Wednesday, January 30, 2013

Taxes, Taxes, Taxes.

Recently Phil Mickelson (professional athlete) complained about his taxes. He pays over 60% taxes, and is wealthy.

The reason is simple - he actually works for a living, as opposed to most wealthy Americans.

You see there are three different ways to be rich in America.

  1. Earn It.  Here you pay your fair share of taxes - perhaps even a little bit more. 
  2. Dividend it.  Her you pay far less than your share of taxes.
  3. Trust Plan It.  Here you pay no taxes - even if you are the guy setting up the trust, as opposed to the kid inheriting it.

Edward J McCaffery wrote an interesting article on CNN about it.  While worth reading because of his concise explanation of the problem, his solution sucks.  He wants a sales tax.  His strategy fails to recognize the existence of method #2 above, or how sales tax typically work in the USA.

Basically, sales tax are always regressive.  By that I mean, if you are poor and live in a state with a 10% sales tax, you pay 10% of your income in tax.  If you are wealthy however, you often pay far less than 10% of your income on tax.   The poor spend all their earning, while the wealthy always invest it. The wealthier you are, the lower the percent of your earnings you spend.  In fact, the truly poor spend MORE (credit cards and other debt) than 100% of their earnings and the truly wealthy spend less than 1% of their income every year.

Sales tax are by definition regressive and ALWAYS taxes the poor too much and the wealthy not enough.  Because the wealthy always have the option of not spending, while the poor never have that option.

So lets look at something reasonable as opposed to yet another 'tax the poor' proposal.

First let me delve deeper into the three methods of making money.

1) Earn it means you get a salary.   You income each year is taxes at the progressive income tax rates.  The more you earn, the higher the tax you pay.

It is in fact how most of our federal funding is done - mostly on the middle class/ lower upper class.  In states with high sate income tax , it is perhaps a bit unfair, but in other states with low income taxes, it is pretty much the ONLY way we tax the wealthy.  If you are wealthy and can move to a lower tax state, it makes sense to do so.

This taxation system is reasonable - the wealthy get far more for their money than anyone else does.  Economies of scale ensure that happen.  They benefit far more from the government's actions than we do.

I see no real reason to increase their taxes.

Again, I do not really see the need for significantly higher income tax.   Is the extra 3% going to kill them?  No.  Nor will it help a huge amount.

2)  Dividend it.  Also Capital Gain it.   Here you don't earn your profit, you put your money to work and it earns for you.  You pay no tax on this money if you are poor (making less than $36,250 single), and only 15% if you are middle class (single making $26,250 to $250k), if you are lower upper class (earning between $250k and $400k) you pay 15%+3.8% (medicare) =18.8%.  If you are truly wealthy (over 400K for single), you pay 20+3.8=23.8%

Note 23.8% is still very low compared to the 39.6% those suckers who try to EARN their money have to pay.  As in half the rate.

This is a joke.  It was put in by the GOP who try to pretend that all Americans earn their money, and they wanted to encourage 'investing".  Fine, encourage investing by offering a 5% tax discount, not 17.8% discount. 

They need to be taxed just like regular income - with perhaps a freebee $10k a year, and special treatment for real estate gains for houses you live in for at least the past year.

3)  Trust plan it.   As McCaffery wrote, the truly rich don't even bother to pay capital gains taxes.  They make investments, take out loans on their wealth, and pay no taxes - not even capital gains or dividend taxes.  When they die, their heirs get new cost basis.  No taxes EVER on their yearly earnings.  Instead they pay interest on their living expenses till they die.   Occasionally, they take small gains, offset by losses to pay off loans.  But they leave the big gains alone.   If they do it right, their heirs don't even have to pay much inheritance tax because of the trust plan they set up.

The only reason for these trust plans and loans are to avoid paying taxes. These people need to be taxed and taxed up the wazoo.  They are not contributing to the system, they are instead manipulating it and abusing it.  They are not 'investing in America', they are raping America.   And we stand back and let them.  No, we point the way, with tons of tax attorneys and lobbyists.

I am all in favor of letting people inherit their wealth. I am not in favor of letting the truly wealthy avoid paying taxes by pretending to leave it to their children.


Early I have suggested replacing income tax with a wealth tax.  Well, if you don't want to do that, here is a simpler, easier solution.

Ten Year Unrealized Capital Gains Tax at 40%.

Right now we encourage people to invest by giving them a low capital gains rate for investments more than one year.   Fine.  But if you have held an asset for more than 10 years, we don't need to encourage you to invest, we need to encourage you to SPEND.  So put a ten year extra high capital gain.

Simple rule - if you have owned any security for more than ten years and it is worth more than when you bought it, you must pay taxes as if you had sold it for a gain and bought it again 1 month later (tax rules currently consider a sale + re-buy to be a false sale if done within 30 days.)

Your cost basis gets adjusted up, you owe the taxes, and we destroy the entire loophole.

Also, arrange for the Inheritance tax to be substantially reduced - ten years after this law goes into effect.  Let's be fair.

P.S.  Yes people, we can put in exceptions, as always, for the home that you live in, and slightly different rules for a business property you earn money on.  You could for example allow business property to pay 4% tax on the gain every year, offset by business losses as opposed to 40% at the end of ten years. 

It will still be far simpler than the convoluted estate and trust garbage we let people get away with every year.

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