Brackets don't tell the whole story. The effective tax rate paid is a function of those, plus 100,000+ pages of tax code concerning deductions, carried
forward losses & criteria for events' taxabibility. These "whys" could be right, but a quantified argument is necessary to see what actually happens.
You were given links earlier in here reporting on people's real tax rates, but dismissed them.
This quantifies it in my view: My calculated tax rate is slightly higher than that of what Warren Buffett reports that his is, and I can do the rough math to show that he's not lying.
In addition, I've calculated that as my income increases over time, my effective tax rate will increase, but then if I keep saving and investing at my current pace, under the current tax laws, my tax rate will begin to decrease as dividend income and partnership income begins to be a larger and larger percentage of my total income. So it's like I've said- it's progressive up to a point, until you get a high enough wealth, and then it becomes regressive.
Capital gains:
This is a particularly trick issue. Much of capital gains is a phantom tax on no real gain at all.
Hypothetical example:
You bought a factory for $1M in 1980. You held it for 10 years, & experienced 7% inflation during that term. You sell it for $2M in 1990.
How much profit did you make? The IRS would say $2M - $1M = $1M profit.
But the government lowered the value of a dollar by 1/2 during that period, so your $2M (in 1990 dollars) is worth only $1M in 1980 dollars.
In real economic value terms, there was no profit, yet the tax is $150K. How would one calculate that tax rate? $150K / 0 = ???.
Capital gains taxes are not indexed for inflation, so the portion of "gain" attributable to currency devaluation (controlled by gov't) is a phantom, & taxing it is confiscatory.
Firstly, 7% is an exaggerated number for inflation. It hasn't been at that level any time recently.
Secondly, you're skipping the all-too-important part of what I
did with the factory. If I just bought a factory and let it sit for 10 years, then I'm a horrible investor. But, if I bought a factory, and then used that factory successfully for its purpose, then I've probably made millions of dollars, especially since realistically I probably used a loan to finance part of the purchase, so my return on equity is probably pretty good. And, I can subtract depreciation from my cash flows each year.
Remember, I've said that taxes on corporations and small businesses should be manageable. This capital gains tax reduced by bush for individuals is mainly for things like stock appreciation and other assets, not factories.
Dividends:
There is a larger picture of taxes on dividends. First, big corporations are just an organization of people who pool capital & cooperate on a venture.
These people (as a corporation) pay corporate income tax on profit before they pay dividends to themselves (as stockholders). Then they pay tax on
the dividends again. So the net tax rate for the stockholder is far higher than just the dividend tax rate. It would be like if you had taxes withheld
from your paycheck, & then had to pay tax on what is left over too.
I know it has been a few months, but we've gone over this part about double taxation.
I advocate
reducing corporate taxation and
increasing the dividend taxation to progressive income levels.
a) This makes businesses more competitive.
b) It changes the nature of double taxation. Rather than big investors and small investors each getting hit with a corporate tax and then paying 15% equally, I think corporate tax should be reduced, and personal tax increased, so that the little investor ends up paying lower taxes in this scenario, or roughly the same taxes, while the bigger investor ends up paying a higher percentage like she should in a progressive system.
Of course, all taxpayers get this tax treatment. Interestingly, I know one odd guy who makes under $10K/year, & he pays the same tax rates as wealthy
investors because it's all investment income. Millionaires who are high wage earners also pay the higher tax rate, albeit reduced after they reach the
payroll tax thresholds.
Technically yes, but that's the exception to the rule. The odd guy who has no employment income but instead has $10k in investment income is not the way normal people and families get taxed. And if anything, the fact that his tax is so low on these types of income is an incentive for him not to work.
A millionaire that is actually paying tax progressively based on the fact that her income is mostly through wages is someone that I'm specifically
not arguing against. That's how it should be. But the super-rich are not making income like that. They are getting tremendous income from their assets, which are taxed very little, and the "wages" they get, if they are executives and such, are in the form of stock ownership plans, options, etc
I've been involved in many real estate partnerships. The depreciation deductions were greatly curtailed by the time Bush arrived in office.
We once had 15 year accelerated depreciation, back when marginal income tax rates were higher. But now it's over 39 years. Then there
are other wrinkles....depending upon the partner's status, losses are not even deductable. And the IRS rules don't comport with GAAP.
Ordinary business deductions like tenant buildouts with a 3 year life are also depreciated over 39 years. So cash flow is often far lower
than net income (by IRS calculations). I've had to pay income taxes on "income" when the year was actually a loss. Moreover, the tax
code imposes great unpredictability upon investors. Sometimes you can deduct losses on sale of investments, & sometimes you can't.
It all depends upon what else you have, market conditions, & what you do with the other investments. I can never accurately predict
what my income or taxes will be.
I wasn't referring to REITs or their private varieties. REITs are treated pretty well, but I think that the taxation people pay on their distributions/dividends should be progressive.
Rather, I was referring to, like I said, publicly traded partnerships and master limited partnerships. These are resource and asset-heavy operations that have tremendous levels of depreciation. Depreciation is often almost as high as the net income. But the way they are operated, depreciation is not truly reducing the value of their operations as much as it is stated on paper. So in addition to skipping corporate taxes, since they are a pass-through entity, investors end up paying tax on only a small part of the cash flow they are receiving.
I invite you to look into them if you want to confirm what I'm saying. I'm familiar with some of them, because I invest in them, so I've read through their financial documents and have held onto units and dealt with the tax. One of the most well-known ones is Kinder Morgan Energy Partners (which is not one I own)- you can look and see how much they are recording in net income each year, what their real cash flow is, what they are paying to investors, what their depreciation and other expenses are, etc. Instead, if you want to take my word on it- the amount they are paying to investors year after year in distributions is 2-3 times what they are recording in net income per unit. Sometimes they have had negative income, and yet still paid out larger distribution, becomes it's covered by cash flow, and they have done this for many years now while growing. These tax structures were specifically designed to be tax-advantageous.
True dat. That's why I favor an income tax on all income (including bennies) with no personal deductions. The simplicity alone would save billions in tax compliance costs.
I agree that tax codes should be simplified- but realize that they get away with it specifically because the tax code doesn't have enough nuances in it to deal with what they are doing. A typical executive has a very small portion of their true income in the form of taxable salary.
Take CEO of Johnson and Johnson (JNJ), William Weldon for example. In 2010, he made a bit under $30 million from JNJ directly, plus owns tens of millions worth of JNJ stock (paying 15% on dividends), and I can only speculate that he probably owns far more other investments that don't need to be reported to JNJ. If we look at his 2010 JNJ compensation alone, in rough numbers:
$1.9 million in salary (he's actually paying progressive tax on this part!)
$2.7 million in stock awards
$4.7 million in option awards
$12 million in "non-equity incentive plan compensation" (includes $1.9 million bonus, which he's actually paying progressive tax on, plus dividend equivalents, and CLC's)
$7 million in increased pension value
Most of the income is tax-advantaged, deferred, tax-deductible, etc.
Wage income sees no phantom tax due to currency deflation, so it seems fair that it should be higher than capital gains tax, which is often just a
tax on gross value. It would seem fair that dividends be taxed the same as wages, but that's not the system we have. For low income investors,
the dividend tax can be actually higher than the taxes on wages (because of the corporate tax rate). The two-tier corporate dividend tax approach
makes no sense to me.
I agree that capital gains tax, for certain things, can be reduced. As I've already said, small businesses and certain groups should have tax breaks. As for "It would seem fair that dividends be taxed the same as wages, but that's not the system we have"- that's exactly my point. That's how it should be, but that's now how it is, thanks specifically to the Bush-era tax cuts. This can be undone if the tax-cut extension is not granted in 2012.
