American Dream: Tax Policy Part 1 - Tax Rate Inequality [104b]

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IS THIS FAIR?

THIS HUB IS LOOKING FOR ANSWERS. For three years now, President Obama has been pushing for a slightly higher marginal tax rate on the wealthy to help pay down the deficit; his reasoning is that they can afford it. For just as long, Conservatives have successfully stopped this from happening arguing that raising taxes on the wealthy, even a little bit, will kill jobs because the wealthy will have a disincentive to invest their money in job producing investments.

Just recently, in the 2012 Republican Presidential Primary, the subject took on new life when Mitt Romney revealed that his effective tax rate on over $20 million in income was around 14% in 2010; this didn't sit well with many Americans, it really seemed unfair. It sure seemed unfair to me with my 19% effective tax rate on an income that was less than 1/100 of Romney's!

Why is Romney's rate so low and mine relatively higher? Because most of his income is taxed at capital gains rate of 15%, which, using the Conservative reasoning, is a reasonable rate given the benefit his "investments" provide America in terms of job and business growth. Well, in Mitt's, and people like him, case, this isn't really true. (Just as an aside, about half of Romney's income was in the form of a salary, just like you and I get, but it was a special salary. Because he was the manager of a particular type of investment company, a sort of a hedge fund, Congress created a special tax break for them; their pay is considered "carried interest" and is taxed at 15%; he managed other peoples money, he didn't invest his own money for this compensation! )

With this as background, let me get to my question about fairness relative to the rational Conservatives use to justify not raising taxes on the wealthy. I took my Turbo Tax and created these three very simple situations.

  1. Taxpayer 1 is married and earned $1,000,000 in interest from a savings account. That is it; no other income or deductions, just a spouse and $1,000,000 in interest. - This taxpayer will pay $319,424 or an effective tax rate of 31.9%
  2. Taxpayer 2 is married and earned $1,000,000 in capital gains from the sale of stock purchased on the New York stock exchange years ago. This taxpayer will pay $142,415 or an effective tax rate of 14.2%.
  3. Taxpayer 3 is married and earned $1,000,000 in qualified dividends from stock purchased on the New York stock exchange years ago. This taxpayer will pay $0 or an effective tax rate of 0%. (There may be a cap, but pretend there isn't for the moment because the example could be changed to pick a figure below the cap and make the same point.)

Conservative reasoning is this is fair; taxpayer 2 should pay the lower rate because it was an investment that created jobs, correct? Well, it could have been, but not in this case. If taxpayer 2 had bought the stock directly from Company A, then yes, a portion of that investment might have ended up creating jobs, but, that is not what happened in my scenario. Instead, taxpayer 2 bought the stock from someone else, not Company A; therefore Company A received no benefit from the investment, hence, no jobs. So, please let me know why taxpayer 2 should get a 15% tax break that taxpayer 1, or a normal wage earner, does not get? Is that really fair?

It gets even worse when you consider taxpayer 3; in this case there is no tax liability at all. The reason is Congress, in a desire to stimulate investment, exempted dividends from certain companies from being taxed. Again, like with taxpayer 2, the reasoning for this being fair is the same - most likely the party benefiting from the tax break did not actually "invest" in any company. Instead, they speculated.

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ib radmasters profile image

ib radmasters 4 years ago from Southern California

I agree and it is not fair.

However both of these people have it pretty good, as the first one couldn't have gotten a real good insurance rate and he has around 20 million in the bank.

The second one probably has even more than that in stock value.

So both cases we are talking about rich people.

But the problem is that the IRC Internal Revenue Code is filled with exceptions that only the rich can take advantage of.

Replacing the Income Tax System with a National Sales Tax of about fifteen percent would be fair to every one.

It can use the same mechanism used by the state sales tax, including exclusions and payments.


michabelle profile image

michabelle 4 years ago

Who wants to believe wealthy people exclusively create American jobs and should get the tax breaks and coddling because they hold the key to economic growth? Many are presently busy buying up foreclosures and improving their portfolios during this unfortunate downturn. I'd rather think this country still exists for entrepreneurs and start-up businesses.

The system isn't fair. Neither question #1 nor #2 would involve interests of probably 90% of the American people.

Great hub. Thanks for your thoughts!


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL Author

Absolutely agree Michabelle, thanks for stopping by and leaving us your thoughts. I think America does exist for those you mention, my company is one of those, but the rules are too lax and open for abuse for the scavangers.

Yes you are right, although I think your 90% is too low, but anyway, those figures were chosed just to make a starke comparison. If someone was earning that much in interest alone, they wouldn't be a very smart investor.

It is nice to know that Congress hasn't gone totally insane in this direction; I make part of my income buying and selling short-term stock options, if I make money at it, it is taxed at my marginal rate and not the 15% capital gains rate, although I suppose there are those that say it should be taxed at the lower rate.


American Romance profile image

American Romance 4 years ago from America

You and all libs miss the biggest point! No one can be born and start investing and getting the capital gains rate of 15%!!! First of all a person must work and pay earned income taxes and make enough money over mortgages and bills to be able to invest! So if the truth be known the government is taxing money that has already been taxed in the first place! That 15% the govt gets is simply a bonus! Kinda like buying a new car and paying taxes on the amount but when you sell it as used the buyer has to pay taxes on it again! That may not be a great point but its called double dipping! Not only that but we are not talking apples for apples in any part of this! Romney still paid in more that 90% of all Americans! Stop the class warfare rhetoric! Once you kill the wealthy you have put in place the chains that will never allow YOU to become wealthy!.........and consequently turned this country into Cuba!..........they don't have a middle class, nor jobs


American Romance profile image

American Romance 4 years ago from America

hey michabele, ............ever got a job from a poor person?.........point made!


ib radmasters profile image

ib radmasters 4 years ago from Southern California

AR

You missed the point that the income tax system is itself the problem While progressive tax on the higher income seems to focus on the wealthy, the Internal Revenue Code gives them the mechanism to escape taxes.

No one becomes a billionaire because they paid too much taxes, but they did use the escape clauses in the Income Tax Code to keep the bulk of their money.

The average middle class taxpayer uses much less than one percent of the IRC. The reason is that they are mostly wage earners and their deductions are very limited, plus they pay SS and Medicare TAXES.

My point is that replacing the Income Tax System which is unfair and to invasive of personal privacy with a National Sales Tax similar to State Sales Tax.

State Sales Tax and its mechanism already exist so using it for National Sales Tax (NST) is a no brainer. So when the say 15% National Sales Tax is applied to purchases every pay the same. The amount of tax then is tied to the purchase price. So vehicle purchases by a low middle class person would be around $20,000 and the NST would be $3,000. When the upper middle class person buys that $80,000 vehicle they would pay $12,000. And when the rich person buys their $240,000 vehicle they would pay $36,000.

So you have $3,000, $12,000 and $36,000. That was done fairly, without invasion of personal privacy and the tax collected at the time of purchase. This would also go a long way to down sizing the IRS.

Exclusions can also be implemented for humanitarian reasons, such as the poor or charities.

Sure some people and companies will try to avoid the tax by buying out of the country, but that all ready exists.

Even at the state level, for example a car bought outside of California still has to pay a use tax when registered in California. The use tax is the same % as the sales tax.

BTW, in CA auto registration is based on the value of the car which also works the way as my NST.

To be fairer, CA auto registration should be based on weight and its effect on the roadways, not value.

The Income Tax System has the most damaging affect on the wage earners, as it prevents them from using their money to invest. They lose a lot from payroll taxes, health insurance and the deadly 1040.

I don't believe the progressive tax system that we have in the US. I also don't believe it is effective to make business decision based on tax consequences.

Also the government wants to be your partner when you win a gamble, be it stocks, gambling or other, but when you lose they distance themselves by limiting your 1040 use of your loss to some 1929 value, and then you can apply it in successive years against new gains.

The Income Tax System is like a company that has the executive floor and the executive washroom. Wage Earners don't have the right to get on that floor or use that washroom.

Is that the system you want to endorse?

my opinion


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL Author

Thanks again for stopping by American Romance. IB covers about 99% of the response, let me add my 1%. Your reasoning about double taxation doesn't hold water, unfortunately, for there is a simple theme that pokes a big hole in it. What if the investor never worked, that is never earned the money they used for the investment, and therefore was never taxed on it? Inheritance, proceeds from a lottory or an insurance claim are just a couple of examples.

Besides, on the face of it, your reasoning is a bit shaky. The taxed dollar that was invested is still there, untaxed. It is just the earned dollar from the investment that is taxed; you still have your original taxed dollar there as well, don't you?

The point then isn't whether the dividend should be taxed, it is the rate at which it is taxed relative to other things that are taxed and the fairness of it.


American Romance profile image

American Romance 4 years ago from America

michabele the coddling you refer to is simply allowing them to keep a small part of the huge taxation most already face! Yes I know all the large corporations that donated to Obama don't pay taxes but the oil companies certainly do! Look up Exxons tax payment??? I owned a small business and had numerous tax loops, Did that I mean I didn't pay taxes? No it just barely kept me from going under! Now at least understand what a tax loophole really is and not the Obama version.

Example: Corporations that buy brand new deisel trucks get the opportunity to write the entire cost off in the first year!........first they have to SPEND hundreds of thousands

If a corporation will invest 3% of its profits to green energy they can write that off...........first they have to spend it!

If a corporation will install solar panels they get a tax break,

sometimes if a corporation can be enticed to move to a certain region the locals will give them tax breaks etc. Its not always what you think!


Credence2 profile image

Credence2 4 years ago from Florida (Space Coast)

Yes, ME, we should lower the boom, the idea that income made from long term capital gains should be taxed less is a valid question. The justification was job creation, I think it is more like lining their own pockets at my expense. I would say at a minimum that you would have to prove that your investments resulted in advantages for the American economy. As it is now, it is just a big loophole, where people can make millions and pay nothing proportionately. It is a loophole that people are beginning to see for what it is. Hopefully, public scrutiny will force the Thurston Howell types to justify and be accountable for liberties that they take at taxpayer expense. I say 'bring it on'!


My Esoteric profile image

My Esoteric 4 years ago from Keystone Heights, FL Author

That is the problem with overly broad statements, in the whole, they are probably false, such as lowering capital gains taxes creates jobs, but in the specifics, there is truth, certain types of capital gains kinds of investment certain do hold the promise of job creation. But, me buying and selling stock on the stock exchange, even if I hold it long-term, isn't one of them when it doesn't involve putting money into the business itself.

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