are:

-Tax dividends and capital gains at the same level as the overall progressive income bracket.
-Remove the social security tax maximum.
-Moderately reduce corporate taxes, but reduce loopholes. (This is to offset the increased tax on capital gains and dividend taxes, which are effectively double taxation to begin with.)
-Provide stronger safeguards for reducing the likelihood of getting stuck in a cycle of medical debt.

 

[Revoltingest]

Offhand, the things I think should be implemented are:
-Tax dividends and capital gains at the same level as the overall progressive income bracket.
-Remove the social security tax maximum.
-Moderately reduce corporate taxes, but reduce loopholes. (This is to offset the increased tax on capital gains and dividend taxes, which are effectively double taxation to begin with.)
-Provide stronger safeguards for reducing the likelihood of getting stuck in a cycle of medical debt.

Would you allow capital losses to be deductable against ordinary income? Otherwise, the tax-vs-income asymmetry would be
even worse than it is now. Right now, many distressed sellers cannot deduct losses, since capital gains just ain't happening.
Would you index capital gains taxes against inflation? Currently, the government taxes us on phantom profits, ie, profits
due to the devaluation of currency relative to economic value. Example: You buy a piece of land for $100K in 1980. Inflation is
7% per year. You sell your widget in 1990 for $200K. Your real profit, adjusted for inflation, is just about $0. But the IRS would
want to tax you on $200K-$100K=$100K. (No wonder the fed loves a little inflation...under 10% or so.)
Another problem with high capital gains taxes is that assets become somewhat trapped with one owner. Let's say the owner's
asset is worth $100K. But if he sells it, he might net $60K after taxes. With a 40% loss of equity, there's incentive to keep
assets which might be more productive in the hands of someone else. This regularly happens in real estate, resulting in
under utilized assets.

 

[Penumbra]

Would you allow capital losses to be deductable against ordinary income? Otherwise, the asymmetry would be even worse.
Right now, many distressed sellers cannot deduct losses, since capital gains just ain't happening.

Perhaps on real estate due to the lack of liquidity. Not on stocks or other liquid investments.

 

[TJ73]

What do you propose is the most appropriate set of solutions for this dilemma?

* People have to be able to receive good physical AND mental health care. Being poor is overwhelmingly depressing. And it is not about wanting "nice things". It is about paying bills and feeding kids and getting the car fixed so you can get to work or buying your kid a pair of much needed shoes.
So first you need to be of sound mind and body.
*Children at risk need to be taught how money REALLY works. They need to learn how to open and properly use a bank account. I can not tell you how much money poor people spend every month, unnecessarily, to pay bills either in person or with money orders or western union. Other people get rich off people being to uneducated and/or poor to have a bank account.
*It would be nice if there was a replacement or overhaul of the FICO system of credit. It is such BS and such a game and if you don't know the game you will lose money every time.There needs to be a way for poor people to have access to money to gain assests. This is tricky and it must have a solid foundation of education, but it can be done.

Sorry but all the mention of taxes is funny to me. Poor people don't worry about taxes. Taxes are only important at refund time. And that means buying some crap you never thought you could get. Some people plan all year for what they will get at refund time. Some people will "buy" the social security number of the child of someone who is not working, claim them as a dependent and share the refund.

Increasing the taxes on the rich only makes some government employees better off, not poor people. So I really don't care for increasing taxes on people that have successful businesses. If they have more incentive they are more likely to hire more poor people and give them better wages.

I'm in the middle here. I have a really great business. Because I am an S corporation the income from my business is considered personal income. but I pour every cent back into the business ( I want to increase the value so I have something to give my kids)
At the same time,I am poor and I live in the ghetto. The amount of taxes I pay in NY State is ridiculous and keeps me from being able to expand and hire more people. So I am rich when it comes to being taxed and applying for help, but i am poor when it comes to buying a home, car and health care.

 

[Revoltingest]

Perhaps on real estate due to the lack of liquidity. Not on stocks or other liquid investments.

So when investors make money, they pay taxes, but when they lose money, the losses aren't deductable?
Say you buy $100K of Acme & $100K of Gozer. 1 year later you sell one at $30K profit, & the other at $50K loss.
You would have a taxable profit of $30K, even though you're $20K in the hole?
This would have the net effect of making the cost of capital higher, since it would almost double the risk.
Certainly, the government would take in more money initially, but what effect would this have on the ability of
companies to raise capital in the stock market? What of new firms looking for venture capital? They have a
hard time as it is, but it would be even worse. Have you ever worked for a hi-tech start-up?

All tax structures create incentives for business. Different policies can yield the same income, yet have different
long term effects on the economy. We should be sure that we encourage business to stick around, & not make
foreign firms relatively more competitive.

 

[TJ73]

Offhand, the things I think should be implemented are:

-Tax dividends and capital gains at the same level as the overall progressive income bracket.
-Remove the social security tax maximum.
-Moderately reduce corporate taxes, but reduce loopholes. (This is to offset the increased tax on capital gains and dividend taxes, which are effectively double taxation to begin with.)
-Provide stronger safeguards for reducing the likelihood of getting stuck in a cycle of medical debt.

Medical debt. I had my business for a month and got hurt. I was in the hospital for 5 days. I didn't have ins. I'm still paying for that "mistake"

 

[Penumbra]

Would you allow capital losses to be deductable against ordinary income? Otherwise, the tax-vs-income asymmetry would be
even worse than it is now. Right now, many distressed sellers cannot deduct losses, since capital gains just ain't happening.

Dude, you keep editing after I've already responded to your post.

Would you index capital gains taxes against inflation? Currently, the government taxes us on phantom profits, ie, profits
due to the devaluation of currency relative to economic value. Example: You buy a piece of land for $100K in 1980. Inflation is
7% per year. You sell your widget in 1990 for $200K. Your real profit, adjusted for inflation, is just about $0. But the IRS would
want to tax you on $200K-$100K=$100K. (No wonder the fed loves a little inflation...under 10% or so.)

No, I would not index them.

Phantom profits? Nah, they're doing quite fine.

Another problem with high capital gains taxes is that assets become somewhat trapped with one owner. Let's say the owner's
asset is worth $100K. But if he sells it, he might net $60K after taxes. With a 40% loss of equity, there's incentive to keep
assets which might be more productive in the hands of someone else. This regularly happens in real estate, resulting in
under utilized assets.

I'd be willing to be flexible on (and therefore willing to reduce) capital gains under certain conditions:
-If the ownership is majority owned by the one doing the action (ie one corporation selling something to another corporation; that would fall under my proposed reduced corporate profits)
-If the owner involved has under a certain amount of income or net worth. I wouldn't want to penalize smaller business owners that rely on capital gains compared to the general population.
-For real estate in general it may be appropriate to have reduced capital gains compared to stocks and other liquid assets.