The Mitt-Lefty Paradox of taxation

[peggy]

A VAT can work, true, but you would have to craft it carefully, and knowing the climate, and business of congress, I doubt it would be done right. I fear it would be just more funneling of wealth to the top 2%.

Why do you say the tax system hasn't worked? There is a cut off below which poorer people don't pay federal tax. But they still get shafted by state taxes, and payroll taxes. I thought we were just discussing federal taxes, but if you want to talk over all taxes then, yeah, poorer people still pay a higher percentage of their money in taxes. Or rather it affects their bottom line more. (ok I'm lumping payroll taxes with state taxes here, I know) It's a fallacy that some in our society pay no taxes, but it makes for a good talking point if you want to wage class warfare dividing society into 'makers and takers' as a recent candidate did.
I still think the real problem lies in loopholes. Whatever the tax rate on paper says, the actual taxes paid is the real world figures we have to work with. Unfortunately, the real power of congress, and party/individuals is in taxation, and 'gifts' of loopholes/deductions/etc... I really don't see congress giving up that power for a simple flat tax, or VAT system. Too simple without the wiggle room to gift favored donors/industry.

The real problem, which no one wants to face is, we like our lives. We like how our country is structured and runs. We like our good roads, schools, library systems. We want our food inspected, and our water to be clean and safe. And we want our homes, cities, and rural areas to be protected by police and fire. And we really don't want the return of The Poor House, so we want our grandparents to be able to live simple, but affordable lives through SS and Medicare. And even on the local level, we want to know our kids school buildings have been inspected and meet all the requirements where the inspectors haven't been simply 'paid off' on the inspection, as I suspect happened in Brazil with that nightclub, if an inspection was even required. There are a million things, large and small, that we use the government for.

It all costs money. Every bit of it. And it must come from somewhere. If not from state taxes then federal taxes. But it must come from somewhere. And it must meet our costs, and yes those costs rise just as surely as our personal costs of running our households rises.

Are their ways to trim the budget? Sure there are, but no one wants to actually talk about those things. And congress surely doesn't want to tell a favored industry/donor that their personal gravy train is stopping. So what do they say? They stand up and make pretty speeches about 'cutting the budget', chest beating and all, but the only thing they mention is entitlements, and even there won't go into specifics. Just vague mumbling. Why don't they mention specifics? When Paul Ryan was asked for specifics of his 'cutting' he said nothing. Crickets.....Here is a guy hailed as some saviour of the budget with his hard charging budget cuts...yet would not say what those cuts were.

Here's a start, and one I don't think you will hear from congress. Stop subsidizing the oil industry. Stop the corn subsidies. Stop honey and milk producers subsidies. Stop all those 'favored industries' subsidies. Of course our food prices will go up, but that is expected. For every action there is a reaction.
Let every church/temple apply for non-profit status. Each one, individually, and stop 'subsidising' churches with no taxes.

Actually, as an aside, I wonder where the Libertarians stand on oil/milk/honey/corn/etc...subsidies? I guess I don't remember them talking about that.

[Yossarian]

I am hardly the tax expert, but one difference I see between the likes of Romney and Lefty is income from wages earned and income from dividends and capital gains. While the income from wages is indeed progressive, the conservatives actually won a huge victory with the new tax laws which made the bush tax cuts on dividends and capital gains permanent. I see this system as indeed favoring the wealthy.

Maybe, but all it did was lower the discrimination. Equity income (e.g. dividends) is still taxed at a higher rate than interest or wages. Although Peggy is totally wrong about the way the tax system works, she did stumble on one truth- smart people know this and try to plan around it. The net effect is to have companies with too much debt and, in a classic application of the law of unintended circumstances, actually causes US companies to be too leveraged and maybe encounter bankruptcy more often.

[iris lily]

Actually, as an aside, I wonder where the Libertarians stand on oil/milk/honey/corn/etc...subsidies? I guess I don't remember them talking about that.

Since Libertarian thought wants as little big government as possible, there is no libertarian love for gooberment subsidies.

[ApatheticNoMore]

It's of course about as relevant a question as asking the anachro-syndicalist position on Obamacare, for all it matters, well it's an interesting intellectual exercise I guess ..... In actual truth anyone elected from a farm state that has people that are disproportionately benefitting from subsidies will support subsidies.

FWIW on farm subsidies: they would only make sense if they encouraged sutainable not unsustainable farming. That would not be the present subsidies.

[creaker]

It's of course about as relevant a question as asking the anachro-syndicalist position on Obamacare, for all it matters, well it's an interesting intellectual exercise I guess ..... In actual truth anyone elected from a farm state that has people that are disproportionately benefitting from subsidies will support subsidies.

FWIW on farm subsidies: they would only make sense if they encouraged sutainable not unsustainable farming. That would not be the present subsidies.

The problem with this is it creates a system where one wants government to be a bigger and bigger cookie jar so there are more cookies to fight over. Entitlements are also subsidies, just one step removed - I expect places like Walmart would be major opponents in reductions in things like food stamps - food stamps are sent out to individuals but a large portion of those are sitting in their cash registers by the end of the month.

[Rogar]

Maybe, but all it did was lower the discrimination. Equity income (e.g. dividends) is still taxed at a higher rate than interest or wages.

Not to quibble over details, but qualified dividends are actually taxed at the same rate as capital gains. which is lower than income or interest rates.

http://en.wikipedia.org/wiki/Qualified_dividend

Ordinary dividends are taxed at the same rate as income from wages and interest.

[Yossarian]

Not to quibble over details, but qualified dividends are actually taxed at the same rate as capital gains. which is lower than income or interest rates.

No quibble at all, I like it when people think about these things (I'm a law school tax professor )


But you need to think bigger. Interest and wages are deductible to corporations, so that income is only taxed once. Let's say you invest $1,000 in a business conducted through a corporation and it earns $100 the first year. If you invested that $1000 in the corp as a loan at say a 10% interest rate, the corp pays you the 100 as interest but takes a deduction for the same 100. So no tax at the corp level (100 earned - 100 interest paid = no taxable income). You receive the 100 as interest and pay tax at ordinary income rates, which is say 40%, leaving you with 60. But if you funded the corp with equity, the corp pays 40 of tax on the 100 it earned and has 60 to send to you as a dividend. If you tax dividends again at 40% like some people want to, that leaves you with $36 of the original 100 of earnings. Your effective rate of tax on your share of income is 64% (it's actually higher when you factor in state taxes). This is what pushes people to invest in a corporation as debt, and why there is a whole body of tax law that tries to address this. Small business owners can also try to game things this way by paying a salary to themselves (which is again deductible) but there is the added complexity of employment taxes in that case.

Other types of businesses, limited partnerships or LLCs, typically default into a tax regime that only taxes that income once, so you keep 60 of the 100, sometimes more depending on the type of business.

There is a currently a regime, qualified dividends, that tries to lessen this disparity (i.e. the 60 after tax versus 36 that you would otherwise get from a corporation). But even with the rate lowered to 15% you still only get $48 of the original 100, less than the 60 for other payments. In a perfect world shareholders would be taxed at their ordinary rates but get a tax credit for the taxes paid by the corporation. Some European countries have done their systems this way. Alternatively you could tax the income at a corporate level and make dividends tax-free, but that has problems from a vertical equity perspective. Or you could make dividends taxable as ordinary income and but make the dividend deductible to the paying corporation. Note, we already have a system like this in place, but it only applies to a politically favored subset of corporations (REITS).

[Yossarian]

It's of course about as relevant a question as asking the anachro-syndicalist position on...

I thought it was "anarcho-syndicalist" ...

[Rogar]

Thanks for the explanation, Yossarian. I will have to re-read it a couple of times. It brings up the issue, at least to me, that our tax laws are extremely complicated. Which makes discussion of tax reform difficult, even for politicians. People look for an easy answer to a complicated issue. (And one of my degrees is in finance).

[peggy]

No quibble at all, I like it when people think about these things (I'm a law school tax professor )


But you need to think bigger. Interest and wages are deductible to corporations, so that income is only taxed once. Let's say you invest $1,000 in a business conducted through a corporation and it earns $100 the first year. If you invested that $1000 in the corp as a loan at say a 10% interest rate, the corp pays you the 100 as interest but takes a deduction for the same 100. So no tax at the corp level (100 earned - 100 interest paid = no taxable income). You receive the 100 as interest and pay tax at ordinary income rates, which is say 40%, leaving you with 60. But if you funded the corp with equity, the corp pays 40 of tax on the 100 it earned and has 60 to send to you as a dividend. If you tax dividends again at 40% like some people want to, that leaves you with $36 of the original 100 of earnings. Your effective rate of tax on your share of income is 64% (it's actually higher when you factor in state taxes). This is what pushes people to invest in a corporation as debt, and why there is a whole body of tax law that tries to address this. Small business owners can also try to game things this way by paying a salary to themselves (which is again deductible) but there is the added complexity of employment taxes in that case.

Other types of businesses, limited partnerships or LLCs, typically default into a tax regime that only taxes that income once, so you keep 60 of the 100, sometimes more depending on the type of business.

There is a currently a regime, qualified dividends, that tries to lessen this disparity (i.e. the 60 after tax versus 36 that you would otherwise get from a corporation). But even with the rate lowered to 15% you still only get $48 of the original 100, less than the 60 for other payments. In a perfect world shareholders would be taxed at their ordinary rates but get a tax credit for the taxes paid by the corporation. Some European countries have done their systems this way. Alternatively you could tax the income at a corporate level and make dividends tax-free, but that has problems from a vertical equity perspective. Or you could make dividends taxable as ordinary income and but make the dividend deductible to the paying corporation. Note, we already have a system like this in place, but it only applies to a politically favored subset of corporations (REITS).

Well, maybe i don't understand it as well as a 'law school tax proffessor' but neither does anyone else. And that's kind of the point. Only the wealthy can afford to hire law school tax proffessors to devote their lives to tax loopholes, obscure deductions, and tax avoidance schemes. People like Romney, who took deductions on his dancing horse that equaled many people's annual salery, or more than, in many cases.

And no, it's not the 'smart' people, but the wealthy who do this.
Saying it is only the 'smart' people who game, or play the system as it should be played is the kind of arrogance displayed by people who are 'smart' (rich) enough to hire the smart people (law school tax proffessors) to do it for them. You do realize that 70%+ of the population can not do this.

I may not be a law school tax professor, but I do know that when Reagan came into office and starting fiddling with the tax codes, the great whooshing sound we all heard was the rush of wealth to the top 3%, and it hasn't stopped. I also know the wealthy have such a 'burden' of tax that Romney was reluctant to disclose his returns (as all candidates, including his own father, have traditionally done) as we 'might' see it in negative terms as to what he actually paid. And when he finally released his one return, it comes out that he refused to take some deductions just so it appears he paid a higher tax.

So where, exactly, is this great tax burden on the wealthy? Where is it? If it was so onerous, why didn't this wealthy candidate put his burden front and center? Why didn't he make it a center piece of his candidacy, instead of totally bogus, out of context sound bites? Why did he have to make up a rallying cry? Oh he promised to eliminate capitol gains tax on DAY ONE, yet refused to prove, by his own real world example, himself, as to why he would do that.

I'm sure you will comfort yourself, and dismiss me by saying, 'oh, she just wants to confiscate every one's wealth and she hates wealthy people anyway', but that's not the truth. The simple truth is, I like the way this country is, with all the comforts it affords. And so do you, and so does everyone else, including all the tea baggers with their signs saying 'keep the government out of my medicare'. But I'll be damned if I pay a penny more while people like Romney takes every obscure deduction, and tax avoidance scheme, like for dancing horses, and super wealthy oil companies, whose profits border on the obscene, get MY tax dollars in subsidy.

Paul Ryan, and the teabaggers are cowards. And the far Right are cowards, when all they can offer is grandma tightening her belt, or poor people just skipping a meal a day, or (my personal favorite) not EVERYONE actually deserves basic medical care....let's just let the insurance companies decide.

Instead of just shooting down my ideas, why not list some of your own. I have, now let's see yours. Specifically.