Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Ironically, Burns points out one of the conservative objections to VATs, but he fails to connect the dots. "[Taxes]give us something to complain about every day." That is supposed to provide a check on "tax and spend". On the other hand ...
A VAT puts big spenders on steroids. It generates lots of revenue, and because this tax is substantially hidden from consumers, there’s less political resistance to it.
In addition, as another Cato commentary observes, VATs tend to go up, and are much higher in other countries than the 14.5% rate that Paul is proposing in the US.
The VAT is supposed to replace both employer and employee side of the payroll tax. It is the consumer who pays VAT. So instead of employees paying (up to) 7.65% of their income in payroll taxes, they would pay an extra 14.5% (embedded in the price of goods) when they spend that income.
The numbers. Burns doesn't say which table he pulled his figures from. It's this one (Excel table). (He's also got a typo in the 50th percentile income figure; it's $36,055, not $36,065.)
This isn't really a flat tax on AGI, because there are still some deductions and exemptions. For the given hypothetical family of four, Rand is giving two $15K deductions, and four $5K exemptions. That's where the $50K reduction in taxable income comes from.
If the 14.5% is to be applied to a reduced AGI, after subtracting standard deduction and exemptions, it needs to be compared to the current average tax rate computed using a reduced AGI after subtracting current standard deductions and exemptions.
The current standard deduction plus exemptions total about $28K ($12.4K + 4 x $3,950). If we subtract $28K/filer from the $8T AGI of the top 50% of earners (the figure Burns was using), we find that the "real" average tax rate is about 18.8%. (Rough figures: 68M filers * $28K = $1,900B = $1.9T) Yes, I'm fudging, because I haven't considered the distribution of family demographics, but neither did Burns.
I didn't get to charitable deductions and the $1.1M mortgage deduction allowed. Rand is letting you keep those, too. So you (and especially those with $1M mortages) wouldn't be paying 14.5%, but even lower rate on your AGI.
This proposal also does away with the estate tax. I haven't seen writing on what's supposed to replace that (the "flat" tax is supposed to replace the income tax; the VAT is supposed to replace corporate and payroll taxes. Estate taxes?)
One can go on and on, but Burns said it best: "An honest debate would start with the combined tax burden most Americans face." That means combining all factors in the proposed tax, including exemptions, deductions, VAT. And to stop calling it "flat". Ending with another irony - Burns calls this "flat" tax "quite progressive".
A couple points which I consider economic policy, not partisan/political:
The complexity of our current tax code is only minimally a function of multiple tax rates, and much more about defining/excluding income -- and differentiating income types (earned, cap gains, etc).
Using “taxable income” as the base for levying a tax rate (as both our current system and the “Fair/Flat tax” does) is a major flaw. “Taxable income” is subject to all manner of distortions. -- Generally, the higher the income level, the greater a taxpayer’s ability to exclude or defer economic income from “taxable income” (consider mortgage interest on mansions, muni-bond income, contributions to deferred vehicles (401ks, IRAs, etc) and for that matter the returns accruing in tax-deferred vehicles…) Its generaly true that the larger your economic income, the less is taxable this year, consequently lower your effective tax rate on real, economic income is..
With regards to corporate taxation, “taxable income” is often even less grounded in economic reality, especially as regards to multi-national corps, who engage in moving profits overseas due to accounting tricks (transfer-pricing etc).
On the corporate side, I’d favor changing the base that is taxed from “income” to “gross receipts” (or something similar). Apply a much lower rate to the receipts, and ONLY allow deductions for W-2 wages (and maybe related benefits). Cap those deductions by employee (i.e. no deductions in excess of $ XXX for each worker) , and further, impose a “AMT” on businesses of say 2% of gross receipts. No deductions for “rent”, capex, nor contract-labor, material COGS etc. (deductibility of interest expense would need to be phased out gradually, so as to allow for an orderly de-leveraging/capital raising) --- Businesses would receive deductions ONLY for direct-labor, employed here, in the USA. Job functions outsourced/offshored would not be deductible for tax purposes.
As for payroll-taxes – its always amazed me that we DIS-incent business from employing Americans by taxing the business for their labor. --- But we don’t levy payroll taxes on the labor-costs imbedded in imports, nor on labor performed by machines… IMO, labor-content of imports should be equally burdened/levied a FICA tax, as are domestic goods/services. Further, if we are going to “burden” (for example) our local Safeway/Kroger/Wal-Mart with an employer-portion of FICA for employing “Mary” to ring up our groceries, we should also burden the automated scanner the equivalent tax, if when it replaces Mary. Just some thoughts.
@Edmond - nice points; I alluded to some of them, but tried to stick to the specific items that Burns raised. Thus I let him keep a veneer of "flat" tax on "modified" AGI; while you (correctly) point out that "taxable income" is extremely flexible.
A note on one of your items - capex. The current law lets companies write off these expenses over a period of years, which arguably makes some sense, since they're "consumed" over many years. Getting rid of this deduction as you suggest would meet the objective of tax simplification (no more depreciation schedules). The proposed "flat" tax would also simplify, but by doing the exact opposite - allowing corporations to deduct the full capital expense in one year!
I don't regard the employer-side portion of the payroll tax quite the same way you do. It could just as easily be levied entirely on the employee, with the corporation grossing up pay to cover that. In other words, I view payroll tax and employee wages as fungible. (They're currently both deductible.)
Finally, IMHO the best incentive the federal government could have given to corporations to hire would have been to really enact universal health care. The largest employer expense after wages/salary (68.3% of total) is health insurance (8.4%). SS/Medicare comes in at 5.5%. (Paid leave, including vacation, sick days, etc. is 7.0%.) http://www.bls.gov/news.release/pdf/ecec.pdf (see Table 1, p. 5)
This is an expense that puts US companies at a significant disadvantage, since virtually all other developed countries have to varying degrees some sort of public, universal coverage. See A Business Case For Universal Health Care, Health Law & Policy Brief 8, no. 2 (2014): 41-55, Section II(B) (starting on pdf p. 11)
“It ain’t what you don’t know that gets you into trouble. It’s what you know that just ain’t so.” That quote, or some close approximation, is often credited to either Mark Twain or Will Rogers. Take your pick. But that saying is especially insightful with respect to taxes.
There is likely one tax related truism that we can all accept; from Judge Learned Hand who said: “There’s nothing sinister in so arranging one’s affairs to keep taxes as low as possible.”
Today, in round numbers, our Federal tax burden extracts roughly 18% of GDP, and the State and Local governments absorb another 9% and 6% of GDP, respectively. Those are big numbers that total about 33% of our GDP. Wow!
But there were things I thought I knew about these revenues that just were not so as I discovered from relatively recent research. I wanted to explore this issue historically to put it into a meaningful comparative and event framework.
I learned much from an Internet search. My eureka moment came when I discovered charts provided at the comprehensive US Government Revenue website. Here is a Link to the charts section of that site:
For years, I incorrectly attributed the higher Federal revenues requirement to the Lyndon Johnson administration and its programs. Not so. The historical charts clearly show that the significant Federal step increase came during World War II, and unexpectedly remained at its elevated level after the War years.
Johnson’s programs in the 1960s did not move the needle whatsoever. Since the end of WW II, the Federal revenues per GDP have been constant. It is the State and the Local revenues that have consistently increased as a percentage of GDP.
I make no judgments in this post with respect to the merits or shortcomings of any specific expenditure increase or reallocation. Each must be debated individually.
With a better understanding of all the revenues, and their distributions historically, we can make better informed judgments about the virtues of the competing programs and candidate tax restructuring. It is likely we all have somewhat disparate views on this matter given our divergent wants and needs.
I hope you find the referenced Link useful in your assessments. I agree with Ted’s opening admonishment and have complied with it.
I confess I do not live lavishly but believe there are lots of people like me. I for one would spend less money if there was a vat tax as I would be familiar with what things cost before the VAT tax. I anticipate I would feel things were overpriced and resist purchases.. Businesses would get much less of my money and the economy would suffer. The simplest way to improve income inequality by impacting the rich (who make much of their income from capital gains ) and also help the middle class would be my MIDDLE CLASS CAPITAL GAINS TAX CUT. IT would in practice be progressive and revenue neutral.Basically my estimate is there is a number somewhere between 25k and 400K that would be revenue neutral if that amount of capital gains was not taxed at all and all amounts greater than that were taxed at ordinary income rates. This would be a tax cut for almost all. I am open to continue the current tax break on lived in homes.
I think you'll be surprised at how high you could go with tax-free gains.
The following is, of course, very crude and approximate. I'm using the IRS SOI Table 1.4 for 2012, all returns' sources of income, by size of AGI. The large majority of cap gains comes from sale of capital assets, so I'm just looking at that column (AA in the Excel sheet).
I'll approximate cap gains subject to tax (at rates between 15% and 23.8%, including Medicare surtax) by looking at cap gains sales for AGIs above $50K. If we exclude the cap gains of AGIs over $5M, this is a total of about $293B of taxable cap gains.
The taxable cap gains of AGIs over $5M (with ordinary income tax rates of 39.6%) is higher than that, about $325B. So if we roughly double the cap gains rate on those with AGIs over $5M (to their ordinary tax rate), that would cover giving up all cap gains taxes on those with AGIs under $5M.
The revenue neutral point looks to be much closer to $5M than to $400K.
There were about 33,000 returns filed with cap gains and AGIs over $5M, out of nearly 10M filed with cap gains from sales (that's 1/3 of 1%), and out of 145M total returns filed (that's 1/40 of 1%, or 0.025%).
Make of that what you will - that the wealthy are paying a lot of taxes, or the wealthy have a lot more than the hoi polloi, or both. Either way, here wealthy means very wealthy.
I don't see why I should get a free pass on my paltry cap gains just because I'm no Trump (thank goodness). Your suggestion of getting rid of special treatment of capital gains, but for everyone not just the wealthy, would have a similar effect in narrowing income inequality. At the same time it would signal that labor is not valued less (taxed more) than capital.
Unfortunately, one can't post an article about a conservative politician's plan to cut taxes and have it not be a "political discussion." There is evidence that Rand's plan would primarily benefit the wealthy and hurt the middle class: bloombergview.com/articles/2015-06-22/rand-paul-s-implausible-flat-tax It would also require cutting back on government programs the middle class and poor need: nytimes.com/2015/07/11/opinion/rand-pauls-fake-flat-tax.html The conservative Tax Foundation's analysis of the plan calculated $3 trillion in cost of lost tax revenues over ten years, but only $1 trillion after factoring in the "economic growth" the plan will supposedly create. The only problem is there is no hard evidence that tax cuts stimulate economic growth: businessinsider.com/study-tax-cuts-dont-lead-to-growth-2012-9 nytimes.com/2012/09/16/opinion/sunday/do-tax-cuts-lead-to-economic-growth.html?_r=0 So what is the purpose of the tax cut really if it doesn't benefit the economy by stimulating GDP? Who really benefits from the cuts? And how can this not be a political discussion? When a politician presents a plan to radically alter the tax code, it is by default a political discussion.
More recent: ... top economists say that the U.S. should tax top earners up to 90 percent.
"What you really should want to do is to soak the rich as much as possible," Krugman said in an appearance on HuffPost Live [last October]. "So the top tax rates should be whatever it is that collects the most revenue, and now the question is, how high is that?"
The Nobel Prize-winning economist was asked about a new working paper [http://www.huffingtonpost.com/2014/10/22/economists-tax-rich_n_6024430.html] by economists Fabian Kindermann and Dirk Krueger, which found that a top marginal income tax rate of 85 to 90 percent would improve all Americans' wellbeing, reduce inequality and bring in more revenue for the government. [ital added] Krugman conceded that "soaking" the rich -- using a nickname for the Revenue Act of 1935, which established a post-Depression wealth tax on top earners of up to 75 percent -- is "not going to happen" due to today's political climate.
Today, the top rate of 39.6 percent is paid on income above $406,750 for individuals and $457,600 for couples.
And no, no, it will not harm the economy or hurt productivity or whatever the glib phrasing is now:
if we choose to raise less revenue from the rich than we can without hurting the economy, we will be forced either to raise more taxes from or provide fewer valuable services to everyone else.; see http://krugman.blogs.nytimes.com/2013/05/28/taxing-the-rich/
But I agree. Unless I missed something, labeling one candidate's position on an issue as "good" is in itself a political statement. Great discussion of taxes however. - Best one-liner of the campaign ... "You're having a hard time tonight."
@MJG: Just got back to SF, so hadn't read your above comments before now. Extremely interesting, I think, and thanks for sharing that info.
To everyone else, the topic, as has been pointed out, can't entirely be divorced from political reality, but it seems to me that everyone here has been remarkably good at having a reasonable and interesting discussion.
Well, most of the time "exceptions" are added after the fact to deal with issues that were unanticipated at the time of the original program, or because the situational factors change over time so the program needs to be modified to contend with that. For example, the recent major change in US law with respect to the definition of marriage will undoubtedly result in "exceptions" or "changes" to accommodate that fact in many, many government policies and programs. How else to deal with the realities of a constantly evolving world?
MJG: "There is likely one tax related truism that we can all accept; from Judge Learned Hand who said: “There’s nothing sinister in so arranging one’s affairs to keep taxes as low as possible.”
Don't speak for me or others (or "all").. Tax law, especially corporate tax law does not appear spontaneously. Nor is it delivered by divine intervention from Mt. Sinai. Its crafted with the active involvement of special interests, and their tax lawyers & lobbyists, and is often contrary to the common interest. Here is a recent analysis of one company's machinations.
And yes, I do call that "sinister". -- Its not a matter of MNCs being "studious" in using tax law --- they continuously set about to rig the game to their advantage by lobbying & legally bribing, our legislators . I cannot afford a lobbying group. Can you? Can any ordinary person?
I certainly agree that special interests and their hired guns, the lobbyists, influence lawmakers and the laws. Although most of us do not play in that game and most citizens object to it, it happens. Our protests are noticed, but are mostly ignored.
Since I can not really control any lawmaking outcomes, I must accept them as they exist, and adjust my reactions accordingly to minimize their impact on me. I hire a tax expert to prepare my taxes. I honestly report my holdings and my "hired gun" does his best to honestly minimize my contributions.
I subscribe to Judge Learned Hand's wisdom: “There’s nothing sinister in so arranging one’s affairs to keep taxes as low as possible.”
While it's not universally true around the world, I do believe most Americans are guided by that wisdom. We mostly play by the rules even if we don't agree with them.
I agree whole heartedly with you Edmund. I believe what MJG is saying is, I just bend over take it. Sadly, that is true of most Americans. Most of us have decided those who can buy off government officials, those wealthy enough to afford lobbyists, that it's ok they control the wealth in their favor. Can't fight city hall. But they are sinister no doubt.
There are two different items here, and it seems that they are being conflated: 1. Rigging the tax code for one's own benefit; and 2. Applying the rules in the tax code legally and intelligently to minimize one's taxes.
I'll happily concur with everyone else that there's a problem with #1. But the example that Edmond gave (ostensibly to demonstrate that problem) was an example of #2.
One of the techniques that Walmart used was to borrow at very cheap rates rather than repatriate money and pay taxes. Apple did the same thing at a high level. (The detail are very different, Walmart borrowed from itself with short term loans, Apple has floated a total of $39B in longer term bonds in the past two years; the use of cheap borrowing in lieu of repatriation was similar though.) Shareholders seemed delighted to get dividends from that cash, and didn't seem to care about Apple's tax exploits.
Probably lots of you follow #2 yourselves. Contribute to a traditional IRA? Great! Deduct it? You don't have to, that's a choice you're making on your 1040 to minimize your taxes. Nothing sinister there.
Year after year, I sell specific shares to minimize taxes. I don't think I'm being particularly sinister - just not being lackadaisical with taxes - not selling my lowest cost shares first (FIFO) or averaging those low cost shares into the basis of shares sold (average cost). (Unfortunately I suspect most people overpay by blindly using the average costs handed to them by their fund companies).
I didn't create these laws or lobby for them. But I'll be darned if I won't use them to my best advantage. As Judge Hand continued (after noting that courts have repeatedly said that there's nothing sinister in minimizing taxes): "Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."
Nice discussion . . . and way to complicated for me. What I'd like to see, is 15% on everything with NO deductions and let's say a $40K personal exemption. That's 15% on all forms of income - cap gains, income, corporate.
Gentlemen: I confess not to have waded through all of the replies. We are free to post anything, of course, particularly in the "off-topic" file. But gentlemen, let's be clear: money issues are by definition political issues. And political issues are by definition moral issues, especially on the national and international level. Unless you just decide to ignore the fact, and state otherwise. To say that a thing is non-partisan does not make it apolitical.
Talking right past my point. But that's OK. Silly me: I forgot. Nothing matters. Particularly regarding what gets done with money. Or not done. Or if it's wasted and pissed away. Or if it's hoarded. Or....
Crash, If you were addressing me, I was speaking to Hand's reductionist, legalistic-coercive view of things. That's all. Emphasizing the 'enforced exaction'-ness of it all, as opposed to something one is very often quite glad to do. Coercive as opposed to ... social?
Comments
In addition, as another Cato commentary observes, VATs tend to go up, and are much higher in other countries than the 14.5% rate that Paul is proposing in the US.
The VAT is supposed to replace both employer and employee side of the payroll tax. It is the consumer who pays VAT. So instead of employees paying (up to) 7.65% of their income in payroll taxes, they would pay an extra 14.5% (embedded in the price of goods) when they spend that income.
The numbers. Burns doesn't say which table he pulled his figures from. It's this one (Excel table). (He's also got a typo in the 50th percentile income figure; it's $36,055, not $36,065.)
This isn't really a flat tax on AGI, because there are still some deductions and exemptions. For the given hypothetical family of four, Rand is giving two $15K deductions, and four $5K exemptions. That's where the $50K reduction in taxable income comes from.
If the 14.5% is to be applied to a reduced AGI, after subtracting standard deduction and exemptions, it needs to be compared to the current average tax rate computed using a reduced AGI after subtracting current standard deductions and exemptions.
The current standard deduction plus exemptions total about $28K ($12.4K + 4 x $3,950). If we subtract $28K/filer from the $8T AGI of the top 50% of earners (the figure Burns was using), we find that the "real" average tax rate is about 18.8%. (Rough figures: 68M filers * $28K = $1,900B = $1.9T)
Yes, I'm fudging, because I haven't considered the distribution of family demographics, but neither did Burns.
I didn't get to charitable deductions and the $1.1M mortgage deduction allowed. Rand is letting you keep those, too. So you (and especially those with $1M mortages) wouldn't be paying 14.5%, but even lower rate on your AGI.
This proposal also does away with the estate tax. I haven't seen writing on what's supposed to replace that (the "flat" tax is supposed to replace the income tax; the VAT is supposed to replace corporate and payroll taxes. Estate taxes?)
One can go on and on, but Burns said it best: "An honest debate would start with the combined tax burden most Americans face." That means combining all factors in the proposed tax, including exemptions, deductions, VAT. And to stop calling it "flat". Ending with another irony - Burns calls this "flat" tax "quite progressive".
The complexity of our current tax code is only minimally a function of multiple tax rates, and much more about defining/excluding income -- and differentiating income types (earned, cap gains, etc).
Using “taxable income” as the base for levying a tax rate (as both our current system and the “Fair/Flat tax” does) is a major flaw. “Taxable income” is subject to all manner of distortions. -- Generally, the higher the income level, the greater a taxpayer’s ability to exclude or defer economic income from “taxable income” (consider mortgage interest on mansions, muni-bond income, contributions to deferred vehicles (401ks, IRAs, etc) and for that matter the returns accruing in tax-deferred vehicles…) Its generaly true that the larger your economic income, the less is taxable this year, consequently lower your effective tax rate on real, economic income is..
With regards to corporate taxation, “taxable income” is often even less grounded in economic reality, especially as regards to multi-national corps, who engage in moving profits overseas due to accounting tricks (transfer-pricing etc).
On the corporate side, I’d favor changing the base that is taxed from “income” to “gross receipts” (or something similar). Apply a much lower rate to the receipts, and ONLY allow deductions for W-2 wages (and maybe related benefits). Cap those deductions by employee (i.e. no deductions in excess of $ XXX for each worker) , and further, impose a “AMT” on businesses of say 2% of gross receipts. No deductions for “rent”, capex, nor contract-labor, material COGS etc. (deductibility of interest expense would need to be phased out gradually, so as to allow for an orderly de-leveraging/capital raising) --- Businesses would receive deductions ONLY for direct-labor, employed here, in the USA. Job functions outsourced/offshored would not be deductible for tax purposes.
As for payroll-taxes – its always amazed me that we DIS-incent business from employing Americans by taxing the business for their labor. --- But we don’t levy payroll taxes on the labor-costs imbedded in imports, nor on labor performed by machines… IMO, labor-content of imports should be equally burdened/levied a FICA tax, as are domestic goods/services. Further, if we are going to “burden” (for example) our local Safeway/Kroger/Wal-Mart with an employer-portion of FICA for employing “Mary” to ring up our groceries, we should also burden the automated scanner the equivalent tax, if when it replaces Mary.
Just some thoughts.
Derf
A note on one of your items - capex. The current law lets companies write off these expenses over a period of years, which arguably makes some sense, since they're "consumed" over many years. Getting rid of this deduction as you suggest would meet the objective of tax simplification (no more depreciation schedules). The proposed "flat" tax would also simplify, but by doing the exact opposite - allowing corporations to deduct the full capital expense in one year!
I don't regard the employer-side portion of the payroll tax quite the same way you do. It could just as easily be levied entirely on the employee, with the corporation grossing up pay to cover that. In other words, I view payroll tax and employee wages as fungible. (They're currently both deductible.)
Finally, IMHO the best incentive the federal government could have given to corporations to hire would have been to really enact universal health care. The largest employer expense after wages/salary (68.3% of total) is health insurance (8.4%). SS/Medicare comes in at 5.5%. (Paid leave, including vacation, sick days, etc. is 7.0%.)
http://www.bls.gov/news.release/pdf/ecec.pdf (see Table 1, p. 5)
This is an expense that puts US companies at a significant disadvantage, since virtually all other developed countries have to varying degrees some sort of public, universal coverage.
See A Business Case For Universal Health Care, Health Law & Policy Brief 8, no. 2 (2014): 41-55, Section II(B) (starting on pdf p. 11)
The proposal has been demolished for several weeks:
http://www.nytimes.com/2015/07/11/opinion/rand-pauls-fake-flat-tax.html
“It ain’t what you don’t know that gets you into trouble. It’s what you know that just ain’t so.” That quote, or some close approximation, is often credited to either Mark Twain or Will Rogers. Take your pick. But that saying is especially insightful with respect to taxes.
There is likely one tax related truism that we can all accept; from Judge Learned Hand who said: “There’s nothing sinister in so arranging one’s affairs to keep taxes as low as possible.”
Today, in round numbers, our Federal tax burden extracts roughly 18% of GDP, and the State and Local governments absorb another 9% and 6% of GDP, respectively. Those are big numbers that total about 33% of our GDP. Wow!
But there were things I thought I knew about these revenues that just were not so as I discovered from relatively recent research. I wanted to explore this issue historically to put it into a meaningful comparative and event framework.
I learned much from an Internet search. My eureka moment came when I discovered charts provided at the comprehensive US Government Revenue website. Here is a Link to the charts section of that site:
http://www.usgovernmentrevenue.com/revenue_history
For years, I incorrectly attributed the higher Federal revenues requirement to the Lyndon Johnson administration and its programs. Not so. The historical charts clearly show that the significant Federal step increase came during World War II, and unexpectedly remained at its elevated level after the War years.
Johnson’s programs in the 1960s did not move the needle whatsoever. Since the end of WW II, the Federal revenues per GDP have been constant. It is the State and the Local revenues that have consistently increased as a percentage of GDP.
I make no judgments in this post with respect to the merits or shortcomings of any specific expenditure increase or reallocation. Each must be debated individually.
With a better understanding of all the revenues, and their distributions historically, we can make better informed judgments about the virtues of the competing programs and candidate tax restructuring. It is likely we all have somewhat disparate views on this matter given our divergent wants and needs.
I hope you find the referenced Link useful in your assessments. I agree with Ted’s opening admonishment and have complied with it.
Best Wishes.
The simplest way to improve income inequality by impacting the rich (who make much of their income from capital gains ) and also help the middle class would be my MIDDLE CLASS CAPITAL GAINS TAX CUT. IT would in practice be progressive and revenue neutral.Basically my estimate is there is a number somewhere between 25k and 400K that would be revenue neutral if that amount of capital gains was not taxed at all and all amounts greater than that were taxed at ordinary income rates. This would be a tax cut for almost all. I am open to continue the current tax break on lived in homes.
The following is, of course, very crude and approximate. I'm using the IRS SOI Table 1.4 for 2012, all returns' sources of income, by size of AGI. The large majority of cap gains comes from sale of capital assets, so I'm just looking at that column (AA in the Excel sheet).
I'll approximate cap gains subject to tax (at rates between 15% and 23.8%, including Medicare surtax) by looking at cap gains sales for AGIs above $50K. If we exclude the cap gains of AGIs over $5M, this is a total of about $293B of taxable cap gains.
The taxable cap gains of AGIs over $5M (with ordinary income tax rates of 39.6%) is higher than that, about $325B. So if we roughly double the cap gains rate on those with AGIs over $5M (to their ordinary tax rate), that would cover giving up all cap gains taxes on those with AGIs under $5M.
The revenue neutral point looks to be much closer to $5M than to $400K.
There were about 33,000 returns filed with cap gains and AGIs over $5M, out of nearly 10M filed with cap gains from sales (that's 1/3 of 1%), and out of 145M total returns filed (that's 1/40 of 1%, or 0.025%).
Make of that what you will - that the wealthy are paying a lot of taxes, or the wealthy have a lot more than the hoi polloi, or both. Either way, here wealthy means very wealthy.
I don't see why I should get a free pass on my paltry cap gains just because I'm no Trump (thank goodness). Your suggestion of getting rid of special treatment of capital gains, but for everyone not just the wealthy, would have a similar effect in narrowing income inequality. At the same time it would signal that labor is not valued less (taxed more) than capital.
It would also require cutting back on government programs the middle class and poor need: nytimes.com/2015/07/11/opinion/rand-pauls-fake-flat-tax.html
The conservative Tax Foundation's analysis of the plan calculated $3 trillion in cost of lost tax revenues over ten years, but only $1 trillion after factoring in the "economic growth" the plan will supposedly create. The only problem is there is no hard evidence that tax cuts stimulate economic growth:
businessinsider.com/study-tax-cuts-dont-lead-to-growth-2012-9
nytimes.com/2012/09/16/opinion/sunday/do-tax-cuts-lead-to-economic-growth.html?_r=0
So what is the purpose of the tax cut really if it doesn't benefit the economy by stimulating GDP? Who really benefits from the cuts? And how can this not be a political discussion? When a politician presents a plan to radically alter the tax code, it is by default a political discussion.
https://www.law.umich.edu/newsandinfo/features/Pages/kahn_waggoner.aspx
More recent:
... top economists say that the U.S. should tax top earners up to 90 percent.
"What you really should want to do is to soak the rich as much as possible," Krugman said in an appearance on HuffPost Live [last October]. "So the top tax rates should be whatever it is that collects the most revenue, and now the question is, how high is that?"
The Nobel Prize-winning economist was asked about a new working paper [http://www.huffingtonpost.com/2014/10/22/economists-tax-rich_n_6024430.html] by economists Fabian Kindermann and Dirk Krueger, which found that a top marginal income tax rate of 85 to 90 percent would improve all Americans' wellbeing, reduce inequality and bring in more revenue for the government.
[ital added]
Krugman conceded that "soaking" the rich -- using a nickname for the Revenue Act of 1935, which established a post-Depression wealth tax on top earners of up to 75 percent -- is "not going to happen" due to today's political climate.
Today, the top rate of 39.6 percent is paid on income above $406,750 for individuals and $457,600 for couples.
And no, no, it will not harm the economy or hurt productivity or whatever the glib phrasing is now:
if we choose to raise less revenue from the rich than we can without hurting the economy, we will be forced either to raise more taxes from or provide fewer valuable services to everyone else.; see
http://krugman.blogs.nytimes.com/2013/05/28/taxing-the-rich/
But I agree. Unless I missed something, labeling one candidate's position on an issue as "good" is in itself a political statement. Great discussion of taxes however.
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Best one-liner of the campaign ... "You're having a hard time tonight."
To everyone else, the topic, as has been pointed out, can't entirely be divorced from political reality, but it seems to me that everyone here has been remarkably good at having a reasonable and interesting discussion.
OJ
I'm not going to look it up ... because I don't think there is.
The USA will have a VAT AND an income tax ... just as Europe does.
You read it here first.
Newly minted - as of January 1, the Bahamas instituted a VAT of 7.5% to replace their 10% hotel tax. There is no income tax there.
http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/gx-tax-latin-america-in-focus-bahamas-highlights-july-2015.pdf
Don't speak for me or others (or "all").. Tax law, especially corporate tax law does not appear spontaneously. Nor is it delivered by divine intervention from Mt. Sinai. Its crafted with the active involvement of special interests, and their tax lawyers & lobbyists, and is often contrary to the common interest. Here is a recent analysis of one company's machinations.
http://viableopposition.blogspot.ca/2015/06/the-tangled-web-of-walmart-and-its.html
And yes, I do call that "sinister". -- Its not a matter of MNCs being "studious" in using tax law --- they continuously set about to rig the game to their advantage by lobbying & legally bribing, our legislators . I cannot afford a lobbying group. Can you? Can any ordinary person?
I certainly agree that special interests and their hired guns, the lobbyists, influence lawmakers and the laws. Although most of us do not play in that game and most citizens object to it, it happens. Our protests are noticed, but are mostly ignored.
Since I can not really control any lawmaking outcomes, I must accept them as they exist, and adjust my reactions accordingly to minimize their impact on me. I hire a tax expert to prepare my taxes. I honestly report my holdings and my "hired gun" does his best to honestly minimize my contributions.
I subscribe to Judge Learned Hand's wisdom: “There’s nothing sinister in so arranging one’s affairs to keep taxes as low as possible.”
While it's not universally true around the world, I do believe most Americans are guided by that wisdom. We mostly play by the rules even if we don't agree with them.
Thanks for your contribution.
Best Wishes.
1. Rigging the tax code for one's own benefit; and
2. Applying the rules in the tax code legally and intelligently to minimize one's taxes.
I'll happily concur with everyone else that there's a problem with #1.
But the example that Edmond gave (ostensibly to demonstrate that problem) was an example of #2.
One of the techniques that Walmart used was to borrow at very cheap rates rather than repatriate money and pay taxes. Apple did the same thing at a high level. (The detail are very different, Walmart borrowed from itself with short term loans, Apple has floated a total of $39B in longer term bonds in the past two years; the use of cheap borrowing in lieu of repatriation was similar though.) Shareholders seemed delighted to get dividends from that cash, and didn't seem to care about Apple's tax exploits.
Probably lots of you follow #2 yourselves. Contribute to a traditional IRA? Great! Deduct it? You don't have to, that's a choice you're making on your 1040 to minimize your taxes. Nothing sinister there.
Year after year, I sell specific shares to minimize taxes. I don't think I'm being particularly sinister - just not being lackadaisical with taxes - not selling my lowest cost shares first (FIFO) or averaging those low cost shares into the basis of shares sold (average cost). (Unfortunately I suspect most people overpay by blindly using the average costs handed to them by their fund companies).
I didn't create these laws or lobby for them. But I'll be darned if I won't use them to my best advantage. As Judge Hand continued (after noting that courts have repeatedly said that there's nothing sinister in minimizing taxes): "Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."
Nice discussion . . . and way to complicated for me. What I'd like to see, is 15% on everything with NO deductions and let's say a $40K personal exemption. That's 15% on all forms of income - cap gains, income, corporate.
Just suck it up and pay at the window.
Alas and alack,
peace,
rono
Unless, you know, you believe in the moral work of government, including paying for things.
If you were addressing me, I was speaking to Hand's reductionist, legalistic-coercive view of things. That's all. Emphasizing the 'enforced exaction'-ness of it all, as opposed to something one is very often quite glad to do. Coercive as opposed to ... social?