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Thursday, June 30, 2011

Simple Math and Income Taxes

So today a friend says he agrees with the President and why shouldn't the rich pay more? So I got to thinking; if I made $50,000 in annual (taxable) income and I paid 15% in income tax, that would be $7,500. If the rich guy I think gets way too much money and lives large on his $1million annual taxable income pays 28% income tax, that works out to $280,000 in taxes paid. Can't we at least agree that the millionaire IS already paying more in taxes?

Then the friend says; "don't these rich people get enough tax deductions? They don't need any more deductions." This got me thinking after I left, that the main deduction (accelerated depreciation on private jets) the President targeted in his press conference is the same deduction both my friend and I have been able to take (albeit on a much smaller scale) because we're both business owners and we can take the deduction on equipment purchased.

This further prompted me to think of the following possibility. Imagine the economy so bad that many people are losing their jobs and homes to foreclosure. Imagine that so many people are suffering financially that some news reporter or politician posits the idea that only the wealthy can afford to own their homes anymore. Now imagine that idea becoming such a widespread belief that the federal government suggests the mortgage interest deduction be eliminated from the annual income tax filing. Imagine homeowners being called the greedy and wealthy. Imagine that.

Many people wonder why I would support giving tax breaks to businesses, rich people or anyone else. Again, simple math; let's say we "get even" with some really, really rich guy who has an annual income of $10million and we increase his tax rate from 38% to 40%. Doesn't sound like much of an increase, right. In fact it is a $200,000 increase. That is $200k now taken out of the economy. That high-income person might have bought goods and services with that $200k which would have employed many people. He or she might have invested it into a business which would have employed people, or invested it in stocks that would have employed people. Instead, through the tax increase, that money will be put into the government which is much less efficient than the private sector, much of it will be eaten up by administrative costs and any jobs that would be created (if any actually are) would be short-term maintenance jobs.

As I've said in the past, I am glad there are wealthy people. They buy our goods and services. They keep many of us employed. They buy products when new inventions are made so that later on the rest of us benefit from better products at affordable prices.

The upper-income earners are not the enemy.

Your thoughts?



2 comments:

  1. This is your brother Chris. I am not disagreeing with what you have said. I am also not agreeing because there are some numbers games being played on both sides. For instance, political party that is against the tax increase are using the high tax number to argue against raising the taxes. The side for raising taxes are using what they call the "realized tax rate", which I believe is what the person pays after deductions and they claim that the 36% goes down to 18%. Either way, both sides refuse to agree on anything.
    In addition to what you have said, Paul Ryan, who I respect, has proposed elimination of the credit home owners get on paying mortgage interest. Both sides are looking at eliminating it. That makes me sad because I think it helps people and does not affect gov't income.
    Lastly, there is talk of privatizing government services (medicare and maybe some other things). I don't know if you are for that but if so, I would refer you to the debacle that is the State of Illinois and their attempts to privatize certain services. Notably their toll road and the parking meters in the city of Chicago. Since privatizing, the meter prices have doubled and the toll road prices have gone up drastically. The private company made the pitch that the meter prices would not increase and yet they did. The city is on the hook for the next 75 years, according to Sen. Durbin from Illinois.
    Another thing that hurts is that both sides are looking at eliminating the credit for interest paid on student loans. My question becomes this: If these credits get eliminated then aren't those who try to buy a home or getting an education being penalized for trying to have a good life (and we are not talking wealthy)?
    I think we may disagree on raising the tax rates back to what they were before Pres. Bush took office may not be a bad thing. What bothers me is that "the wealthy" is being misused. Restoring the tax rates affects all of us no matter what rate you pay.
    I do think rates should be adjusted for "small businesses" and we agreed previously on that. I would also ask this: Why do people like Warren Buffet pay less in taxes than his secretary (Buffet made it public)? I have also listened to people like Dave Ramsey who states that he and others who have money ("wealthy")buy used and don't throw their money away. They spend it more wisely. We try to follow Dave's logic in his book "The Total Money Makeover." It has helped us a lot.
    I guess I am just saying that we could argue these points all day long. I see the problem is that neither side wants to give a little to get a little and that is the bigger problem.

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  2. Have you read The Fair Tax? It is an easy read and would eliminate all income tax loopholes.

    You cite "both sides" using "numbers games." I used no such games and think my example is pretty simple. Since I'm not taking any politician's position, why do you focus your comments away from my point?

    Have you researched the Warren Buffett example? I have the following to say about that;
    1. If Mr. Buffett claims to pay less in income taxes than his secretary who makes $60,000/year, why is the 3rd richest guy in the world paying such paltry salaries?
    2. Mr. Buffett could take an income and pay higher taxes, but he takes his income through capital gains which are taxed at 17%. Why doesn't he choose to take an income and pay the higher rate? Oh, and if his capital gains income is more than $200k a year, he's still paying more in taxes (raw dollars) than his secretary.

    I'm a big fan of Dave Ramsey and the Total Money Makeover. However, I doubt the very wealthy buy their flat screen tvs, furniture, medical procedures and clothes all second-hand. Therefore I think The Fair Tax would be a great way to fund the government.

    I believe the problem is fundamental. Both sides in Washington will argue for spending and taxes based on a fundamental belief that we need an income tax. I say, the income tax gives the government so much power that it pits one group of people against another (i.e. class warfare).

    According to a 2005 CBO study, the top 10% of wage earners had 40.9% of pre-tax income, but paid 72.7% of the share of individual income taxes. And we still don't think "the wealthy" are taxed enough?

    Thanks for the thoughts.

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