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18 votes (64.28%)

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s2dbaker
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July 20th, 2011 at 3:33:47 PM permalink
Quote: AZDuffman

I can say for sure that people who don't care what things cost, including taxes, never worked for their money which is why they don't mind giving it away. People who work for their money protect it. Hence your statements about wanting higher taxes makes me guess you probably made your money easy or had it handed to you.

Which would make you wrong.
Someday, joor goin' to see the name of Googie Gomez in lights and joor goin' to say to joorself, "Was that her?" and then joor goin' to answer to joorself, "That was her!" But you know somethin' mister? I was always her yuss nobody knows it! - Googie Gomez
Nareed
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July 20th, 2011 at 3:34:49 PM permalink
Quote: MathExtremist

It's just borrowing against anticipation of future income (GDP growth and corresponding tax receipts growth, in the government's case), and it happens all the time from individuals to corporations to nations.



Many businesses operate on credit, not a deficit, because their income can be seasonal. Agriculture is a good and obvious example, but also the whole garment industry. Most sales of women's clothes, for example, take place around mother's day, Christmas, and the discount sales after each season in Feb/Mar and Jul/Aug. But banks seldom loan against future income. Typically they laon against assets and demand some form of colateral. A farmer who fails to pay back laons can lose his farm.

Of course the government does not borrow from banks, not directly, but through treasury notes.

Quote:

The problem is that right now our deficit is highly immodest.



That will do for an understatement until a better one comes along :)

Quote:

And if the recent, or some would argue current, housing crisis is any indication, if the U.S. does default on its mounting debts then there will indeed be hell to pay. But how? It's not like China can foreclose and take over ownership of California. Or can it?



For starters the US Dollar will drop like a stone with a rocket attached to its back. That will set prices in the US to climb faster than light, and the prices of many commodities around the world as well, against either the Euro, gold or local currencies, if not all. Countries with currencies tied to the dollar or with large foreign reserves in US currency or US debt intruments will crash.

That's just for starters. It's unkown what will happen next or when or how things will end. Calamity is not a strong enough word, neither is disaster.
Donald Trump is a fucking criminal
thecesspit
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July 20th, 2011 at 3:44:02 PM permalink
Quote: AZDuffman

I don't see why. You have to pay sales tax no matter what you make. I see it as a way to make more careful voters. The next time a Hillary Clinton proposes a $5,000 grant for every newborn child for college more people will say, "WHOA! Who will pay for all that?!"

To me "fair" is everyone giving the same %. You are stating that "fair" has to be engineered so it is some kind of equality of outcome. That gets us into all kinds of problems. The bottom 75% paying just 5.13% shows the problem. A dirty little secret is that if "revenue enhancements" are to have an effect on the deficit they will have to be broad-based. The top 1% doesn't have the cash to make the big difference. Take 50% of their income and the next Steve Jobs or Bill Gates will say, "Who is John Galt?" instead of keeping building strong businesses.



Seems there's no convincing you of the marginal value of money. Is there a single country that has enacted a flat tax, and has it worked? A progressive system doesn't necessarily result in the tax burden being all at the top end. In fact, I'd completely agree it shouldn't. But making a flat tax on every dollar earned is a lousy way to encourage people into productive work.

Oh, look Sweden's tax rate is pretty flat, and they have a large sales/consumption tax. :)
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
AZDuffman
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July 20th, 2011 at 3:52:54 PM permalink
Quote: thecesspit

Seems there's no convincing you of the marginal value of money. Is there a single country that has enacted a flat tax, and has it worked? A progressive system doesn't necessarily result in the tax burden being all at the top end. In fact, I'd completely agree it shouldn't. But making a flat tax on every dollar earned is a lousy way to encourage people into productive work.

Oh, look Sweden's tax rate is pretty flat, and they have a large sales/consumption tax. :)



I completely understand the marginal value of money. I just don't accept that taxing the marginal dollar at a different rate makes it more "fair."

Seems you agree taking more money form people is "a lousy way to encourage productive people into work" which would mean you agree taking the highest marginal dollar at the highest rate kills the economy?

The best way to "encourage productive people into work" is to limit welfare and other handouts. An empty stomach encourages work.
All animals are equal, but some are more equal than others
AZDuffman
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July 20th, 2011 at 3:55:06 PM permalink
Quote: thecesspit

Someone earning 16k a year ($8/hour, 40 hours per week, 50 weeks a year) will pay $1,105 assuming no other credits. That suggests that their are other credits that i didn't look at or that the lowest earners are paying -something- (6.91% of earnings in this case).



Looks as you are missing the Earned Income Credit. At $16K/yr a person should qualify, espically if they have kids. It gives an effective negative tax rate to many as it is refundable.
All animals are equal, but some are more equal than others
AZDuffman
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July 20th, 2011 at 3:57:34 PM permalink
Quote: s2dbaker

Which would make you wrong.



Well, be aware that you come off sounding that way. And in any case bragging about how well off you are is considered rude by most folks no matter where you are.
All animals are equal, but some are more equal than others
s2dbaker
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July 20th, 2011 at 4:02:57 PM permalink
Quote: AZDuffman

Well, be aware that you come off sounding that way. And in any case bragging about how well off you are is considered rude by most folks no matter where you are.

Your sensibilities are duly noted. I apologize if I gave you the vapors.
Someday, joor goin' to see the name of Googie Gomez in lights and joor goin' to say to joorself, "Was that her?" and then joor goin' to answer to joorself, "That was her!" But you know somethin' mister? I was always her yuss nobody knows it! - Googie Gomez
thecesspit
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July 20th, 2011 at 4:08:58 PM permalink
Quote: AZDuffman

I completely understand the marginal value of money. I just don't accept that taxing the marginal dollar at a different rate makes it more "fair."



Fair enough.

Quote:

Seems you agree taking more money form people is "a lousy way to encourage productive people into work" which would mean you agree taking the highest marginal dollar at the highest rate kills the economy?



No, I wouldn't. As the marginal value of the dollar taken is less at the top level than at the lower level. At some point, yes, higher taxes at the top level will slow down the economy. The US shouldn't be in that position. It may be such that the steepness of that progression is far too high. That doesn't mean the progressive taxation system is broken per se. Just the implementation of it.

More over, giving the low paid an extra dollar stimulates the economy more than Bill Gates getting that extra dollar. The dollar is much more likely to spent, quickly, into the economy (and you get that nice accelaration of money).

So if your goal is to stimulate the economy (or stop it slowing down) then more money at the lower level would be the way forward. THE OPPOSITE of those who suggest only the high earners can save the economy by their spending (I'd theorise, that during a boom time that you'd be better to shallow of the progression, rather than during a recession, as the high paid are more likely to save their income in case of disaster, so any tax break aimed at the top earners is going to have lesser effect).

Quote:

The best way to "encourage productive people into work" is to limit welfare and other handouts. An empty stomach encourages work.



If you'd prefer to use the stick rather than the carrot. That said, if the US has to use masses of illegal immigrant to do it's harvest work, while there is a 9% unemployment rate, something's broken (probably the expectation of the minimum quality of life for those in the US)
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
thecesspit
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July 20th, 2011 at 4:15:24 PM permalink
Quote: AZDuffman

Looks as you are missing the Earned Income Credit. At $16K/yr a person should qualify, espically if they have kids. It gives an effective negative tax rate to many as it is refundable.



The tax calculators I'm looking at won't add that in... rather annoying. But noted, that'd be the big gap I'm seeing.
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
AZDuffman
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July 20th, 2011 at 4:34:44 PM permalink
Quote: thecesspit

The tax calculators I'm looking at won't add that in... rather annoying. But noted, that'd be the big gap I'm seeing.



You don't even want to know some of what I have seen with that credit. Scary. Lets say it should be the busiest two weeks of the year for Rick and Chumlee yet will never make the show.
All animals are equal, but some are more equal than others
AZDuffman
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July 20th, 2011 at 4:42:06 PM permalink
Quote: thecesspit


No, I wouldn't. As the marginal value of the dollar taken is less at the top level than at the lower level. At some point, yes, higher taxes at the top level will slow down the economy. The US shouldn't be in that position. It may be such that the steepness of that progression is far too high. That doesn't mean the progressive taxation system is broken per se. Just the implementation of it.

More over, giving the low paid an extra dollar stimulates the economy more than Bill Gates getting that extra dollar. The dollar is much more likely to spent, quickly, into the economy (and you get that nice accelaration of money).

So if your goal is to stimulate the economy (or stop it slowing down) then more money at the lower level would be the way forward. THE OPPOSITE of those who suggest only the high earners can save the economy by their spending (I'd theorise, that during a boom time that you'd be better to shallow of the progression, rather than during a recession, as the high paid are more likely to save their income in case of disaster, so any tax break aimed at the top earners is going to have lesser effect).



The high marginal dollar in the hands of the "rich guy" will have a better chance of going to investment. He will expand his business. Hire people. This is why the 1980s boomed. If you reduce the "rich guy's" after tax income by 5%, fewer businesses will open or expand. That is what you are seeing now. Obama simply cannot hide how excited he is to raise taxes. So people and businesses are sitting on loads of cash.



Quote:

If you'd prefer to use the stick rather than the carrot. That said, if the US has to use masses of illegal immigrant to do it's harvest work, while there is a 9% unemployment rate, something's broken (probably the expectation of the minimum quality of life for those in the US)



Americans do not know what poverty is. And yes, people need the stick. Welfare reform in 1996 showed that.
All animals are equal, but some are more equal than others
MathExtremist
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July 20th, 2011 at 4:58:30 PM permalink
Quote: AZDuffman

I don't see why. You have to pay sales tax no matter what you make.


And sales taxes are terribly regressive too. The example is understandable if you favor regressive tax structures, but I don't. I think the optimal tax structure is a progressive one guided by utility theory.
Quote:

To me "fair" is everyone giving the same %. You are stating that "fair" has to be engineered so it is some kind of equality of outcome. That gets us into all kinds of problems. The bottom 75% paying just 5.13% shows the problem. A dirty little secret is that if "revenue enhancements" are to have an effect on the deficit they will have to be broad-based. The top 1% doesn't have the cash to make the big difference. Take 50% of their income and the next Steve Jobs or Bill Gates will say, "Who is John Galt?" instead of keeping building strong businesses.


First off, a tax scheme directed toward "equality of outcome" would mean we'd all have the same after-tax income. That's never going to happen, nor should it, and that's not what I was suggesting. I was suggesting that taxes be structured to maximize the aggregate after-tax utility.

Look at it this way. We all agree that consumption drives the economy, so an optimal fiscal policy should encourage consumption (within means, not driven by unwise debt). So let's take two people, B and C. B makes $25,000 and C makes $2,500,000. And then let's say there are only 500 Bs for every C (the true ratio is much higher but I'm being deliberately conservative to make a point). B's cost of living is $20,000 while C's cost of living is $500,000. Everything above cost of living is used in either discretionary spending or savings/investments. If you impose a 20% flat tax on every dollar, B now has $0 in available discretionary funds while C has $1,500,000. Is C going to spend all of that? Of course not -- trickle-down economics has been debunked and many economic studies show that high-income taxpayers save a much greater percentage of their discretionary funds than spend it. Let's suppose that C saves 33%. That puts $1,000,000 non-debt spending into the economy from C's spending and $0 from all the Bs.. On the other hand, suppose you imposed a 10% tax on B (which is much higher than reality) and a 30% tax on C. B now has $2500 in discretionary funds, which is almost certainly going to be 100% spent if current low-income savings trends are any indication. C, on the other hand, has $1,250,000 in discretionary funds. That won't affect C's savings rate so C spends just over $800,000 (rounded). In total, 500 Bs = $1,250,000, plus $800,000 from C = over $2,000,000 non-debt spending, more than twice the consumer spending than under a flat 20% tax regimen.

There is no way that a flat tax can compete with a properly-crafted progressive one for encouraging economic growth. Favoring a flat tax only makes sense if you want to kill the economy, but there's nothing fair about that.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
AZDuffman
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July 20th, 2011 at 5:42:02 PM permalink
Quote: MathExtremist


So let's take two people, B and C. B makes $25,000 and C makes $2,500,000. And then let's say there are only 500 Bs for every C (the true ratio is much higher but I'm being deliberately conservative to make a point). B's cost of living is $20,000 while C's cost of living is $500,000. Everything above cost of living is used in either discretionary spending or savings/investments. If you impose a 20% flat tax on every dollar, B now has $0 in available discretionary funds while C has $1,500,000. Is C going to spend all of that? Of course not -- trickle-down economics has been debunked and many economic studies show that high-income taxpayers save a much greater percentage of their discretionary funds than spend it.



"Trickle down" has not been "debunked," this is the first problem. In fact, trickle-down was proven when you saw layoffs in 1991-2 after a top-marginal rate increase. Remember the "jobless recovery?" Layoffs in manufacturing of boats and other luxury products? In any case, what do you think "C" is going to do with their money, put it in a matress? Some WAM may be kept in the house, but that money will go to the bank and be available for loan or else be invested, or some combination of both. "Saving" money should not be a bad thing.



Quote:

There is no way that a flat tax can compete with a properly-crafted progressive one for encouraging economic growth. Favoring a flat tax only makes sense if you want to kill the economy, but there's nothing fair about that.



Flat taxes have revived the economy in several places and there is nothing to suggest they retard economic growth. Until you can explain why someone would work and invest more when they pay a 31% tax than a 15% tax you will be unbable to convince me a flat tax "kills the economy."

Put another way, why are US States with a progressive income tax generally more low-growth than states without?
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SOOPOO
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July 20th, 2011 at 5:46:05 PM permalink
Quote: AZDuffman

The high marginal dollar in the hands of the "rich guy" will have a better chance of going to investment.



I tend to disagree. My extra dollars go into the bank. The poorer person's extra dollars are more likely to go back into the local economy in the form of a produst purchase. In general, though, AZ, I agree with your general concept. If marginal tax rates on the wealthy are too high that is a disincentive to work harder and produce more, as each extra hour of work is worth less than the previous hour.
MathExtremist
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July 20th, 2011 at 6:42:50 PM permalink
Quote: SOOPOO

If marginal tax rates on the wealthy are too high that is a disincentive to work harder and produce more, as each extra hour of work is worth less than the previous hour.


Do you know any wealthy people who get paid by the hour? Except for consultants (like me) and attorneys, wealthy people don't draw wages. It's not like an attorney who bills out at $500 is going to say "okay, my income has just hit the 35% tax bracket, time to cut back."

I agree that if rates are too high -- on anyone -- that it has a negative effect on efficiency. All taxes are economic friction. But I don't think anyone's arguing that we should make taxes too high. But right now it's pretty clear that taxes aren't high enough, certainly not to pay for everything we've bought.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
MathExtremist
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July 20th, 2011 at 7:16:13 PM permalink
Quote: AZDuffman

"Trickle down" has not been "debunked," this is the first problem.


The only problem with supply-side economics is that naive economic conservatives still believe it's effective.
http://www.nytimes.com/2007/04/12/business/12scene.html
http://tpmcafe.talkingpointsmemo.com/2008/08/26/trickle_downrip/
I could keep going, but consider that since 1981, GOP administrations account for 20 out of 28 years (Census numbers go through 2009) but only 17% of the growth in median household income. The other 9 years (Clinton + Obama's 1st year) account for 83% of that growth. Edit: I chose median household income because that was the basic premise of supply-side economics: that cutting taxes on the wealthy would increase the income of the middle class. It didn't happen. Look at the numbers yourself:

http://www.census.gov/hhes/www/income/data/historical/household/H09AR_2009.xls, cells D7:D35.

And saving money isn't a bad thing. But taxing the middle-class so much that only wealthy people have money to save, is.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
thecesspit
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July 20th, 2011 at 9:25:39 PM permalink
Do US citizens get a tax rebate for investments in pensions, or other tax smart savings vehicles?

In the UK and Canada they do, which means that a tax cut will have little effect on long term, tax smart investments. It may have a lot of effect on short term consumer spending, rather than capital growth.

Thatcher tried supplied side economics. Thatcher also saw a large reduction in the UK's industrial base. I don't contend that these things are linked, but I'm hardly convinced about 'trickle down'.

How about 'trickle up' (the acceleration of money where an influx of spending creates demand, markets and opportunity for business)? That would seem to be just as valid to me (if not more so) and there's good evidence to show that a dollar in the hands of the lower waged is actually $2 of spending in the local economy.
"Then you can admire the real gambler, who has neither eaten, slept, thought nor lived, he has so smarted under the scourge of his martingale, so suffered on the rack of his desire for a coup at trente-et-quarante" - Honore de Balzac, 1829
MathExtremist
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July 20th, 2011 at 10:23:42 PM permalink
Quote: thecesspit

How about 'trickle up' (the acceleration of money where an influx of spending creates demand, markets and opportunity for business)? That would seem to be just as valid to me (if not more so) and there's good evidence to show that a dollar in the hands of the lower waged is actually $2 of spending in the local economy.


Yes, that's the Keynesian money multiplier. It's been an accurate model more often than otherwise. Indeed, all over the world, demand-side economic theory in general has proven to be more accurate and effective than supply-side theory. Proponents of supply-side theory and/or flat-tax structures often point to countries like Russia and their 2001 economic turnaround after instituting a flat tax, but fail to note that the real reason for Russia's turnaround is that they actually started enforcing tax collections. We don't have a massive tax evasion problem in the US like Russia did in the 1990s so we can't fall back on that one. I maintain that in today's economy, given the fragile beginnings of a recovery, instituting another misbegotten round of supply-side policy would push us back into recession.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
boymimbo
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July 20th, 2011 at 11:10:09 PM permalink
There is no data available from the top 2 percent. I presented the top 1 percent. Yes, the top one percent pay more tax revenue. It is clear however, from that same data that the income level for the top 1 percent has risen, thus showing that the rich get richer.

I would happily produce a chart for the top 5 percent that shows a similar result.

What other simple, straight forward questions do you have? The chart clearly shows that the top 1 percent of income paid a tax rate of 23.27 percent. The chart provided directly from the IRS web site, not FoxNews or MSNBC, breaks out the income by the percentage tax paid which supports my statement that the tax rate is divided between the top effective tax rate of 35 percent and the capital gains rate of 15 percent. It's all there.

Politically, I support a measured approach of reducing spending and raising revenue.
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boymimbo
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July 20th, 2011 at 11:11:23 PM permalink
Quote: thecesspit

Do US citizens get a tax rebate for investments in pensions, or other tax smart savings vehicles?

In the UK and Canada they do, which means that a tax cut will have little effect on long term, tax smart investments. It may have a lot of effect on short term consumer spending, rather than capital growth.



The major equivalent to the RRSP in Canada is the 401(k) which is tax deferred savings.
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boymimbo
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July 20th, 2011 at 11:30:07 PM permalink
Quote: thecesspit

The tax calculators I'm looking at won't add that in... rather annoying. But noted, that'd be the big gap I'm seeing.



The Earned income credit is completely phased out at 40,362 for 2 children for single, head of household, and 45,362 for 2 children of married filed jointly returns. At 40K earned income, the EIC is worth $73 for the single and about 1,100 for the married filed jointly. Not much effect on the taxes paid.
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Paradigm
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July 21st, 2011 at 12:13:22 AM permalink
I think in theory this concept of "too high a marginal tax rate is a disincentive" makes sense, but it is not what I have observed on a case by case basis.

I am a CPA and have clients all over the income spectrum. While my high income earners certainly complain about their tax load, in 22 years of being in practice I have yet to have one of my business owner clients say that the tax rate is a consideration in whether or not they expand their business and grow profits. But I will also say that I have never practiced in an timeframe where the marginal tax rate routinely got above 50% between federal and state rates, but we do get very close to that in California right now. I do think if you take tax rates to a point where the amount of tax paid on a marginal dollar was more than the individual/business retained, that may be the tipping point where clients do say "it just isn't worth it".

However, when you start to talk about uncertain future changes in regulation or uncertainty with regard to costs for employee healthcare, those are the types of items that have businesses sitting on their hands and waiting to see what gets worked out before moving forward with hiring, expansion, etc. Take away the uncertainty, tell us the rules, and then everyone can decide how they want to move forward.

Employees are hard enough for most businesses as it is. When you start adding on additional costs with hiring (i.e. forced medical coverage or high workers compensation costs, etc.) I have seen businesses say "we would like to expand the business, but hiring another 10 employees puts us under different medical insurance or retirement or other rules that make it simply not worth it". Those are comments I have heard from small business owners.

I think a flat tax system will not happen because ultimately it takes a powerful social tool out of the hands of the politicians. The tax code allows politicians and the government a very significant way to influence social behavior by using it to provide incentives to do certain things and disincentives to do others.

For example, home ownership is a evidently a better option for everyone than renting (at least according to the tax code). So they have given us a tax deduction for mortgage interest and real estate taxes. Why doesn't a renter get a tax deduction for rent paid? Both cash outflows provide a place for the taxpayer to live but one is tax preferred to the other.

Having children is a good thing, evidently, because we get additional tax deductions and credits if you have children that others that chose not to have children do not get. Again, one behavioral activity is preferred to the other under the tax code.

Now we can argue a lot about whether home ownership, children, or other personal or corporate behaviors should or should not be given this type of preferred treatment, but the fact is that politicians are never going to give up the power to influence how we live our lives by giving in to a flat tax system. And I don't care which side of the aisle we are talking about.

There are also a host of problems with implementing a flat tax system from a practical standpoint. The biggest being that we have all made significant long term commitments both financially and otherwise based on the current system. If you go to a flat tax tomorrow, what happens to the price of your home without the mortgage interest and real estate tax deduction? It goes down because the after tax cost of paying the mortgage and real estate taxes just went up dramatically. What happens to charitable organizations when their donors no longer get a tax deduction for contributions? Their ability to serve their causes goes way down. What happens to states and municipalities cost of bonds when the interest earned by investors on their muni bonds are now subject to tax? More importantly what happens to the value of the bonds being held by investors currently.....suddenly they are worth a lot less.

These kinds of massive swings in the value of assets is only avoided if we do a flat tax with exceptions. So we get proposals to have a flat tax but still allow the mortgage deduction and charitable deductions and this and that. Pretty soon this new simple flat tax system looks a lot like the system we have now as each lobbying group gets the politicians to give their particular industry or cause an exlcusion under the new simple system.

I don't pretend to know the answer here, but what I do believe is the longer we have continued uncertainty with regard to the debt ceiling, tax rates, health insurance burdens placed on employers and unpredictable changes in business regulation, the longer it will take to get this country's economy growing at a healthy rate again.
rxwine
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July 21st, 2011 at 3:21:47 AM permalink
Quote: MathExtremist

But I don't think anyone's arguing that we should make taxes too high. But right now it's pretty clear that taxes aren't high enough, certainly not to pay for everything we've bought.



I think you've hit on something I've never heard from any politician. Taxes should be flexible. One size fits all is good for things that are static and unchanging. An economy is one of the most dynamic things there is. It makes more sense to me to not get stuck in a particular range. There are both expected and unexpected events that drive the economy.
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AZDuffman
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July 21st, 2011 at 3:23:53 AM permalink
Quote: boymimbo

The Earned income credit is completely phased out at 40,362 for 2 children for single, head of household, and 45,362 for 2 children of married filed jointly returns. At 40K earned income, the EIC is worth $73 for the single and about 1,100 for the married filed jointly. Not much effect on the taxes paid.



At lower levels, say the mid $20Ks, the EIC can be worth up to $5,000 and a huge effect on taxes paid. Someone with 2 kids and earning in the high teens gets a rebate, IOW, their tax rate is negative. I used to see people who made $17K/yr walk out with $5,000 tax refunds.
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AZDuffman
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July 21st, 2011 at 3:28:10 AM permalink
Quote: MathExtremist

Do you know any wealthy people who get paid by the hour? Except for consultants (like me) and attorneys, wealthy people don't draw wages. It's not like an attorney who bills out at $500 is going to say "okay, my income has just hit the 35% tax bracket, time to cut back."



It doesn't matter if they get paid hourly or not. At some point they see the increase in their pay and decide it is better to go home and relax. Or in the case of investment, they get told their after-tax rate of return went from 10% to 5% and they decide it is not worth the risk. I just put it into "extra hour" terms for simplicity sake.

BTW: I have had low-level employees who would not work the extra hour because "it wasn't worth it." If you think high marginal rates do not hurt economic activity you are fooling yourself.
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SOOPOO
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July 21st, 2011 at 6:26:47 AM permalink
Quote: thecesspit

Do US citizens get a tax rebate for investments in pensions, or other tax smart savings vehicles?



Sort of. If I 'earn' 200k per year, but my company has a fully funded pension plan, I can put away (not sure of exact number, it changes year to year) 43k per year, and since I am 50 or over, and extra 6k per year, so when I file my tax return my 'income' will be listed as $151k, not 200k. There is an even better plan, called a "New Comparability Plan", that lets higher income earners put away even more. So someone 'making' 500k may only show 320k on their tax return. This is one 'loophole' that might be closed by the deal the 'gang of six' has proposed.
boymimbo
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July 21st, 2011 at 7:21:35 AM permalink
@paradigm: very nice post.
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MathExtremist
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July 21st, 2011 at 7:33:46 AM permalink
Quote: AZDuffman

It doesn't matter if they get paid hourly or not. At some point they see the increase in their pay and decide it is better to go home and relax. Or in the case of investment, they get told their after-tax rate of return went from 10% to 5% and they decide it is not worth the risk. I just put it into "extra hour" terms for simplicity sake.

BTW: I have had low-level employees who would not work the extra hour because "it wasn't worth it." If you think high marginal rates do not hurt economic activity you are fooling yourself.


Nobody's arguing that high marginal rates do not hurt economic activity. All taxes hurt economic activity, period. The argument, and this has been empirically demonstrated over and over again, is that a single marginal rate for all earners hurts economic activity *more than* unequal marginal rates which correlate with income. One sensible economic goal of a well-crafted tax structure is to maximize economic activity for a given revenue level, and history has shown that economic output is higher with a progressive system where the total tax is X than with a single-rate tax system where the total tax is X. I'm not making an argument between whether total taxes should be higher or lower -- right now, given the existing debt, it's pretty clear they should be higher. But my point is that if you've identified an overall level of tax revenue that the government needs to run itself, and now you're going about collecting that revenue, then you have lots of ways to distribute that tax burden across the population. If you distribute the tax burden such that the wealthy pay a larger percentage of income than the middle-class, the economy will grow at a faster rate than if you distribute the tax burden such that everyone pays an equal percentage of income. The only time it makes sense to dramatically cut taxes on the wealthy is if you *want* the economy to slow down, such as in an inflationary cycle. And that's another reason why taxes shouldn't be flat -- so fiscal policy has more levers with which to control the economy.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
thecesspit
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July 21st, 2011 at 7:40:35 AM permalink
Quote: AZDuffman

It doesn't matter if they get paid hourly or not. At some point they see the increase in their pay and decide it is better to go home and relax. Or in the case of investment, they get told their after-tax rate of return went from 10% to 5% and they decide it is not worth the risk. I just put it into "extra hour" terms for simplicity sake.

BTW: I have had low-level employees who would not work the extra hour because "it wasn't worth it." If you think high marginal rates do not hurt economic activity you are fooling yourself.



Was the refusal to work based on the 20 % tax rate or the ten dollars of wages?
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SOOPOO
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July 21st, 2011 at 7:41:18 AM permalink
ME- as you know 'the wealthy already pay a larger percentage than the middle class'. Just how much more is what society has to decide on. A successful man in the typical 4 person household earning a million a year pays more taxes than 100 4 person households making 40k per year. (Federal taxes)
MathExtremist
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July 21st, 2011 at 7:48:54 AM permalink
Quote: SOOPOO

ME- as you know 'the wealthy already pay a larger percentage than the middle class'. Just how much more is what society has to decide on. A successful man in the typical 4 person household earning a million a year pays more taxes than 100 4 person households making 40k per year. (Federal taxes)


Yes, I agree, but I think the decision should be based on the overall goal of maximizing economic output, not making the tax rates "fair" for everyone at the expense of economic output.
"In my own case, when it seemed to me after a long illness that death was close at hand, I found no little solace in playing constantly at dice." -- Girolamo Cardano, 1563
Paradigm
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July 21st, 2011 at 7:51:42 AM permalink
I need to understand more about this "low-level" employee. When I think of a low level employee, I am imagining someone making an hourly wage of $12-$15 per hour. Hard for me to fathom that someone in that range of income is not working an extra hour due to the income tax consequences of the extra earnings as they should be in a low tax bracket, but I may be missing something. Even if the extra earnings took them from a 15% bracket to a 25% bracket, did they really decide not to work for the extra hour due to the $1.20 to $1.50 difference in taxes?
boymimbo
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July 21st, 2011 at 9:32:46 AM permalink
I'd like to add a couple of more cents here.

I have the choice to live and work in Canada or the United States. My job is transferrable, and I do alot of my work in the United States now via a Visa where I can have dual intent. Further, my wife is American as well, and I live pretty much 10 minutes away from the border between the two countries.

I would get equal pay in both countries, but would be subject to different tax rates, deductions and Social Security. I choose to live in Canada. Why?

(1) The United States is 13 trillion plus in debt and has no plan in place to reduce this at this time.
(2) Obama Care does not provide an adequate choice should I lose my job. The cost of medicaid/medicare when I retire will be too expensive I fear.
(3) Though I realize that the tax rate is much less in the United States at my income level, the truth is that I don't require that extra 5 or extra 6 percent of income.
(4) I generally like Canada more.

I generally work around a bunch of folk who make a fair bit of money, and I don't hear any of them complaining about the amount of taxes they pay. And I certainly don't think that a 2 point increase in income taxes overall will force people to change their work behaviour.

And as for the earned income credit, it maxes out between 12,550 and 16,450 for a single parent with two children. If a single parent is not working at all, they receive no credit. At 12,550 with 2 children you would get the full $5,036 credit. It's supposed to be an anti poverty measure. However, given that most of these people are unskilled, to get to 12,550 requires part time earnings of a 1,050 a month or about 142 hours at the minimum wage of 7.25, which is 30 hours a week. For me, if someone is working 30 hours a week at minimum wage and has two kids, I don't mind the government handing them out an extra $5K. This money would probably go to the children. Of course there will be abuse -- alot of it. But I am sure that these single parents would prefer to work at a job that pays them 50K and have no earned income credit. They just are unskilled. Lots of people are. And some are smart enough to abuse the system and prefer to do so.

Call me a liberal, but I would rather see these kids raised properly then continue the cycle of low income poverty. And if the 20K of taxes I pay a year (in the US) goes to support an impoverished child, I'm all for that.
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buzzpaff
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July 21st, 2011 at 10:17:25 AM permalink
(4) I generally like Canada more.

Shouldn't that be number 1 ?
thecesspit
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July 21st, 2011 at 11:13:59 AM permalink
Quote: buzzpaff

(4) I generally like Canada more.

Shouldn't that be number 1 ?



Should be number 1 and number 4.

If the current government can get the national debt well under control, I see good things for Canada's economy going forward. I also like the 1.05 exchange rate right now when I travel (though this may cause problems going onwards).

The more conservative members of the board will tell me that it's all downhill due to the high taxes and socialized health care up here. <shrug>
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AZDuffman
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July 21st, 2011 at 8:43:28 PM permalink
Quote: boymimbo

And as for the earned income credit, it maxes out between 12,550 and 16,450 for a single parent with two children. If a single parent is not working at all, they receive no credit. At 12,550 with 2 children you would get the full $5,036 credit. It's supposed to be an anti poverty measure. However, given that most of these people are unskilled, to get to 12,550 requires part time earnings of a 1,050 a month or about 142 hours at the minimum wage of 7.25, which is 30 hours a week. For me, if someone is working 30 hours a week at minimum wage and has two kids, I don't mind the government handing them out an extra $5K. This money would probably go to the children. Of course there will be abuse -- alot of it. But I am sure that these single parents would prefer to work at a job that pays them 50K and have no earned income credit. They just are unskilled. Lots of people are. And some are smart enough to abuse the system and prefer to do so.

Call me a liberal, but I would rather see these kids raised properly then continue the cycle of low income poverty. And if the 20K of taxes I pay a year (in the US) goes to support an impoverished child, I'm all for that.



I used to see the abuse of the EIC when I did taxes. In fact, the level of people you had to deal with was the reason I didn't pursue an income tax prep franchise. They don't understand how to use a checking accout but they sure knew how to max out EIC. The running joke was that it was "rent a kid" to get their money. As to most "going to the kids," uh-uh. First, they never had the money to pay upfornt So they paid at least $80 to just have the prep fee deducted from their refund. Most couldn't wait for their refund so they paid big (800% or so APR, once I saw > 1,000%) to get their money the next day. Then they never had bank accounts so they went to the check cashing store to get their money. Then they went to Rent-A-Center for new furniture, until they had to send it back.

Yes, some did the right thing, most not. And one was crying the blues because she worked more hours and got less EIC. (So much for taxes having no effect on motivation to earn!) A better way to "help kids" would be to get them to keep their legs together until they were married or/and could support them. But in the USA we have a poverty-industrial complex many times bigger than any military-industrial complex.
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AZDuffman
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July 21st, 2011 at 8:47:02 PM permalink
Quote: Paradigm

I need to understand more about this "low-level" employee. When I think of a low level employee, I am imagining someone making an hourly wage of $12-$15 per hour. Hard for me to fathom that someone in that range of income is not working an extra hour due to the income tax consequences of the extra earnings as they should be in a low tax bracket, but I may be missing something. Even if the extra earnings took them from a 15% bracket to a 25% bracket, did they really decide not to work for the extra hour due to the $1.20 to $1.50 difference in taxes?



They don't calculate the rate. They do realize more is coming out of their pay and say "forget it" when you ask them to work. See my other post for an example.

Occasionally even low-level pay can be taxed at the highest marginal rate. Mostly this happens with bonuses paid on a seperate paycheck. And most of the time it is females who have the biggest gripe about it.
All animals are equal, but some are more equal than others
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