Monday, August 8, 2011

What Is a Fair Share of Taxes.

One of the tricks that the GOP likes to do is to pretend that your income determines whether you are poor or not.   They use the fact that $250,000 is not a lot of money for a family of 5 to live on, as an excuse to cut the taxes on single people earning $250,000.

Conservatives love to talk about the rich as if they are tireless workers for the country, while the poor sit around and do nothing.  They quote numbers like:   "In the U.S. now, the wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of the income tax. The top 10 percent pay 68 percent of the tab. "  The link inside the quote came from the quote, so it might not be reliable. (my Source for the quote)

Now at first that sounds impressive.  Until you realize they quoted the wrong numbers.  It's not how much you declare as 'income', but how much wealth you have in the bank that matters.  I know people earning $150,000 a year that are poor - because they are paying off huge school loans, or supporting a wife and 5 kids.  I know people earning less than $90,000 that are rich - because they are still single and invested wisely - one guy I know makes less than 90k, but it worth more than 900k at the age of 42.  He is aiming to be a millionaire by the time he is 43.

Note that the conservative quoted the wealthiest 1% of the population, not the highest earners, so you need to look at their wealth, not how much they pay.  A man worth $1 billion dollars who has a salary of $100,000 (while living in a company owned Yacht, driving a company owned car, etc. etc.) is not 'middle class'.  No, that guy is rich, despite his salary.  Talking about income is how we got into this mess, we need to talk about his wealth.

So lets look at the numbers that actually matter, instead of the bullcrap that is not relevant  (Source for real numbers)
  • The wealthiest 1% own 34.3% of all the wealth in the US and they pay 37% of our taxes
  • The next 9% own 36.7% and pay 31%.  
  • The middle 50% own 29% of the wealth and pay 32% of the taxes.  
  • The bottom 40% own about 0.2% of the wealth, so it is not surprising that they pay almost no taxes. 


Taxes need to be based on your WEALTH, not the salary.   (see my previous post about taxing assets, not income)  If you own $1 billion, in the bank, you should pay higher taxes than the broke guy, even if you salary is less than his.

Why?  Because it is easy to fiddle with the number you declare as your 'income', but it is hard to fiddle with your wealth.  If you own your company, then you own all the wealth it has.  But if you own your company, you can still use accounting tricks to cut your income down to nothing.  Also, if you are foolish enough to keep all your 'wealth' in the company name, then you lose one of the main benefits of being incorporated - protection from lawsuits/corporate bankruptcy.

Some of you may notice that numbers look reasonably close to the numbers. Not exactly.  The top 1% pay 'an extra 3%'.   But the next 9%, pay 6% too little (taking back the extra 3% the very top give, then an extra 3% stolen from the middle class). The middle 50% (excluding the top 10% and the bottom 40%) are the middle class and are getting ripped off - they own 29% of the wealth but pay 32% of the taxes. 

If we were to truly fix our tax structure, we would raise taxes on the top 10% wealthiest not the top 10% earners.   I repeat my previous blog's (New flat tax idea) claim that taxes should be on ASSETS, not on income.   I don't want to replace the entire tax system, but we need to use this idea as a basis for changes in our current system.   Require people to tell the IRS their total net worth, and tax that, as opposed to their income.   It doesn't have to be large, the Total Net Worth of all US households is about 55 Trillion (in 2009).   Total federal tax Income collected was about 2.6 trillion.   A 4.7% Net Worth Tax would pay for everything (up from 4% in my old article based on 2008 numbers), even during the recession.  But I don't want to do that.  Despite the fact that it would be MUCH easier to calculate: no hunting down income forms, just check your last month's financial statements and a housing valuation from a service like Zillow.  No calculations on gain/loss, no working out exemptions, etc.    If you spent or lost it you don't have to pay tax on it.  We only taxed the wealth you accumulate.   No, that idea is too radial a change.

Instead we could simply trade in the complex AMT rules with a simpler rule.  Here is one (of many possibilities):   First drop the current AMT rules.   Calculate your net worth.  If it is under $1 million you owe no additional taxes.  If your net worth is more than a millon dollars, you owe taxes of either the standard rate or $20,000 plus 5% for every dollar of net worth above that exempt $1 million.  Note the $1 million would be automatically adjusted for inflation every year.

Net worth doesn't change all that much, so you know each year roughly how much you have to pay in taxes.   Yes, illiquid assets would make calculating Net Worth harder, but we could require them to be published and have people be legally required to sell any such illiquid asset for any offer at 150% of the listed taxed value.  The only problem is people with large assets and low income (farmers).   That could be solved with a corporation minority share sale.  For example a farmer incorporates, trades his land for shares, keeps 51% of the shares themselves, sells 49%.  He owns a controlling interest, gets taxed on only 51% of the value of his farm, and can pay the early taxes using the money from the shares sold.   He can also diversify himself by buying some shares from  other farmers.

And no, farmers are not hicks.  If they own enough property to inflate their taxes, then they are intelligent businessmen (or women) quite capable of running a corporation. 

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