The Rich Don't Pay Taxes: Myth Debunked

Off Topic Politics and World Issues
61

Confusing Wealth and Income

by Richard W. Rahn

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Added to cato.org on August 27, 2008

Which of the following families is “richer”? The first family consists of a wife who has recently become a medical doctor, and she makes $160,000 per year. Her husband is a small business entrepreneur who makes $110,000 per year, giving them a total family income of $270,000 per year. However, they are still paying off the loans the wife took out for medical school and the loans the husband took out to start his business, amounting to debts of $300,000. Their total assets are valued at $450,000; hence, their real net worth or wealth (the difference between gross assets and liabilities) is only $150,000.

The second family consists of a trial lawyer who took early retirement and his non-working wife. They have an annual income of $230,000, all of it derived from interest on tax-free municipal bonds they own. However, their net worth is $7 million, consisting of $5 million in bonds, a million-dollar home with no mortgage, and a million dollars in art work, home furnishings, automobiles and personal items.

Many politicians and media people confuse taxable income with disposable and in-kind income.

The second family is clearly far better off financially than the first family, yet many in the U.S. Congress, including Sen. Barack Obama, want to increase taxes on the first (and poorer) family and not on the wealthier family. They have mis-defined “rich” by confusing a flow (income) with a stock (real net assets), and thus come to the wrong conclusion. They want to tax those (who make more than $250,000 a year) who are trying to become rich, while preserving the status for those who already have wealth.

Increasing taxes on those 2.3 million American households who earn more than $250,000 per year is foolish and destructive for several reasons. It reduces the incentives for highly productive people to spend years in school obtaining needed skills, and then work hard in producing goods and services desired by their fellow citizens. It encourages the misallocation of productive resources by encouraging people to find ways to minimize the tax burden rather than to use their labor and savings for the highest and best use. It reduces the mobility of families up and down the income scale, and freezes the advantages of those who have substantial inherited wealth (e.g., the Kennedys, Kerrys, Pelosis, etc.).

Those who want the “rich” to pay more or “give back” not only confuse income with wealth, but also fail to understand life cycle mobility, and the effects of taxation and income redistribution programs on “disposable income.” Many people, when they are young (including the average graduate student), would be classified as poor in terms of taxable income. Most people have a sharp rise in family or “household” income after they graduate from school, and many of these enter the definition of “upper income” in their forties and fifties, but after they retire, their taxable income often drops to the point where they are considered middle income, even though they may have more than a million dollars in net assets. Income distribution is most often defined by “household” income as contrasted with individual income. Most low-income “households” consist of single (often young) individuals, while most families with more than one income earner are higher income “households.” The fact is there are about 4 times (8.9 million) as many households that have net assets of a million or more than there are households that earn more than $250,000. And many of the high-income households do not have a million dollars in net assets.

Many politicians and media people confuse taxable income with disposable and in-kind income. Because of the highly progressive income tax system, (97 percent of income taxes are paid by the top 50 percent of income earners and the top 1 percent pays 40 percent of the tax, despite having only 20 percent of the income), the difference in high-income and low-income families in after-tax income is far less than pre-tax income. In addition, there are many government welfare and subsidy programs for low-income people that are not included in many of the standard definitions of income.

Given that high marginal tax rates on income are counterproductive, some have argued for a wealth tax, but that doesn’t work either. A wealth tax mainly taxes productive capital, thus reducing job and productivity growth, and it also encourages people to move their wealth to other countries and/or engage in extravagant expenditures - as the French have found out, much to their regret.

Mr. Obama also says that he wants to increase the capital gains tax. Many people have times in their lives when they reap a substantial capital gain from the sale of a farm or small business or a vacation home, etc. If they receive a couple of hundred thousand dollars or more from the capital gain, they appear to be “rich” in that year, according to Mr. Obama’s definition, even though they may have an average yearly income of less than $100,000 and net assets of less than a half-million dollars. They will not only be taxed at a higher rate, but if the asset has been held for many years and has grown in value no faster than inflation, they will be taxed on imaginary income, and may well suffer a real loss - which is not only economically destructive but immoral.

Those who confuse taxable income with wealth are guilty of both sloppy use of language and sloppy thinking. Is it prudent to trust the writing of the tax code to a group of sloppy thinkers?

emphasis mine

http://www.cato.org/pub_display.php?pub_id=9611

62

Australia, but still:

How the rich slip through tax net

By Brian Toohey, Sun Herald, 21st March 1999

There are 170 Australians honest enough to declare taxable income of more than Au$2 million a year. Yet they still manage to get their average rate of net tax below what someone on average weekly earnings has to pay.

More than half the nation’s companies do even better - they pay no tax at all.

According to tax statistics released last week, 661 multimillionaires were hones enough to declare a taxable income of Au$1 million in 1996-97, while 3,065 declared taxable income of more than Au$500,000 a year.

Many other millionaires use fancy tax-avoidance schemes to cut their taxable income far below what they really earn. A Tax Office survey a few years ago found that a significant proportion of people on BRW magazine’s Rich List claimed to have a taxable income below the minimum wage.

But even those who declared high incomes don’t do to badly once various rebates and credits are taken into account. According to the latest figures people with a taxable income of more than Au$2 million a year paid only 21.3% in net tax.

ttp://www.geocities.com/CapitolHill/Senate/8789/sunher2.htm

63

Taxing The Rich Yields Less Taxable Income

While soaking the rich has appealed to many government officials, a recent study suggests that this may decrease taxable income – resulting in lower government revenue. The study analyzes the 1993 tax increase and draws several conclusions about the wealthy and the way they avoid paying higher taxes.

The study found that in anticipation of the 1993 tax hike, the top income earners on average:

* Reduced take-home pay 14 percent.
* Raised their average taxable income by $252,000 in 1992, then lowered it by $463,000 in 1993, after the tax hike.
* Increased their non-taxed compensation by $11,000 in 1993, with stock options accounting for 90 percent to 95 percent of the change in taxable income.

The study concludes that the wealthy classes tried to get as much income as possible paid out before the tax increase and then shifted to other nontaxable methods of payment after the tax increase. These other methods were primarily stock options.

Source: Austan Goolsbee, “What Happens When You Tax the Rich? Evidence from Executive Compensation,” Journal of Political Economy, April 2000.

http://www.ncpa.org/sub/dpd/index.php?Article_ID=9685

64

Somewhat on topic:

July 14, 2004, 8:30 a.m.
Teresaâ??s Taxes
Mrs. Kerry is filthy rich. Why is her taxable income so small?

If John Kerry wins the presidency, his household will be the richest ever to occupy the White House. Kerry’s wife, Teresa Heinz Kerry, controls a vast fortune estimated by a Los Angeles Times study to fall somewhere between $900 million to $3.2 billion. Through a series of entirely legal maneuvers, Kerry is attempting to conceal from American voters the full extent of his wife’s wealth and her corporate holdings â?? and the fact that she apparently manages to pay a remarkably small amount of taxes.

Such evidence as one is able to assemble from publicly available information raises deeply disturbing questions. The Kerry campaign has disclosed Mrs. Kerry’s 2003 income as $5,115,000. Using a conservative estimate of her wealth at $1 billion â?? at the low end of the Los Angeles Times’ estimates â?? then we can easily see that her investments yielded only a miniscule one half of one percent last year.

In 2003 even Treasury bills yielded twice that much. Dividends on the S&P 500 yielded three times that much. Long-term Treasury bonds yielded eight times that much. If Mrs. Kerry’s investment income really was only one half of one percent, then she is perhaps the world’s worst investor. Or if her income is in fact greater, and she has found some way to minimize it for tax purposes, then Mrs. Kerry may be the world’s greatest cheat.

Let’s put this in terms that people of less extreme wealth can relate to. If you had $100,000 invested last year and your investment income was only $500 â?? the same percentage as Mrs. Kerry’s income â?? then something would be very much out of whack.

Perhaps much of Mrs. Kerry’s wealth is held in various types of trusts, the income of which is not reported on her personal tax returns. But if that’s the explanation, then disclosing only her personal tax returns would be a deceptive exercise in making her income seem as small as possible to voters.

Or perhaps Mrs. Kerry’s taxable income has been greatly reduced by legitimate deductions, such as contributions to charity (including her support of liberal political causes like the Tides Foundation). Maybe Mrs. Kerry has found a way to take deductions in connection with her Gulfstream jet, her $5-million ski chalet in Idaho, her $9 million oceanfront “cottage” in Nantucket, her $4 million estate in western Pennsylvania, or the $6.9 million five-story Boston mansion she purchased with her husband.

We can’t know exactly what is out of whack with Mrs. Kerry’s income, if anything, because she and her husband have always chosen to file separate tax returns. Mrs. Kerry’s separate returns have never been made part of the public record.

The Kerry campaign said in March that it will make the first two pages of Mrs. Kerry’s Form 1040 available to the public in October, when her tax preparers finalize it. This will give voters no more than a handful of days to consider what little is disclosed there, before going to the polls on November 2.

Even then, the first two pages of Mrs. Kerry’s Form 1040 are a mere summary that will disclose virtually nothing we don’t already know. They will not disclose specific holdings; income, profits, or losses from individual investments or partnerships; or whether or not Mrs. Kerry utilizes potentially abusive tax shelters or off-shore entities. Mrs. Kerry’s reported taxable income will remain suspiciously small in proportion to reasonable estimates of her vast wealth. And voters will have no explanation as to why.

The Kerry campaign justifies this last-minute pre-election peep at Mrs. Kerry’s wealth by claiming that George W. Bush did the same thing during the 2000 election with his 1999 returns. But Kerry fails to mention that Governor and Mrs. Bush’s entire joint Form 1040 for 1998 â?? the prior tax year â?? was made available. By the standard set by candidate Bush, Mrs. Kerry should release her entire 2002 Form 1040 immediately â?? not just the first two pages â?? and she should do so now.

The Kerry campaign argues that more complete disclosure would compromise Mrs. Kerry’s right to privacy. But surely a woman who serially marries senators understands that, from time to time, she may have to forfeit that right.

Liberals have argued that Mrs. Kerry’s personal fortune has nothing to do with her husband â?? after all, she married it. But then again, so did he.

Legitimate concerns extend beyond wondering just how rich Mrs. Kerry really is, and whether she paid her fair share of taxes. There are also questions about power, influence, and conflict of interest. According to the Los Angeles Times, Mrs. Kerry’s “money is actively managed every day of the year, providing capital to Gannett, Anheuser-Busch, Pfizer and Procter & Gamble, among many others.” Any of those companies would have a keen interest in Mrs. Kerryâ??s husbandâ??s policies as president.

Already Kerry’s economic proposals seem tuned to serve his wife’s economic interests. His proposal last March to end tax breaks for U.S. corporations that do business overseas was designed with a loophole that would let the H. J. Heinz Company â?? the centerpiece of Mrs. Kerry’s family fortune â?? keep its overseas tax breaks, and get a lower domestic tax rate at the same time.

Voters of both parties should demand immediate and full disclosure of Teresa Heinz Kerry’s holdings and tax returns. There is ample precedent: In 1984 the husband of Democratic vice presidential candidate Geraldine Ferraro made his tax returns public in response to pressure from voters. Today the stakes are greater in every way. Mrs. Kerryâ??s disclosure should be no less.

http://www.nationalreview.com/nrof_luskin/luskin200407140830.asp

65

The Elasticity of Taxable Income: Evidence and Implications

Abstract

A central tax policy parameter that has recently received much attention, but about which there is substantial uncertainty, is the overall elasticity of taxable income. We provide new estimates of this elasticity which address identification problems with previous work, by exploiting a long panel of tax returns to study a series of tax reforms throughout the 1980s. This identification strategy also allows us to provide new evidence on both the income effects of tax changes on taxable income, and on variation in the elasticity of taxable income by income group. We find that the overall elasticity of taxable income is approximately 0.4; the elasticity of real income, not including tax preferences, is much lower. We also estimate small income effects on tax changes on reported income, implying that the compensated and uncompensated elasticities of taxable income are very similar. We estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above $100,000 per year, who have an elasticity of 0.57, while for those with incomes below $100,000 per year the elasticity is less than one-third as large. Moreover, high income taxpayers who itemize are particularly responsive to taxation. We then derive optimal income tax structures using these elasticities. Our estimates suggest that the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels.

Note to Mr Roberts, that high elasticity of taxable income starts at 100000 USD and not at net worth of 100 mill.

66

[quote]erik-the-red wrote:

From what I understand, you reason as follows: a corporation derives its revenues from consumers; the check to the Treasury for income taxes is taken from these revenues; therefore, consumers paid for the corporation’s income tax. Sorry, but I don’t agree with this line of thinking. That the corporation sends a check to the Treasury is pretty strong evidence in my opinion that they do, in fact, pay taxes.[/quote]

So the VAT is also paid by the corporation and not by you?

If you happen to think that you would be also wrong on that count.

http://www.capmag.com/article.asp?ID=2686

Taxation 101: Who Pays Corporate Taxes?
by Walter Williams (April 14, 2009)

When we think about government spending, and the taxes needed to finance its spending, we should also think of the effects of taxation.

Suppose I hire you to repair my computer. The job is worth $200 to me and doing the job is worth $200 to you. The transaction will occur because we have a meeting of the mind. Now suppose there’s the imposition of a 30 percent income tax on you. That means you won’t receive $200 but instead $140. You might say the heck with working for me – spending the day with your family is worth more than $140.

You might then offer that you’ll do the job if I pay you $285. That way your after-tax earnings will be $200 – what the job was worth to you. There’s a problem. The repair job was worth $200 to me, not $285. So it’s my turn to say the heck with it.

This simple example demonstrates that one effect of taxes is that of eliminating transactions, and hence jobs. But politicians have what we economists call a zero elasticity vision of the world. They think people will behave after taxes just as they behaved before taxes and the only effect of a tax is to bring in more revenue. Here’s a question for you: Would we and society be better off if you and I agreed to the repair job but did not tell anybody? I’d say yes, but we’d be criminals.

Here’s another tax question: Which worker receives the higher pay on a road construction project: a worker moving dirt with a shovel or a worker moving dirt atop a giant earthmover? If you said the guy on the earthmover, go to the head of the class.

But why? It’s not because he’s unionized or that employers just love earthmover operators. It’s because he’s more productive and the reason is that he has more capital (tools) with which to work. In general, the more capital workers have to work with, the higher their pay.

So what’s a good policy for higher wages? One is to keep the cost of capital formation low so companies will do more of it. Policies that raise the cost of capital formation and lower risk-taking are high corporate income taxes, low allowances for depreciation and capital gains taxes. Those who want to see higher productivity gains and higher wages, of which I’m one, should champion tax reductions.

How in the world can tobacco companies survive and remain profitable in the wake of punitive taxes, penalties and court settlements? If the government and the courts imposed these multibillion dollar sanctions on the beef industry, it would have been long gone. The answer’s easy. Corporations do not pay taxes, penalties and settlements.

A subject area in economics, called the incidence of taxation, says that the party upon whom a tax is levied does not necessarily pay the tax. They might shift it onto some other party. That’s precisely what corporations do. They are merely tax collectors.

In the case of tobacco, the punitive taxes, penalties and settlements are shifted forward to consumers in the form of higher prices – thus, government has punished smokers much more than tobacco companies.

If the government made a similar attack on the beef industry, it would be out of business. Why? There are many substitutes for beef that consumers would turn to, whereas there’re few substitutes for tobacco. Imposition of oppressive taxes on goods having few substitutes is standard fare for government. King George III did it with what our ancestors called the Intolerable Acts (Stamp Tax, Tea Tax and others). But not for long. Americans of that day hadn’t learned the lessons of submissiveness and compliance – they rebelled.

Born in Philadelphia in 1936, Walter E. Williams holds a bachelor’s degree in economics from California State University (1965) and a master’s degree (1967) and doctorate (1972) in economics from the University of California at Los Angeles.

Please note the “Taxation 101”, as in, very basic stuff.

67

[quote]jsbrook wrote:
orion wrote:
jsbrook wrote:
orion wrote:
jsbrook wrote:
orion wrote:
Loose Tool wrote:
orion wrote:
Loose Tool wrote:
orion wrote:
The obvious bias of this clearly escapes you, huh?

The top tax payers pay the most taxes, huh?

Corporate taxes, like the VAT are payed by the customers, not the owner of the company. If they pay their dividends into a trust fund or do not pay them out at all the rich do not pay anything at all, except for the relatively small amount they need to live off, because they cannot escape consumption taxes and capital gains taxes.

Who pays the taxes is mostly the middle class, i.e. those who actually have, an need, an income.

And yes, the really “rich” pay very little taxes, relatively speaking. Their tax rate is actually regressive.

The top-earning 25 percent of taxpayers (adjusted gross income over $66,532) earned 68.7 percent of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86.6 percent). The top 1 percent of taxpayers (adjusted gross income over $410,096) earned approximately 22.8 percent of the nation’s income, yet paid 40.4 percent of all federal income taxes. That means the top 1 percent of tax returns paid more in federal individual income taxes than the bottom 95 percent of tax returns.

Follow the link for the data tables.

Yes, it is about income taxes. And income is defined by the tax code.

If you however plough your money back into your company and only take out a relatively small part of that as “income” you only pay taxes on that “income”.

Your company however may be worth more a few million dollars, tax free. You would only pay taxes when you sell your company and at least in Europe even that can be avoided easily.

The percentages I quoted are only with regard to individual income taxes, not corporate. So what bearing does the corporate bias have on the percentages?

None, but people present it as if the “rich” pay an extraordinarily high percentage of taxes, which they don’t and never will.

That is not the point. The point is that people that make a nice living and have a good income are falsely categorized as ‘rich’ and pay a high percentage of income tax. Maybe the percentage is justified. Maybe not. But the top 1% cannot truly be categorized as rich. A nice lifestyle sure. But after paying for college and various other things, there is really not a huge amount of surplus money floating around. The truly rich do not pay a high percentage of income tax.

I agree.

So why are you arguing with Bill? Everything he says is right for 99.9% of people. To the extent it does not apply to the megarich .1% (all 1000 of them) who are able to avoid paying a high percentage of taxes through tax shelters and other loopholes, that is irrelevant. They represent such a small percentage, and it does nothing to change the fact that the vast majority of the top 1% income bracket pays a high percentage of taxes.

First of all, that effect comes in sooner than at 100m.

Let us say 10m.

If you have 10m in liquid assets you are pretty loaded.

Those people own almost all of America and yet can avoid taxes EASILY.

I am not saying that this is wrong.

I am saying that that whole income tax debate is a diversion.

I agree with the conclusion of that diversion though, that the upper middle class gets anally raped.

Just saying, you had a revolution to get rid of the untaxed aristocracy?

How is that working for you?

It is the whole premise of the welfare state, to soak the rich.

And yet, they never achieve that.

It is always the middle class.

Ok. But this thread wasn’t about corporate taxation. It was about taxation of individual income. And to the extent what you say about big corporations exploiting the tax system is true, it still doesn’t apply to small business owners.

As far as individual income goes, maybe something should be done to close loopholes that are exploited by the megarich (who still actually pay billions in taxes because of the sheer amount of their wealth even if they are able to manipulate the system to pay a lower percentage of income in taxes than those less well-off). But that’s another issue. You can quibble about what percentage of taxes this small segment of megarich pays and how much of America’s wealth they actually own. but that is still a sideshow.

The fact remains that the vast majority of the top income bracket is NOT superich, does not have the ability avoid taxation through tax loopholes, and does pay a high percentage of income tax. You don’t disagree with that. Because you can’t. Because it’s true. [/quote]

See the abstract that I posted about the elasticity of taxable income.

You are wrong.

I also have posted an article about the taxable income of Theresa Heinz-Kerry, demonstrating that you are also wrong when it comes to your second point.

So sorry.

68

[quote]Bill Roberts wrote:
Orion can correct me if I’m wrong as to what I meant, but it seems to me that he means that if you don’t ever want to yourself see or be able to use for personal expenses or possessions the income that you earn, and you own your own business and are incorporated, you can drive your personal income tax to zero or a low level.

He seems to be confused on thinking that in America the corporation can earn the profit and yet still have it available for you to have, as the owner, when you want it. Being utterly unfamiliar with American tax law, yet presuming to educate an American accountant on it, I suppose he does not know that the sum of the corporate income tax rate and tax on dividends is just as high as the personal income tax rate.

(Pre-emptive strike: Saying that the customers pay the corporate income tax does not change the above consideration in any case where the owner wants to himself be able to enjoy the money earned on things like all his personal and family expenses, things he would like to buy for himself, college education for the kids, etc, etc.)

But having only the shallowest knowledge of America gleaned from thousands of miles away never has stopped and I guess never will stop Orion from assuming that he knows more about how things are done in America than those that have been immersed in this society for decades. So the above will probably just get another post saying how we just don’t understand American taxation.[/quote]

See, despite being wrong on almost all counts, because your tax law is very similar to other nations you seem to get the gist of it.

Yes, if you want to consume your money, spend it on your family, whatever, it gets harder to avoid taxation.

However, the richer you are, the less important that relatively small amount of you fortune becomes.

Insofar the regression of the “taxable income” more than offsets the progression of the income tax.

Therefore the graph he posted was redundant, it just shows that those who pay the most income tax pay the most income tax.

Well, duh.

That does not really correlate too much with being “rich” though.

See articles and studies above.

So, in fact, he has not “debunked” anything.

69

[quote]LIFTICVSMAXIMVS wrote:
jsbrook wrote:
orion wrote:

These kind of threads make it look though as if the income tax was where its at.

I am saying that “income” is a highly arbitrary concept that is quite malleable when that should be necessary.

Income tax IS where it’s at. Because that is what affects the most people’s lives most directly. It’s not like we’re talking 19th century European philosophy. I don’t really understand what this last sentence is supposed to mean.

Most “Rich” people (the owner class) can define their own incomes therefore the notion of rich people paying income taxes is preposterous. A rich person could theoretically live off an expense account provided by his company and draw $0 income – or even incur a loss through capital devaluation.

So: soak the rich really means soak the middle class – including those mom and pop businesses everyone seem to be waxing poetically about. Mom and pop businesses can usually declare a loss to avoid paying income taxes as long as they are creative enough in declaring those losses – they still get fucked over by consumption taxes which lowers their productivity and thus lowers their actual income in the long run.

You (and everyone else who deigns to argue with Orion) really need to pick up an economics book or three.[/quote]

So I guess you start to see why I have kind of given up on reforming the system from within?

70

[quote]orion wrote:
jsbrook wrote:
orion wrote:
jsbrook wrote:
orion wrote:
jsbrook wrote:
orion wrote:
Loose Tool wrote:
orion wrote:
Loose Tool wrote:
orion wrote:
The obvious bias of this clearly escapes you, huh?

The top tax payers pay the most taxes, huh?

Corporate taxes, like the VAT are payed by the customers, not the owner of the company. If they pay their dividends into a trust fund or do not pay them out at all the rich do not pay anything at all, except for the relatively small amount they need to live off, because they cannot escape consumption taxes and capital gains taxes.

Who pays the taxes is mostly the middle class, i.e. those who actually have, an need, an income.

And yes, the really “rich” pay very little taxes, relatively speaking. Their tax rate is actually regressive.

The top-earning 25 percent of taxpayers (adjusted gross income over $66,532) earned 68.7 percent of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86.6 percent). The top 1 percent of taxpayers (adjusted gross income over $410,096) earned approximately 22.8 percent of the nation’s income, yet paid 40.4 percent of all federal income taxes. That means the top 1 percent of tax returns paid more in federal individual income taxes than the bottom 95 percent of tax returns.

Follow the link for the data tables.

Yes, it is about income taxes. And income is defined by the tax code.

If you however plough your money back into your company and only take out a relatively small part of that as “income” you only pay taxes on that “income”.

Your company however may be worth more a few million dollars, tax free. You would only pay taxes when you sell your company and at least in Europe even that can be avoided easily.

The percentages I quoted are only with regard to individual income taxes, not corporate. So what bearing does the corporate bias have on the percentages?

None, but people present it as if the “rich” pay an extraordinarily high percentage of taxes, which they don’t and never will.

That is not the point. The point is that people that make a nice living and have a good income are falsely categorized as ‘rich’ and pay a high percentage of income tax. Maybe the percentage is justified. Maybe not. But the top 1% cannot truly be categorized as rich. A nice lifestyle sure. But after paying for college and various other things, there is really not a huge amount of surplus money floating around. The truly rich do not pay a high percentage of income tax.

I agree.

So why are you arguing with Bill? Everything he says is right for 99.9% of people. To the extent it does not apply to the megarich .1% (all 1000 of them) who are able to avoid paying a high percentage of taxes through tax shelters and other loopholes, that is irrelevant. They represent such a small percentage, and it does nothing to change the fact that the vast majority of the top 1% income bracket pays a high percentage of taxes.

First of all, that effect comes in sooner than at 100m.

Let us say 10m.

If you have 10m in liquid assets you are pretty loaded.

Those people own almost all of America and yet can avoid taxes EASILY.

I am not saying that this is wrong.

I am saying that that whole income tax debate is a diversion.

I agree with the conclusion of that diversion though, that the upper middle class gets anally raped.

Just saying, you had a revolution to get rid of the untaxed aristocracy?

How is that working for you?

It is the whole premise of the welfare state, to soak the rich.

And yet, they never achieve that.

It is always the middle class.

Ok. But this thread wasn’t about corporate taxation. It was about taxation of individual income. And to the extent what you say about big corporations exploiting the tax system is true, it still doesn’t apply to small business owners.

As far as individual income goes, maybe something should be done to close loopholes that are exploited by the megarich (who still actually pay billions in taxes because of the sheer amount of their wealth even if they are able to manipulate the system to pay a lower percentage of income in taxes than those less well-off). But that’s another issue. You can quibble about what percentage of taxes this small segment of megarich pays and how much of America’s wealth they actually own. but that is still a sideshow.

The fact remains that the vast majority of the top income bracket is NOT superich, does not have the ability avoid taxation through tax loopholes, and does pay a high percentage of income tax. You don’t disagree with that. Because you can’t. Because it’s true.

See the abstract that I posted about the elasticity of taxable income.

You are wrong.

I also have posted an article about the taxable income of Theresa Heinz-Kerry, demonstrating that you are also wrong when it comes to your second point.

So sorry.
[/quote]

I don’t have time to discuss this anymore. The weekend’s over and I’m really busy again. But if I’m wrong, it’s not relevant. And I don’t really care. I assume your point is that the superich pay little tax and not simply a lower percentage of real income than they they technically should. It’s possible in some cases. We don’t tax wealth or consumption in this country. We tax income. Presumably, it was taxed when it was made as income. To the extent there are loopholes that prevented that, it’s regrettable. But so what. Really, so what. There are few enough with that level of wealth that this is not the true issue facing our tax system.

If, on the other hand, you are trying to say that someone making $180K a year doesn’t pay a pay percentage of income tax, you are simply flat-out wrong. And some little article can’t change that. I and everyone I know lives the reality.

71

[quote]orion wrote:
LIFTICVSMAXIMVS wrote:
jsbrook wrote:
orion wrote:

These kind of threads make it look though as if the income tax was where its at.

I am saying that “income” is a highly arbitrary concept that is quite malleable when that should be necessary.

Income tax IS where it’s at. Because that is what affects the most people’s lives most directly. It’s not like we’re talking 19th century European philosophy. I don’t really understand what this last sentence is supposed to mean.

Most “Rich” people (the owner class) can define their own incomes therefore the notion of rich people paying income taxes is preposterous. A rich person could theoretically live off an expense account provided by his company and draw $0 income – or even incur a loss through capital devaluation.

So: soak the rich really means soak the middle class – including those mom and pop businesses everyone seem to be waxing poetically about. Mom and pop businesses can usually declare a loss to avoid paying income taxes as long as they are creative enough in declaring those losses – they still get fucked over by consumption taxes which lowers their productivity and thus lowers their actual income in the long run.

You (and everyone else who deigns to argue with Orion) really need to pick up an economics book or three.

So I guess you start to see why I have kind of given up on reforming the system from within?

[/quote]

Ha. Well, it’s not your system. To be a real ‘reformer’ and ‘champion of our cause’ you’d have to much more reading. And do more THAN reading. You’d need to learn enough to recognize that what you read in textbooks and spout on these forums are only half-truths and not always applicable either to the situations you try to use them in. You often try to cram a square peg into a round hole.

72

You can’t even download the elasticity article without being a member. From the abstract I doubt very much really disputes our main points. And which probably is really being posited for some other propositions and being distorted by you. If you reallly want to be a pal, why don’t you post the whole article here for us?

73

Well, I was able to download a free copy of this paper on elasticity of taxable income. But won’t get a chance to read it until next weekend. I would be shocked, however, if it stands for any of the propositions Orion is citing it for.

74

[quote]jsbrook wrote:

If, on the other hand, you are trying to say that someone making $180K a year doesn’t pay a pay percentage of income tax, you are simply flat-out wrong. And some little article can’t change that. I and everyone I know lives the reality. [/quote]

I suggest you read the articles I posted, if only to get an idea how to avoid taxes, even at a relatively low “income”.

75

[quote]jsbrook wrote:
orion wrote:
LIFTICVSMAXIMVS wrote:
jsbrook wrote:
orion wrote:

These kind of threads make it look though as if the income tax was where its at.

I am saying that “income” is a highly arbitrary concept that is quite malleable when that should be necessary.

Income tax IS where it’s at. Because that is what affects the most people’s lives most directly. It’s not like we’re talking 19th century European philosophy. I don’t really understand what this last sentence is supposed to mean.

Most “Rich” people (the owner class) can define their own incomes therefore the notion of rich people paying income taxes is preposterous. A rich person could theoretically live off an expense account provided by his company and draw $0 income – or even incur a loss through capital devaluation.

So: soak the rich really means soak the middle class – including those mom and pop businesses everyone seem to be waxing poetically about. Mom and pop businesses can usually declare a loss to avoid paying income taxes as long as they are creative enough in declaring those losses – they still get fucked over by consumption taxes which lowers their productivity and thus lowers their actual income in the long run.

You (and everyone else who deigns to argue with Orion) really need to pick up an economics book or three.

So I guess you start to see why I have kind of given up on reforming the system from within?

Ha. Well, it’s not your system. To be a real ‘reformer’ and ‘champion of our cause’ you’d have to much more reading. And do more THAN reading. You’d need to learn enough to recognize that what you read in textbooks and spout on these forums are only half-truths and not always applicable either to the situations you try to use them in. You often try to cram a square peg into a round hole.[/quote]

Why would I want to be a reformer if I had to convince people who are unwilling to do ANY reading and yet tell me I am wrong?

If the very idea of getting fleeced is so revolting to you that you are willing to defend their privileges as a knee jerk reaction, Id rather try to get rich.

Why work against peoples willful ignorance when I can make it work for me?

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[quote]jsbrook wrote:
You can’t even download the elasticity article without being a member. From the abstract I doubt very much really disputes our main points. And which probably is really being posited for some other propositions and being distorted by you. If you reallly want to be a pal, why don’t you post the whole article here for us?[/quote]

6 Conclusion
Over the last few years, economists have recognized the centrality of the elasticity of
taxable income as a parameter of interest for evaluating tax policy. But the substantial
variability in the estimates of this central parameter have made it diÃ??cult to draw con-
clusions about the role that taxes play in determining income generation. Moreover, the
fact that we have a non-linear tax system implies that it is critical to estimate not just
an overall elasticity, but how that elasticity varies along the income distribution.
We have presented a framework that provides new estimates of the elasticity of taxable
income that surmounts some problems with previous work. We nd that the elasticity is
0.4, which is large but well below early estimates of its value. We also nd much lower
elasticities for real, broadly dened, income; about two-fths of the dierence between
these results arises from the mechanical eect that the base of broad income is smaller,
but the majority arises from the fact that tax preferences are sensitive to tax rates. And
we nd that the income eects of tax changes on taxable income are small, implying little
dierence between compensated and uncompensated elasticities.
Moreover, this framework allows us to explore the variation in this elasticity along the
income distribution, and we nd that it is primarily driven by the response of very high
real income taxpayers to changes in tax rules . We then use these ndings to implement a
model of optimal income tax schedules, and nd that they suggest for most distributional
preferences a tax system which is progressive on average but not on the margin, with a
large demogrant that is rapidly taxed away at the bottom of the income distribution, but
with marginal rates that fall, rather than rise, with income.
One important dierence between our study and previous work is the size of the tax
changes being studied. Most of the previous literature has focused on the Tax Reform Act
of 1986, which imposed large changes in tax rates on upper income taxpayers, whereas our
variation comes in addition from bracket creep, state tax changes, and changes through
ERTA and TRA on other groups which were more modest. If individuals react more
32
strongly to large, and presumably as a result better understood, changes, then by \mud-
dying the waters" with these smaller change we may be reducing the estimated elasticity
relative to the previous literature. Of course, it is not at all obvious why the reaction to
the large changes of TRA 86 only are more relevant for projection purposes than are the
reactions to all tax changes in the 1980s; TRA was more dissimilar than it was similar
to the modal post-war tax reform. Thus, our estimates are probably the preferred ones
for the types of modest (relative to TRA 86) reforms that are currently contemplated by
Congress.
These ndings have a three potentially important implications for tax policy. First,
they highlight the value of having low tax rates on a broad tax base, a position long
advocated by economists. The large elasticities that we observe are driven by \holes" in
the tax base that allow taxpayers, particularly at higher income levels, to reduce their
tax burdens. With a broader tax base we would distort behavior less and could therefore
raise revenues more eÃ??ciently.
Second, they suggest that the substantial concern currently expressed about the dis-
torting impact of high implicit tax rates at the bottom of the income distribution may be
overblown. Most of the concern is focused on the $10,000 to $50,000 income range that
we examine where the EITC is phased out. But we nd no evidence that, at least for
the explicit taxes that arise through the federal and state income tax system, taxpayers
in this range are substantially changing either their real incomes or reported taxes in
response to tax policy. This suggests that the distributional advantages of tightly income
targeted tax subsidies may outweigh the eÃ??ciency costs of high implicit tax rates on the
lower middle income taxpayers, as is illustrated by the high optimal rates in this bracket
in our simulations.
Of course, our study does not consider non-lers and individuals who move into ling
status between a pair of years. If these individuals are particularly responsive, then there
still may be concern about the high implicit rates arising through transfer programs.
This type of responsiveness is indeed suggested by the high elasticities of labor force
participation with respect to taxation estimated in Meyer and Rosenbaum (1999). This
potential dichotomy between the responsiveness of those inside and outside of the tax
system suggests that attention be paid to incentives that reward work per se rather than
marginal increments to hours worked.
33
Third, we do nd that there is substantial responsiveness of taxable income to taxes
among the highest income taxpayers. This suggests that the optimal tax system should
feature declining (or at least not increasing) marginal rates, although perhaps increasing
average rates. These ndings stand in contrast to the actual pattern of marginal rates
that we observe in most developed countries. As our nal simulations show, the high
rates for upper income taxpayers imply very low social weight on that group. It is an
interesting political economy question why tax systems have universally evolved towards
progressive marginal rate structures.
3

emphasis mine

77

Excuse me for not being able to read a 78 page article at the drop of the hat. I’ll get to it next weekend. But from this excerpt, you have surely mistated the central principle. The article is about an optimal tax system.

But nothing in there says that someone making $160K a year does not have a high percentage of income going to taxes, and it cannot be read that way. If I’m wrong, I’ll find out Saturday. Maybe I will discover a wonderful new way to avoid paying a high rate of tax.

78

I didn’t realize this wasn’t common knowledge…

79

[quote]jsbrook wrote:
Excuse me for not being able to read a 78 page article at the drop of the hat. I’ll get to it next weekend. But from this excerpt, you have surely mistated the central principle. The article is about an optimal tax system.

But nothing in there says that someone making $160K a year does not have a high percentage of income going to taxes, and it cannot be read that way. If I’m wrong, I’ll find out Saturday. Maybe I will discover a wonderful new way to avoid paying a high rate of tax.[/quote]

Maybe you shouldn’t comment until you do.

80

[quote]orion wrote:
Bill Roberts wrote:
Orion can correct me if I’m wrong as to what I meant, but it seems to me that he means that if you don’t ever want to yourself see or be able to use for personal expenses or possessions the income that you earn, and you own your own business and are incorporated, you can drive your personal income tax to zero or a low level.

He seems to be confused on thinking that in America the corporation can earn the profit and yet still have it available for you to have, as the owner, when you want it. Being utterly unfamiliar with American tax law, yet presuming to educate an American accountant on it, I suppose he does not know that the sum of the corporate income tax rate and tax on dividends is just as high as the personal income tax rate.

(Pre-emptive strike: Saying that the customers pay the corporate income tax does not change the above consideration in any case where the owner wants to himself be able to enjoy the money earned on things like all his personal and family expenses, things he would like to buy for himself, college education for the kids, etc, etc.)

But having only the shallowest knowledge of America gleaned from thousands of miles away never has stopped and I guess never will stop Orion from assuming that he knows more about how things are done in America than those that have been immersed in this society for decades. So the above will probably just get another post saying how we just don’t understand American taxation.

See, despite being wrong on almost all counts, because your tax law is very similar to other nations you seem to get the gist of it.

Yes, if you want to consume your money, spend it on your family, whatever, it gets harder to avoid taxation.

However, the richer you are, the less important that relatively small amount of you fortune becomes.
[/quote]

No, I am not wrong.

Your answer to the fact that the upper 10% – which is tens of millions of Americans – and the upper 1% – which is a million or so Americans – pay a crushing tax burden and carry the great majority of the burden of government is that those of us saying this are wrong, because if we were in a situation where incorporation would apply, and IF WE WANTED TO LIVE LIKE PAUPERS AND SEE VERY LITTLE OF OUR MONEY BENEFIT OURSELVES OR OUR FAMILIES, then we wouldn’t have to pay much if any personal income tax.

(Though generally the corporation would then have to pay the corporate income tax rate, which is the second highest in the world.)

Your argument is a total “so what?” and is completely irrelevant to the reality of the problem.

And then when you, who have never even seen an American tax form, tell an American accountant that he doesn’t understand what he’s talking about with regard to American taxes, compared to you, and gee, all you have to do is incorporate in Nevada, it goes to the completely off-the-wall.