Taxes and Tax Breaks

[Cablemender]

This was brought up in another thread, and it's a good question to ponder, IMO. Maybe we can grind it up in a seperate thread.

BTW: I just heard that the GAO has just released a report that has determined that something like two-thirds of the recent tax cuts has most benefitted the top one percent of our population. Comments? RNS?

I think there is a lot of room for bending and twisting the data from something like that, because most people don't take the time to think that the top 1% of wage earners pay some 17-21% of all taxes to begin with. To me, this is like a short guy and a tall guy going on a diet, losing the same 10 pounds each, then claiming the short guy is doing better because he's losing more pounds per foot (of height). In orde to piece it together into something meaningful, it's important to look at who pays what to begin with, then from that figure out who should or should not get the breaks. Without that, it's comparing apples to oranges.

Here is a link to some data on this stuff, the link it to a page on Rush's website. There are a couple others on the main page, including an IRS spreadsheet that will show you the hard numbers. But it's worth a read to see how these figures pan out.

www.rushlimbaugh.com/home/menu/top_50__of_wage_earners_pay_96_09__of_income_taxes.guest.html

Gentlemen.... start your calculators!

[stetto]

This topic is running at the top of several BBs right now, and responses almost seem patented across the board. My ignorance on the subject keeps me from posting any contributory info, but I warn you guys that I intend to cull some of your posts on this topic (RetNav and Tom esp.) to post elsewhere...With your permission and full credit, of course...

[RetNavySuppo]

I read Tom's link and found it to be the usual Republican tactic - start out with something that is true and then embellish it with fertilizer.

Yes, the rich do pay more taxes than lower income levels. Duh! They make more, if not most, of the money. However, in this current discussion, that is only the beginning of the story.

Let's look at the question at hand. Did the rich benefit more (or put another way - receive more preferential treatment) from the GWB tax cuts than the lower income levels?

Let's see how the tax cuts were sold. They were advertised as tax relief for EVERYONE and as an economic stimulus for the economy. As an economic stimulus, it was an expensive dud, especially when you compare the performance of the economy in previous recovery years without a tax cut. However, this is grist for another thread.

Did the tax cuts benefit EVERYONE? Yes, but only in the short-term. We can debate the merits of a tax cut that was actually just the creation of additional debt. However, implicit in the question of whether the tax cuts benefitted everyone is the question of whether one income level was favored over the others in these tax cuts.

Republicans argue that since the rich pay more in taxes, it is only fair that they receive more money back in a tax cut. That makes sense up to a certain point. For example, if Tom pays $10,000 in taxes and I pay $100,000 in taxes, then it is fair to conclude that the tax cut, IF EVENLY APPLIED, should garner me a tax refund that is 10 times higher than Tom's.

The Republican tax cut did apply a straight percentage tax rate cut to tax rates for all income brackets. However, if that was all it did, I could accept that on a "fairness" basis. Had the Republicans stopped at that, the Democrats would have had a much weaker argument against the tax cuts. But that's not where the Republicans stopped, now was it? No, it wasn't. The Republicans expanded the tax cut to give preferential tax cuts to those categories of income that more likely to enjoyed by higher income levels, i.e., capital gains and dividends.

Wait, Republicans will tell you that everyone, rich or poor, can have dividends or capital gains and the tax treatment thereof will be equal. In fact, lower income level taxpayers will pay lower tax rates on capital gains than richer folk and these poorer folk will also pay no taxes on dividends. Gee, that's right. But like most Republican propaganda, it sounds good until you look closer.

The following reference is to a chart that compares the distribution of dividend and capital gain income to marginal tax rate groups.

www.taxpolicycenter.org/TaxModel/tmdb/TMTemplate.cfm?DocID=456&topic2ID=40&topic3ID=43&DocTypeID=7

There are three things that should be clear to you from this chart. First, the propensity to have dividend and capital gain income rises with income level.

Second, most of the dividend income and capital gain income is skewed to the upper income levels. For instance, the top 4.8% of taxpayers receive 56% of the dividend income and 79.3% of the capital gains. I think it is clear to everyone as to who benefits the most from dividends and capitals gains.

Third, pull out a copy of your Tax Rate Schedule (which you all should have) and look at the income bands that correspond to the marginal tax rates listed in my reference. If you are halfway perceptive, you will also notice that as income rises, the PROPORTION of total income attributable to capital gains and dividend income also rises.

Now let's go back to the GWB tax cut. Which type of income received the most generous tax cuts? Was it earned income (as per the IRS meaning, i.e., wages and salaries)? Well, taxpayers of all income levels received the same percentage tax cut here - I believe the last cut was something like 10%. Was it dividends and capital gains? Capital gains taxes were cut 33.3% (from 20% to 15%) and the tax on dividends was cut 100% (from "ordinary income" tax rates to ZERO).

So let's pull it all together. The type of income enjoyed by most taxpayers (earned income) did receive the same tax cut, regardless of income level. However, the types of income (dividends and capital gains) that accrue more heavily to upper income levels and which constitute a higher percentage of the income of the more wealthy, received a much more generous tax cut.

So if you asking if the rich benefitted DISPROPORTIONATELY from the GWB tax cuts, the answer is obvious. You bet your sweet bippy.

[Cablemender]

If I understand you correctly, RNS, you are simply saying that people with higher incomes are more likely to invest their money, and therefore profit from it more so than the everyday, 9-5 Joe. I don't know anyone arguing with that. There is no law that says wealthier folks can't take the same risks with their money, although in chunkier proportions than the rest. This would be the same as if gasoline went on sale, then pointing out that the "rich" people driving big cars or SUVs got a greater opportunity to benefit because their gas tanks are bigger, or they own more vehicles. What does that matter? To be fair, do we sell cheaper gas to people in Toyota Corrolas and Ford Probes?

Another thing is that the vast amounts of that capital gain tax savings by the wealthiest citizens is far more likely to get invested back into the system, which puts more capital on the table for businesses to expand, and makes more money available for things like loans and mortgages. It doesn't do any good to have a building boom if people can't qualify for a mortgage at a decent rate. All these things work in concert.

The other aspects of the tax breaks, such as elimination of the marriage penalty and child tax credits don't really factor into the top tax brackets only, but they seldom get much mention because the people in the lowest income brackets DO see the largest effect from them

Maybe my outlook is simplified, but I see little to gain in the long term by shifting the tax burden upward without any end game. Right now, over 98% of the entire federal tax collected comes from people making over $26,000 (2001 figures). The top 1%, $293,000 and up, pay almost 20% of that total. So the question is, who SHOULD get the tax breaks?

It always seems to come down to a question of either the people who pay it most, benefit from the breaks most, and somehow don't need or deserve it; or the people who pay the least, or none to begin with, somehow "ought" to get more breaks because they.. deserve it, or can benefit in more direct ways or something. I'm not for a system that doesn't collect anything from someone, then wants to supplement that with even more benefit at the cost of others having to foot even more of the bill. We've seen similar problems in the past with the way entitlement programs like welfare and unemplyment have made it such a sweet deal to not go get a job that many people made staying on such a system their life's avocation.

Maybe if we had a flat tax rate or one of the consumption type taxes it would eliminate some of the heartburn with the system we have now. I don't know what the right answer is, except that maybe if Congress and the President would tighten up on the spending for a few years it might make these kinds of breaks seem less impacting. I don't like them at the cost of soaring deficit spending, but at the same time I look at the interest rates as low as they are, and wonder how the heck any loaning institution is going to make any money if we were to put another trillion or so back into circulation?

[jim]

The typical third world country has almost all its wealth in the hands of a very small percentage of the population, and no middle class. Most people in the world are poor and live in third world countries. Why should we be any different?

New Golden Rule--Them as has the gold makes the rules.

Jim

[Grug - American Neanderthal]

Capital gains tax (as all tax basically) is nothing more than wealth redistribution.

Kennedy himself pretty much laid out what it is in his executive summary.

• substantially raise tax collections and increase tax payments by the rich;
  
• increase the rate of capital formation, economic growth, and job creation through the year 2000;
  
• unlock hundreds of billions of dollars of unrealized capital gains, thus promoting more efficient allocation of capital
  
• expand economic opportunities for the most economically disadvantaged workers by bringing jobs and new businesses to capital-starved areas, such as America's inner cities.

How does a tax expand economic opportunites in the privarte sector and bring jobs?

From www.cato.org/pubs/pas/table-chart/pa-242figures.html#fig3

We can see the correlation of investment and capital gains. How can that be a good thing?



Not that this has to do with tax topic directly, but the middle class was not built on taxes, it was built on the increasing wages and growth of the American market and economy in post WW2. I think we are seeing the effect of a global market with the competion from other developing countries who have less overhead both natural and artificial. We could tax the crap out of business and get them to stay here, but the net effect of them moveing off shore or going broke will be the same.

[RetNavySuppo]

Tom,

No offense, but you completely missed my point. Your gas station analogy proves that. Let's look at YOUR analogy again:

"This would be the same as if gasoline went on sale, then pointing out that the "rich" people driving big cars or SUVs got a greater opportunity to benefit because their gas tanks are bigger, or they own more vehicles. What does that matter? To be fair, do we sell cheaper gas to people in Toyota Corrolas and Ford Probes?"

Let's say there are two gas pumps - one for Toyotas and Fords and one for SUV's. Is it fair to charge SUV's a lower price per gallon (i.e., tax rate, not total tax) than you charge Toyotas and Fords simply because they are SUV's? You are focused on gross tax REVENUES and ignoring tax RATES, or in your example, how many gallons each buys vs. what they pay per gallon.

You also wrote:

"Another thing is that the vast amounts of that capital gain tax savings by the wealthiest citizens is far more likely to get invested back into the system, which puts more capital on the table for businesses to expand, and makes more money available for things like loans and mortgages. It doesn't do any good to have a building boom if people can't qualify for a mortgage at a decent rate. All these things work in concert."

I hate to tell you this, but the money for mortgages and business expansion was already in the economy before the capital gains tax cut and it was available at rock-bottom interest rates, thanks to Alan Greenspan. Interest rates also reflect the availability or scarcity of money. At current rates, there is actually an oversupply of money in the system. Why do we need an expensive infusition of new money into the economy when the money that is already there is underutilized? As to your assertion that capital gains go into the economy for economic growth, that is highly questionable. I'll address that when I answer Eric-K's post.

You also misstate my position on taxes in general. I don't wish to see "the taxes on the rich keep rising with no end game". I just want to see ALL income taxed EQUALLY. Where is the inequity in that? Yes, the rich have more money to invest and I certainly don't begrudge them their profits (if obtained legally) because it was through investment income that my wife and I achieved our own financial independence. But why should I be assessed less taxes per dollar of investment income than you pay per dollar of your salary (i.e., earned income)? Is investment income somehow more noble than "the sweat of someone's brow".

One last thought, Tom.

1. We are currently two years into a recovery, yet the budget deficits are rapidly increasing - even if we factor out the costs of George Junior's Magnificent Iraqi Adventure.

2. In 2003, we paid less than 83 cents for every dollar we spent. We borrowed the difference. Half of that borrowing is from foreign governments and citizens that are our economic competitors and might become our enemies in the future (like Communist China, our third largest creditor). Therefore, any tax cut we get is merely an additional increase in debt.

3. This recovery's performance is no better than most previous recoveries that had no tax cut as a stimulus.

Given all this, the Republicans still say taxes are too high. So tell me, Tom, who is going to pay the bills? Look at the Clinton years. In spite of a hot economy AND a TAX INCREASE, the budget deficits still piled up to the tune of over a TRILLION dollars. Today, even Republicans avoid predicting a hot economy AND they are slashing taxes. Please explain the wisdom of this kind of Republican thinking.

[RetNavySuppo]

Tom,

A quick P.S.

I do agree with you about the attractiveness of a flat-tax or consumption tax. However, the proposals that have been floated have so many special deductions and exemptions so as to reduce the possible utility of these proposals.

Also, like you I hate programs that somehow make being poor seem like a noble enterprise. Temporary help, yes - but not subsidizing a life-style of dependence on public assistance.

[RetNavySuppo]

Eric-K,

Talk to any serious (and successful) investor and ask him/her if tax consequences are the primary motivation in when to buy or sell a stock. Preservation of gain or the limiting of losses is the biggest factor in stock sales. Capital gains are a by-product of the transaction. Whether they are are taxed at 15% or 20% is of little consequence considering how much the price of a stock can change in a very short period of time.

In today's economic climate, the most important function of capital gains is the tax revenue they generate, giving our growing deficits. Capital gains themselves aren't even a part of the GDP because they are not goods or services. Capital gains are usually reinvested in other already existing assets, like stocks and bonds. The sales price of a stock (which may include a capital gain if the stock went up) is the money used to buy other stock. How else can we have billions of shares of stock being bought and sold each day?

As for your example of IPO's vs. capital gains tax rates, be careful of what you make of that. In most cases, an IPO is merely a transfer of wealth. Take the impending IPO of Google. The monies raised in this offering are merely money transfers from outside investors to the present owners of Google. Google already exists. Remember, we found out in the 90's what happens if you buy something that isn't there. The IPO is not going to allow Goggle to expand dramatically and create tons of new jobs. The business sector Google exists in is already crowded. It cannot grow unless it takes market share from a competitor and that will be a tough battle, especially with growing competition from Microsoft. So the bottom line is that the Google owners sell a portion of their company, get very rich (they are already rich as Google is already quite profitable), but it doesn't do much for the economy as a whole.

As for capital gains creating jobs, well, most job creation is accomplished by small businesses which have nothing to do with the stock market. Money was already available for this in the banks BEFORE the capital gains tax cut. Kennedy was talking from the context of a different set of economic realities, i.e., that of the 1960's.

By the way, here is an interesting little something I found that is applicable to the overall discussion:

www.forbes.com/2004/07/20/cx_da_0720presidentstable_print.html

Look at these comparisons while keeping in mind the various tax policies of the various Administrations listed. You will see that there is NO consistent nexus between tax policy and economic performance.

You asked how a tax can bring jobs, etc. Well, it can if it is targeted properly. States and localities do this all the time. They give tax breaks (which the residents have to make up out of their pockets) to companies to build factories in their area, banking on the probability that the taxes on the wages of the jobs thus created will exceed the tax breaks given to that company. They just don't give every resident of that area an $X.00 tax refund and hope something good happens.

[Grug - American Neanderthal]

Interesting seeing the correlations.

I understand how the tax incentive thing works locally, but how does that work on a federal level. Pork needs funding too?

[Cablemender]

Tom,

No offense, but you completely missed my point.

Hey, my background is in making electrons flow, not dollars. That's why I put my thoughts out here so you can school me in these things.

Let's say there are two gas pumps - one for Toyotas and Fords and one for SUV's. Is it fair to charge SUV's a lower price per gallon (i.e., tax rate, not total tax) than you charge Toyotas and Fords simply because they are SUV's? You are focused on gross tax REVENUES and ignoring tax RATES, or in your example, how many gallons each buys vs. what they pay per gallon.

Well it could be that I have a fundamental misunderstanding of what capital gains taxes were designed to do. As I understand it, the whole point of such a program was to prevent the government from putting their hands in your pocket and skimming the profits (well, less profit anyway) off something a person did with their invested income. In other words, a person risks their already-taxed income in some kind of investment, maybe properties or stocks, and because of the rising-price trends of those, they become worth more over time. So the investor, who has already paid taxes once when he earned the money, and now ties all that money up in it, is offered a reduced SECOND round of taxation in order to encourage that investment. Were they to be straight income-taxed on it a second time, why would they bother putting their money to work that way, when it would pay more real dollars to them to operate a business at a loss and avoid the huge tax burden? I thought the whole point of capital gains was to prevent this kind of upside-down investing, and allow people a way to grow their money, rich OR poor. If you look at how this works in conjunction with windfall profit tax, the two of them together provide an incentive to let people invest, and provide them incentives to keep that money reinvested when they realize a good profit from cashing out of one investment.

As to your assertion that capital gains go into the economy for economic growth, that is highly questionable. I'll address that when I answer Eric-K's post.

Capital gains are usually reinvested in other already existing assets, like stocks and bonds.

Absolutely. And what does a company do what that money when its investor base grows? Don’t they use it to grow, either internally or through acquisitions? Generally the whole point of going public is to reap the benefits of that cash infusion without the same obligation of long-term loans. With a loan, the interest rate is somewhat carved in stone; with stocks, there is no guarantee of profits. My own company did this for several years; they went public years ago allowing them to build a nationwide fiber-optic network second to none. Now that we have it, they are buying back their own stock to once again go private (actually ownership by parent company). This is off-topic, but there is such a state of flux in the telecom business right now, no stocks are moving and for good reason. The cable companies, phone companies, satellite companies, and the big network providers (like MCI) are like people all on the same street corner selling bananas. It’s unlikely any of them will suddenly invent a better banana, so all their efforts are on marketing that banana in ways more appealing to customers. We do cable and internet, and phone and security in some markets.. so by bundling them we can sell our bananas cheaper if you buy the fruit basket, so to speak.

I just want to see ALL income taxed EQUALLY. Where is the inequity in that? Yes, the rich have more money to invest and I certainly don't begrudge them their profits (if obtained legally) because it was through investment income that my wife and I achieved our own financial independence. But why should I be assessed less taxes per dollar of investment income than you pay per dollar of your salary (i.e., earned income)? Is investment income somehow more noble than "the sweat of someone's brow".

No, it isn’t nobler than the income of a guy framing houses or something, but it is that second round of taxation that is the killer. Remember, this is investing dollars one year, then taking them back out another year where that same dollar might now be the same in value. To tax those dollars at higher rates nullifies the gain, and reduces incentives to invest. Right now, with the present economy, it might not be so bad to make the tax rates the same, because returns are high. The problem comes in when the economy takes its inevitable downswings. During those periods, who would keep their money in stocks with low returns and equal taxation? The converse, naturally, is that when the economy IS good, and profits are high, it can almost seem like easy money if your investments were sound. So, why penalize that? Who would bother to try and ride out the storm of low profits when the penalty is higher than safer investments? The only way to stabilize that that I know of is to offer lower tax rates on that kind of investment, which is why I thought it came to be. Isn’t this the same economic principle that IRAs work under? Where incentives for long-term tie-up of your money is rewarded by a reduced taxation when you take that money back out at 59 or older?

I’m certainly no economist, and I have as many questions on this stuff as I do opinions. What I do know though is more and more I see tax dollars offered as the answer to all problems. Here locally, we had this ballot initiative four years ago billed as “a half-cent tax.” It wasn’t a half-penny, it was a half-percent added on to sales tax, the purpose of which was to fund two new schools and generate some cash to fix up the older ones. We really needed it, so it passed with enormous margin. It ran two years, then when it’s life span approached the end, our local politicos found some other good cause, and it was extended for another two years. Now in this coming election, there is yet ANOTHER extension/reason, AND there is another “half-penny” initiative to fund something else. This will bring local sales tax up to 8 percent. This is a prime reason why I am against taxation that promises to “cure” things, like education or bad roads. While it might do that in the short term, or at least help, it ends up becoming just another checkbook our elected leaders rely upon to “give us stuff.” We had no money to repair school roofs, yet we had matching funds for $67 million in federal funds to expand an interstate so that morons who wouldn’t evacuate when a Cat 5 hurricane bored down on us can now leave at the last possible nanosecond and not be crowded when they divert all 12 lanes to northbound traffic.

[ctdahle]

Nice analysis RNS.