Effective tax rate: What really matters

[manualman]

Maybe you can answer this for me. Are people who earn money off long term investments and are taxed at the capital gains rate allowed to item deductions just like someone who is paying income tax? If the two taxes are not treated the same in that respect we can not compare then head to head.

Agreed. That is a fair and reasonable request.

 

[ComputerGeek25]

Hardly. It is not class envy to recognize that we have a government that spends drastically more than it takes in. We need to BOTH spend less and take in more. To take in more (outside of partisan fantasy worlds), you need to take - in - more. I can’t do whatever I want with my wages. I have to pay my taxes first. Why should somebody who inherits a windfall be any different? You’re simply proposing class priviledge.

I’m not proposing that at all. I’m merely bringing up the point that you need to define what is fair or not.

 

[ComputerGeek25]

Maybe you can answer this for me. Are people who earn money off long term investments and are taxed at the capital gains rate allowed to item deductions just like someone who is paying income tax? If the two taxes are not treated the same in that respect we can not compare then head to head.

I’ve invested in Stocks/Bonds/T-Bills to avoid paying Federal and state income taxes. Many middle class (and poor people for that matter) do that so they can reduce their burdens.

 

[manualman]

Why the hostility?

The rich already pay more than than the “poor,” even though the current tax system is broken. That’s the point of this thread. You’re always going to have statistical outliers like Warren Buffet, Bill Gates and GE. Even so, we’re talking about percents - the rich will always pay more in dollar amount than the poor. But in general the “rich” pay more than the “poor.”

Also, simply taxing the “rich” more doesn’t fix the problems. We’d have to tax everyone who makes $70K or more at 100% to cover . $70K isn’t exactly rich and I don’t think the government has a right to 100% of income of anyone.

I’ve been on the record as saying the rich could afford to pay more (within reason) but the other issue is we need to reign in government spending and waste.

What hostility? I’m actually in agreement with you for most of this post. I don’t think we can tax our way out of deficit. Nor do I think we can cut our way out. Both are needed. And since our society has been on a medium term trend of increasing concentration of total wealth in the top coupler percent, I think it is reasonable to ask them to pay more. That’s not class envy, it is problem solving reason skills.

 

[Nate13]

Agreed. That is a fair and reasonable request.

If no deductions are allowed out of capital gains tax then that money would be being taxed at the equivalent marginally of 25%. This is based on the effective federal income tax chart where for the group in the highest bracket is paying effectively 25% and is in the 35% bracket to begin with. Average deductions are therefore around 10%.

I don’t have a perfect understanding of all of this, and I’m always willing to be corrected.

 

[Nate13]

I’ve invested in Stocks/Bonds/T-Bills to avoid paying Federal and state income taxes. Many middle class (and poor people for that matter) do that so they can reduce their burdens.

Haha no I get that but then that income is taxed at the capital gains tax rate right? I’m wondering if you get to do itemized deductions from that rate then. In other words is the capital gains tax rate a marginalized rate or is it the effective rate. Based on Romney’s tax return I would tend to think it is very close to the effective rate and very few deductions are allowed if any.

 

[ProVobis]

Why the hostility?

The rich already pay more than than the “poor,” even though the current tax system is broken.

This is true. But an argument could be made that the rich benefit more from defense spending, etc. in (at least) two ways. (1) They are better equipped (less commission, etc.) to buy stock in defense industries or any other industry which have government contracts; (2) protection from foreign aggression as they have more to lose in case of attack. A sort of insurance against yourself, if you will.

Just saying.

 

[manualman]

I’m not proposing that at all. I’m merely bringing up the point that you need to define what is fair or not.

Not sure I follow. Here’s what I see as fair:

Guy wins a $8 million lottery, but must pay taxes on that amount. He got a windfall and must pay the prevailing taxes on it. That’s fair.

Guy inherits $8 million, but must pay taxes on that amount. Hot got a windfall and must pay the prevailing taxes on it. That’s fair.

How are these any different? I’ve heard the argument, but his dad already paid taxes on that money before, that’s double taxation! Unfair!!

No. That was his DAD paying taxes on it when HE made it. When it is transferred to another person, that person now must pay taxes too. The lottery is no different. Everybody who bought a $1 ticket did so on their AFTER-taxes income. No fair, all that lottery pool money had ALREADY been taxed. That’s double taxation. No, it’s not. When the winner collects, the money is transferred from one person to another, which triggers tax. Just like inheritance.

 

[manualman]

If no deductions are allowed out of capital gains tax then that money would be being taxed at the equivalent marginally of 25%. This is based on the effective federal income tax chart where for the group in the highest bracket is paying effectively 25% and is in the 35% bracket to begin with. Average deductions are therefore around 10%.

I don’t have a perfect understanding of all of this, and I’m always willing to be corrected.

I’m not an expert either. Your example may be true of a little old lady whose income s 100% capital gains and limited to, say $75,000 a year. But Mitt Romney isn’t going to have 10% worth of deductions for his mortgage, kids, etc. on his millions of capital gains income. For him, it’s more like 0.01% deduction, I suspect.

But I’m certainly open to capital gains being determined than lumped into income BEFORE deductions are removed, then tax rates applied.

Wow, you guys got me really going on the responses!

 

[Nate13]

Not sure I follow. Here’s what I see as fair:

Guy wins a $8 million lottery, but must pay taxes on that amount. He got a windfall and must pay the prevailing taxes on it. That’s fair.

Guy inherits $8 million, but must pay taxes on that amount. Hot got a windfall and must pay the prevailing taxes on it. That’s fair.

How are these any different? I’ve heard the argument, but his dad already paid taxes on that money before, that’s double taxation! Unfair!!

No. That was his DAD paying taxes on it when HE made it. When it is transferred to another person, that person now must pay taxes too. The lottery is no different. Everybody who bought a $1 ticket did so on their AFTER-taxes income. No fair, all that lottery pool money had ALREADY been taxed. That’s double taxation. No, it’s not. When the winner collects, the money is transferred from one person to another, which triggers tax. Just like inheritance.

Interesting argument. I can see how you could argue that they should both be treated the same. That doesn’t mean that same has to be to the tune of 50% though

 

[Nate13]

I’m not an expert either. Your example may be true of a little old lady whose income s 100% capital gains and limited to, say $75,000 a year. But Mitt Romney isn’t going to have 10% worth of deductions for his mortgage, kids, etc. on his millions of capital gains income. For him, it’s more like 0.01% deduction, I suspect.

But I’m certainly open to capital gains being determined than lumped into income BEFORE deductions are removed, then tax rates applied.

Wow, you guys got me really going on the responses!

Go back to the original post in the thread. The average effective federal income tax rate on people making over 1 million a year in salary is 25%. The marginal rate for these guys is 35% so you have an average of 10% in deductions. I want to know if capital gains is treated the same way. If not a capital gains rate of 15% is the equivalent of about a 25% marginal tax rate.

A person making $25,000 a year has a marginal rate of 15% federal income tax, and pays an average effective rate of 3%.

 

[manualman]

Interesting argument. I can see how you could argue that they should both be treated the same. That doesn’t mean that same has to be to the tune of 50% though

Agreed. I think there should be a graduated inheritance tax. Especially since it might avoid situations where family farm inheritors would have to sell it immediately.

Spitballing, you could make it:

0% on first million
10% on the next million
20% on the third million
30% on the fourth to 10th million
40% on the 10th to 50th million
50% above that.

 

[Nate13]

Agreed. I think there should be a graduated inheritance tax. Especially since it might avoid situations where family farm inheritors would have to sell it immediately.

Spitballing, you could make it:

0% on first million
10% on the next million
20% on the third million
30% on the fourth to 10th million
40% on the 10th to 50th million
50% above that.

The 5million number there is to protect farm inheritors, no? I don’t think you can start taxing at all until 5 million unless you have some kind of special protection.

 

[manualman]

Go back to the original post in the thread. The average effective federal income tax rate on people making over 1 million a year in salary is 25%. The marginal rate for these guys is 35% so you have an average of 10% in deductions. I want to know if capital gains is treated the same way. If not a capital gains rate of 15% is the equivalent of about a 25% marginal tax rate.

A person making $25,000 a year has a marginal rate of 15% federal income tax, and pays an average effective rate of 3%.

Yeah, but statistics are tricky boogers. Precious few salaries are $1M or larger, I imagine, and I can’t imagine that many mere “salaries” are too much larger than that. Some of these guys could conceivably have some hefty mortgages and such to sustain the flashy lifestyle that a $1M salary probably requires (imagining we are taling CEOs here). But I can’t see how people with multimillion dollar capital gains are going to sustain 10% deductions. I can’t say I’ve checked, but I’m pretty sure you can’t deduct the note on a private jet as a mortgage…

 

[Nate13]

Yeah, but statistics are tricky boogers. Precious few salaries are $1M or larger, I imagine, and I can’t imagine that many mere “salaries” are too much larger than that. Some of these guys could conceivably have some hefty mortgages and such to sustain the flashy lifestyle that a $1M salary probably requires (imagining we are taling CEOs here). But I can’t see how people with multimillion dollar capital gains are going to sustain 10% deductions. I can’t say I’ve checked, but I’m pretty sure you can’t deduct the note on a private jet as a mortgage…

I’m sure if someone donates 10%+ to charity that takes out quite a chunk. I’m having a hard time understanding how Romney has an effective tax rate of 14% when he gave close to 14% to charity. He gets to deduct 1% lol?

 

[Texas_Roofer]

Actually I was talking with someone who handles investments not too long ago at a local bank and he was saying an increase in the capital gains tax would hurt small business owners most. If I start a local business from scratch and work my butt off paying my high bracket personal and business taxes for 20 years as I grow the business with my sweat equity and then decide to sell it, I have to pay capital gains on that sale. In other words the business I have been sweating over for 20 years and paying my taxes on all of my profits is then going to get a second bite taken out of it and a huge bite at that if you want the capital gains to be 30%.

On what basis can you in good faith say that the extra 30% should be taken away from that owner when he sells his business he has built up from the ground?
…

Remember these people also benefited from 20 years of tax depreciation.

 

[ProVobis]

Remember these people also benefited from 20 years of tax depreciation.

My ex-employer benefitted from building depreciation and capital losses for over 10 years without paying a dime of taxes.

 

[Nate13]

Remember these people also benefited from 20 years of tax depreciation.

Actually he owned a small business for quite awhile and sold it when the capital gains rate was still 30%. It was interesting talking with him though about how many different ways there are to avoid paying taxes. The entire system is really dependent on people being honest and honorable. I.e without virtue America does not work. There is no way the IRS could track down every person who cheats on their taxes in a cost efficient manner. Its just not worth it to go after someone who avoided paying $10,000 in taxes because it will cost them that much or more to run them down.

This however supports my opinion that we should push to a system more reliant on charitable giving. This promotes virtue in society, which is the core of all problems.

 

[Nate13]

For those curious I looked into it and the capital gains tax of 15% is an effective tax rate. You do not get deductions at least at the level of a small time investor. You take 15% out of the total straight up. This would seem to make sense though considering Romney’s effective tax rate of 14%.

So, I can now say with some certainty that if you want to compare the capital gains tax rate to the marginal income tax rate you have to take this into account.

Thus the true state of things on the federal level is that the millionare who receives a salary of $20 million is in the 35% tax rate as compared to the millionare who receives an income through long term capital gains of $20 million and is paying an adjusted rate of 25% tax.

 

[Texas_Roofer]

For those curious I looked into it and the capital gains tax of 15% is an effective tax rate. You do not get deductions at least at the level of a small time investor. You take 15% out of the total straight up. This would seem to make sense though considering Romney’s effective tax rate of 14%.

So, I can now say with some certainty that if you want to compare the capital gains tax rate to the marginal income tax rate you have to take this into account.

Thus the true state of things on the federal level is that the millionare who receives a salary of $20 million is in the 35% tax rate as compared to the millionare who receives an income through long term capital gains of $20 million and is paying an adjusted rate of 25% tax.

??? Nate, capital gains is a type of revenue. Deductions are a different type of entry, so they are not entered in a single entry. However entering one does not prevent entering the other. Though few tax returns enter capital gains revenue (70% are deferred inside retirement accounts) practical all returns have some deductions. The reason capital gains is generally an effective rate is because really, really, few will have both a high capital gains and a high salary. (they would typically stop working). Your last paragraph maybe saying more than you think. CEO practically never have a 20 million salary - they take the pay in capital gains! It is done by awarding stock options which are sold and thus capital gains. Since CEOs selling options have no deterioration of value through inflation, it is a travesty to tax these action equal to a sale of a 20year old stock, equipment, building, land, etc…