Effective tax rate: What really matters

[Nate13]

I’ve noticed a lot of discussion about whether our tax code in America is truly “fair” or rather what we should care about “just”. The problem with many of these discussions is they lack the facts to actually be able to do a true comparison. They also fail to even bother to actually look at the state of taxes in this country on a federal level. First take a look at this website and the chart shown below:
taxfoundation.org/blog/

http://www.taxfoundation.org/UserFiles/File/Average_Tax_Rates.png

Paying an effective tax rate of 15% is a higher effective tax rate than 97% of Americans pay. 50% of Americans pay 0 federal taxes.

The problem is the tax code in America is so convoluted that it is impossible to do a comparison of rates by looking at marginal rates that everyone likes to look at. It should also be noted that dividends from stocks are taxed as normal income tax, while money earned from buying and selling stock is charged at the 15% rate. Dividends are taxed with normal income because they are known quantity of return that will come from an investment.

The income from buying and selling stock though is a much more risky venture and requires more incentive to get people to go in a buy it. The income earned from this is taxed at a the rate it is because if it were taxed higher, people would hesitate to invest because the reward from investing would drop and no longer outweigh the risk that was being taken.

I’d also point out that even looking at the effective tax rate someone pays and comparing those to each other is not enough. You also have to look at how much a person gives to charity. A rich person who donates 10% of their income to charity is going to be able to write a lot of that off, and their effective tax rate will be much lower compared to someone who only pays 1% of their income to charity. The fact is their money got where it was so supposed to go and is being used for social justice.

So is America’s tax code socially just?

 

[Texas_Roofer]

It would seem you made the classical error of mis-representing “INDIVIDUAL FEDERAL INCOME TAXES” as all taxes. Federal income tax is only a small part. If you add FICA tax to your chart it has a drastic change.

FWI - The IRS shows only 43% (26/60) of the tax collected in “Personal Income Tax”
http://www.irs.gov/app/understandingTaxes/whys/thm01/les01/media/ac3_thm01_les01.jpg

 

[Nate13]

It would seem you made the classical error of mis-representing “INDIVIDUAL FEDERAL INCOME TAXES” as all taxes. Federal income tax is only a small part. If you add FICA tax to your chart it has a drastic change.

FWI - The IRS shows only 43% (26/60) of the tax collected in “Personal Income Tax”
http://www.irs.gov/app/understandingTaxes/whys/thm01/les01/media/ac3_thm01_les01.jpg

Yeah…exactly. FICA taxes are equal all the way across the board. Everyone pays social security and medicare taxes for example and gets the same thing from it. There is actually a lot of talk though about getting rid of those benefits for people in the upper income brackets that don’t need it, but still having them pay the tax. This would further skew what is actually happening in the tax system and the ability to see whether it is just or not. It makes complete sense though not to give someone earning a million dollars a year social security benefits. Would it not be nice if we could have the program just actually help the people who needed it?

Secondly I have not misrepresented anything. Looking at Federal Income taxes and the capital gains tax together gives a clear picture of the state of our tax code as it relates to what individuals have to pay. That of course is what everyone has been throwing a fit about, and you do yourself no good with your attempt at misdirection. I have a provided a clear comparison between exactly what everyone has been throwing a fit about recently.

Also read the poll question again:

Is America’s tax code as far as individual’s go socially just?

I think our corporate tax system is definitely screwed up because some can completely avoid paying any taxes at all through loopholes and its hard to know whether they are doing so justly or not. Thus why we need a simpler tax code in general that scraps what we have.

Lets keep focused on individual tax burdens (the 43%) and you can go start another thread on the other part if you really care that much. The fact is paying a 14% rate in federal income tax+capital gains tax+dividends tax is paying more than 97% of all Americans do.

 

[Texas_Roofer]

Yeah…exactly. FICA taxes are equal all the way across the board.

No, FICA stops at $106,800 gross earned income (in 2010). That has a lot to do with the chart originally posted. The left side would rise by +12.5% (historically higher) and the right edge would rise very little.

Everyone pays social security and medicare taxes for example and gets the same thing from it. There is actually a lot of talk though about getting rid of those benefits for people in the upper income brackets that don’t need it, but still having them pay the tax. This would further skew what is actually happening in the tax system and the ability to see whether it is just or not. It makes complete sense though not to give someone earning a million dollars a year social security benefits. Would it not be nice if we could have the program just actually help the people who needed it?

I would support eliminating FICA because it has become just another tax, which was not the original plan.

Secondly I have not misrepresented anything. Looking at Federal Income taxes and the capital gains tax together gives a clear picture of the state of our tax code as it relates to what individuals have to pay. That of course is what everyone has been throwing a fit about, and you do yourself no good with your attempt at misdirection. I have a provided a clear comparison between exactly what everyone has been throwing a fit about recently.

Also read the poll question again:

I think our corporate tax system is definitely screwed up because some can completely avoid paying any taxes at all through loopholes and its hard to know whether they are doing so justly or not. Thus why we need a simpler tax code in general that scraps what we have.

Lets keep focused on individual tax burdens (the 43%) and you can go start another thread on the other part if you really care that much. The fact is paying a 14% rate in federal income tax+capital gains tax+dividends tax is paying more than 97% of all Americans do.

You have to use the term " Personal Federal Income Tax" every time because the statements are not correct without that. Even after that restriction the original chart is only 51% of FEDERAL collections (roughly 43% of all taxes). That is the problem the 57% missing. The chart you post shows the way Federal Income taxes are used to flatten the average tax rate. While low income earners pay mostly FICA tax and little or small additional federal income taxes, high income individuals pay low percentage to FICA.

For an example $50,000 salary would generate about $6,250 FICA to the Federal Government (an 11.8% rate the math has hidden entries) while $1,000,000 salary would generate about $13,350 FICA to the Federal Government (a 1.3% rate the math has hidden entries)

 

[essie7777]

…snipped for space…The fact is paying a 14% rate in federal income tax+capital gains tax+dividends tax is paying more than 97% of all Americans do.

Unfortunately, this only emphases how broken the US tax system is; not how competitive the rate of 14% is for a politician who earnt over $20million last year.

This is surely ridiculous by any standards isn’t it??? Do you honestly think its just or appropriate that such high earners pay so little tax… whilst the middle class shoulder a burden that averages to about 32% real cost of wages… and its not even as if the US has great public services, free healthcare, free or cheap higher education etc… this is a joke.

Additionally, your previous comments about dividend tax are a little too simplistic. Dividends are only charged at a person’s normal earned income rate in certain circumstances.

Otherwise the payments can vary from 0%-15%. .

 

[Nate13]

Unfortunately, this only emphases how broken the US tax system is; not how competitive the rate of 14% is for a politician who earnt over $20million last year.

This is surely ridiculous by any standards isn’t it??? Do you honestly think its just or appropriate that such high earners pay so little tax… whilst the middle class shoulder a burden that averages to about 32% real cost of wages… and its not even as if the US has great public services, free healthcare, free or cheap higher education etc… this is a joke.

Additionally, your previous comments about dividend tax are a little too simplistic. Dividends are only charged at a person’s normal earned income rate in certain circumstances.

Otherwise the payments can vary from 0%-15%.

Haha are the true numbers that bad that you have to continue to make comparisons that do not make a bit of sense? What on the graph above can you not read? Average tax burden is 32%? Do you mind posting where you get that number from? I assume that must include payroll taxes as well as state and local taxes. We are talking about federal tax here specifically. You have federal income tax, capital gains tax, and payroll taxes to look at. Federal income tax is shown above in the chart I provided. Payroll taxes are the same for everyone and are not going to change the ratios you see above at all, and thus are negligible for this conversation.

You cannot bring state and local taxes into the equation because those are going to be different everywhere. I’m 99% sure the “32%” number you provided includes state and local tax burden. Instead of further skewing the true state of things by bringing that into the equation, why don’t we concentrate on federal taxes specifically which is the thing that affects all of us equally?

Effective Total tax rate by group - 2004

1st quintinile - 19.7%
2nd quintile - 23.3%
3rd quintile - 27.0%
4th quintile - 29.8%
Next 15% - 31.6%
Next 4% - 32.2%
Top 1% - 32.8%

 

[MarkInOregon]

I’ve noticed a lot of discussion about whether our tax code in America is truly “fair” or rather what we should care about “just”. The problem with many of these discussions is they lack the facts to actually be able to do a true comparison. They also fail to even bother to actually look at the state of taxes in this country on a federal level. First take a look at this website and the chart shown below:
taxfoundation.org/blog/

http://www.taxfoundation.org/UserFiles/File/Average_Tax_Rates.png

Paying an effective tax rate of 15% is a higher effective tax rate than 97% of Americans pay. 50% of Americans pay 0 federal taxes.

The problem is the tax code in America is so convoluted that it is impossible to do a comparison of rates by looking at marginal rates that everyone likes to look at. It should also be noted that dividends from stocks are taxed as normal income tax, while money earned from buying and selling stock is charged at the 15% rate. Dividends are taxed with normal income because they are known quantity of return that will come from an investment. {/quote]

If you want us to look at the facts–then please give us the facts. Dividends paid on the common stock of most companies are currently called “Qualified Dividends” and they are taxed at a 15% rate just like long-term capital gains. Not all gains from the buying and selling of stock is taxed at 15%–only long-term gains. Short-term gains are taxed at the same rate as ordinary income.

The income from buying and selling stock though is a much more risky venture and requires more incentive to get people to go in a buy it. The income earned from this is taxed at a the rate it is because if it were taxed higher, people would hesitate to invest because the reward from investing would drop and no longer outweigh the risk that was being taken.

 

[Texas_Roofer]

… Payroll taxes are the same for everyone and are not going to change the ratios you see above at all, and thus are negligible for this conversation.

Nate, That is not a true statement. Payroll taxes stop at 106,800 salary (+/- minor yearly change after 2010)

You cannot bring state and local taxes into the equation because those are going to be different everywhere. I’m 99% sure the “32%” number you provided includes state and local tax burden. Instead of further skewing the true state of things by bringing that into the equation, why don’t we concentrate on federal taxes specifically which is the thing that affects all of us equally?

Scott Burns of the Dallas Morning News claimed real tax rates were typically 40+% by income levels. informationliberation.com/?id=20551

Effective Total tax rate by group - 2004

1st quintinile - 19.7%
2nd quintile - 23.3%
3rd quintile - 27.0%
4th quintile - 29.8%
Next 15% - 31.6%
Next 4% - 32.2%
Top 1% - 32.8%

?? That looks like FICA + Federal Income Tax, but we can only guess? Please note how much flat that rate change is compared to the original post.

 

[MarkInOregon]

Yeah…exactly. FICA taxes are equal all the way across the board. Everyone pays social security and medicare taxes for example and gets the same thing from it. There is actually a lot of talk though about getting rid of those benefits for people in the upper income brackets that don’t need it, but still having them pay the tax. This would further skew what is actually happening in the tax system and the ability to see whether it is just or not. It makes complete sense though not to give someone earning a million dollars a year social security benefits. Would it not be nice if we could have the program just actually help the people who needed it?

What do you mean by “equal all the way across the board”? I assume you are aware that one only pays social security tax on wages up to $106,800? So in reality those with wages over the limit will pay a smaller portion of their income in ss tax than those with an income under the limit.

Peace,
Mark

 

[Nate13]

What do you mean by “equal all the way across the board”? I assume you are aware that one only pays social security tax on wages up to $106,800? So in reality those with wages over the limit will pay a smaller portion of their income in ss tax than those with an income under the limit.

Peace,
Mark

Yes, but that makes sense considering social security, medicare, and medicaid are run like government insurance programs or at least are supposed to be run like that. My point was that the rate itself applies to all of them equally to pay for their “fair share” of that program. The rich guy does not get anymore benefits than everyone else so why should he be required to pay more? There is actually a lot of talk about cutting social security benefits as well as possibly medicare and medicaid benefits for people making over $500,000 dollars and I support that. Someone who was making $500,000 dollars or more a year throughout their lifetime does not need social security. Then once again you would have more benefits that the rich are paying for without receiving any benefit, but that is fine if you stop treating social security like insurance. Social security should instead be treated like a program to help those in need, not a widespread, ineffective program that helps the government feel likes it in control.

Unless they are arguing that insurance companies are not just in asking the same amount from everyone to pay for their care, I don’t see how this method of taxation is not just. If you want to treat it as a program for the needy then we can talk, but that is not how its treated.

 

[PeterGStanley]

Stat wise it may look unfair but theres a lot missing - a rich person taxes effects their lives in no way at all - they have all and much more then they will ever need. The rest of the people - it can drasticly affect their livelihood - the less you make the more it affects their lives - I don’t need to go into to detail we all know this is true.What does the rich man miss but few pennys on his huge pile.

 

[Nate13]

Stat wise it may look unfair but theres a lot missing - a rich person taxes effects their lives in no way at all - they have all and much more then they will ever need. The rest of the people - it can drasticly affect their livelihood - the less you make the more it affects their lives - I don’t need to go into to detail we all know this is true.What does the rich man miss but few pennys on his huge pile.

I think God is a pretty just guy (or gal if that is how you like to refer to God). God seems to think its just to ask for the first 10% of what everyone makes no matter how much they make. This works because everyone is equal in God’s eyes and given the same opportunity to accept his grace.

I’m alright with a progressive tax rate if you can show opportunity is not equal. This country was founded on the principle of equal opportunity for all though, and that is not a principle I’m willing to give up on. If we do not have equal opportunity for all then we should be working day and night to fix that (privatizing education would be a good first step).

It is wrong and unjust to argue that we need equal opportunity for all in this country and at the same time demand we need a progressive tax rate. That is unChristian.

Stat wise it may look unfair but theres a lot missing

Your right, how often do we look at how much of their income rich people (exclude Hollywood stars) donate to charity?

 

[PeterGStanley]

I think God is a pretty just guy (or gal if that is how you like to refer to God). God seems to think its just to ask for the first 10% of what everyone makes no matter how much they make. This works because everyone is equal in God’s eyes and given the same opportunity to accept his grace.

I’m alright with a progressive tax rate if you can show opportunity is not equal. This country was founded on the principle of equal opportunity for all though, and that is not a principle I’m willing to give up on. If we do not have equal opportunity for all then we should be working day and night to fix that (privatizing education would be a good first step).

It is wrong and unjust to argue that we need equal opportunity for all in this country and at the same time demand we need a progressive tax rate. That is unChristian.

Your right, how often do we look at how much of their income rich people donate to charity (exclude Hollywood stars)?

If you want to defend the rich thats your prerogative.

 

[Nate13]

If you want to defend the rich thats your prerogative.

I’ll defend justice as God sees it any day. I assume your lack of response shows you agree how illogical it is to demand equal opportunity for all and a progressive tax rate at the same time.

 

[essie7777]

@ Nate 13,

When talking about tax, if you ignore half of the picture --everything beyond federal taxes you are missing the actual “real” impact of what people pay. This gets very misleading as its not a realisitic perception of what the “average joe” pays. You are right the figure i quoted was the REAL tax rate. This is a very different picture to the one your presenting, but as other posters have pointed out its incomplete.

I do have one comment/question though:

how is a system of tax “just”, when in essence its a self negioated amount thats paid at the end of the yr? At this time of year, the billion dollar industry that does tax returns for people start their multi-million dollor camapigns in the media, about how they can save you more. It’s simply a competition of interpretation of the tax code between commercial entities.

This suggests the system is* “just”* based on who you actually get to do your returns.

It’s a very bizarre system that allows people to skirt around its intentions depending on the skills and knowledge of the person filing the returns. The code is so complicated there is no uniformity to it at all.

Therefore isn’t this demonstrating how unjust it is??

 

[Aegis12345]

exposingchristianity.com/
www.joyofsatan.org

 

[Texas_Roofer]

“just”

based on who you actually get to do your returns.

It’s a very bizarre system that allows people to skirt around its intentions depending on the skills and knowledge of the person filing the returns. The code is so complicated there is no uniformity to it at all.

Therefore isn’t this demonstrating how unjust it is??

Someone sees a bigger picture. Now with our kids grown, I have to make a tough decision; should I pay twice as much on my income as most others? Or should I start this “hide the income” strategy? It is sad the system will more than double my taxes if I do not “find” new deductions or employ strategies to hide some of the income.

Does anyone want to vote? A) Pay the full high rates, B) Find new deductions, or C) Hide some income

 

[Nate13]

Someone sees a bigger picture. Now with our kids grown, I have to make a tough decision; should I pay twice as much on my income as most others? Or should I start this “hide the income” strategy? It is sad the system will more than double my taxes if I do not “find” new deductions or employ strategies to hide some of the income.

Does anyone want to vote? A) Pay the full high rates, B) Find new deductions, or C) Hide some income

Interesting point. My point was rather that the outcomes are just, not the way that we get there. A flat tax rate with a few specific deductions would bring transparency to the process and actually allow normal people to be able to make some sense from our tax code. The fact is though the assertions that it is unjust to have a capital gains rate of 15% is unfounded using the correlation liberals want to use. Reasonable people also no that upping the capital gains rate any higher would destroy the incentive to invest and hurt the economy as a whole even more making people further dependent on the government.

 

[Nate13]

@ Nate 13,

When talking about tax, if you ignore half of the picture --everything beyond federal taxes you are missing the actual “real” impact of what people pay. This gets very misleading as its not a realisitic perception of what the “average joe” pays. You are right the figure i quoted was the REAL tax rate. This is a very different picture to the one your presenting, but as other posters have pointed out its incomplete.

Liberals recently have seemed anxious to compare federal income tax to the capital gains tax rate and I wished to present the true facts surrounding this comparison (even though it is absurd to compare the two on equal grounds).

When you include state and local taxes in the picture everything becomes incredibly subjective. Some states tax people a lot harder than others do and looking at the average overall rate does not tell you anything. If you think your state is unjust in how it taxes people go change it but don’t bring that into this debate. On the federal level which is what this thread is about, the outcome of our tax code is just in my opinion, period.

I do have one comment/question though:

how is a system of tax “just”, when in essence its a self negioated amount thats paid at the end of the yr? At this time of year, the billion dollar industry that does tax returns for people start their multi-million dollor camapigns in the media, about how they can save you more. It’s simply a competition of interpretation of the tax code between commercial entities.

So your for a flat tax right?

This suggests the system is* “just”* based on who you actually get to do your returns.

It’s a very bizarre system that allows people to skirt around its intentions depending on the skills and knowledge of the person filing the returns. The code is so complicated there is no uniformity to it at all.

Therefore isn’t this demonstrating how unjust it is??

Correct, so lets close up the loopholes and make it more transparent and streamlined. Your still dodging the fact that the actual average outcomes are just, even if the process is not.

 

[essie7777]

Liberals recently have seemed anxious to compare federal income tax to the capital gains tax rate and I wished to present the true facts surrounding this comparison (even though it is absurd to compare the two on equal grounds).

I don’t think it’s a liberal issue rather a practical issue … even by not looking at the whole it is still unjust in the sense that i read some data recently (i will find the link when i have a bit more time), that showed the disparity to paid federal taxes and then what’s left after “negotiation” , The table you have is simply the end result.

On the federal level which is what this thread is about, the outcome of our tax code is just in my opinion, period.

The thread was about a political candidate, his tax results were his combined owed individual taxes, the fact he doesn’t earn traditional income and is not subject to the state levels as an average person is simply based on his circumstances… if that wasn’t your intention and i misunderstood that you were placing his total taxes against just federal taxes i apologize… my error.

So your for a flat tax right?

I don’t think there’s any easy answers. I was raised in a country with taxes and welfare, personally i have no issue paying the higher tax rate as i firmly believe that if i earn enough for it then i can contribute more. By choice i pay tax out of the UK at the highest band as i believe in the system it supports. And there’s no flat rate there!

Correct, so lets close up the loopholes and make it more transparent and streamlined. Your still dodging the fact that the actual average outcomes are just, even if the process is not.

I’m not dodging at all – i don’t believe you can interpret outcomes of an “unjust” system as being “just”, that seems a defunct conclusion. If a process is “unjust” then logically its results must be as well.