mykeystrokes.com

"Do or Do not. There is no try."

“A Tax System Tilted Toward The Rich”: Hitting Working Americans With Punishing Rates

Congress managed to pass a tax bill in December — a great relief to tax professionals like myself who are going to spend the next four months preparing returns for clients. But what our legislators didn’t do was address the fundamentally unfair way the United States taxes people who work for a living compared with people who live off of the earnings of their investments.

Our current system hits working Americans with punishing rates compared with what the investing classes are charged. A generation’s worth of legislative twists have left our tax code so warped that during the coming filing season, one married couple bringing in $150,000 in total income from two jobs could find itself paying almost three times as much in federal income taxes as another couple that is alike in every way — except for the source of its income.

The tax code started to tilt in the direction of favoring income from investments — or favoring the 1 percent, if you will — more than 20 years ago. In 1993, the year Bill Clinton took office, a married couple claiming the standard deduction — with no children, tax credits or other adjustments to income — and earning $75,000 apiece in wages, would have paid $35,650 in federal income taxes.

A similar couple, whose income came solely from long-term capital gains, would have gotten a small break thanks to what was then the 28 percent top rate on those gains. Their total tax bill, $34,158, would have been about $1,500 lower than that of the wage earners.

By 2000 — the year George W. Bush was first elected — the tax gap between wage earners and investors had already opened up. In that year, our two-wages couple would have paid $33,607 in taxes. They also would have paid that amount if all of their income had been from stock dividends; there was no preferential treatment for dividends at that point.

But the couple whose income came from long-term capital gains would have paid $23,025 in taxes — almost a third less.

Fast-forward to the 2014 tax season. Our two-income couple are still working full time to make the same $150,000 (not a farfetched scenario in our new-normal era of stagnant wages). After a decade’s worth of inflation adjustments to their tax bracket, their tax bill is now $24,138.

And the couple living off of their investments? Their tax bill — whether their money came from long-term capital gains or qualifying dividends — has been slashed to $8,385, or a little more than one-third of the tax load on wage earners.

Some of my clients who get their money from unearned income find this discrepancy unbelievable when they compare their federal taxes to their state bills. During this tax season, I know I will have clients — in California and Oregon, where I live — who will pay more in state income taxes than they do in federal taxes. I may even have some clients who will be stunned to learn that they face a four-figure state tax bill while paying exactly zero in federal income taxes for the year.

The reason: The federal code provides that there is no tax on capital gains or qualifying dividends for people in the 15 percent income tax bracket. That means that a Los Angeles married couple filing jointly for 2014 with $94,100 of adjusted gross income, all from long-term capital gains and qualifying dividends, would pay nothing — zero! — in federal income tax. But their California tax bill would be north of $3,000.

How did we get to this point? No legislator ever campaigned saying, “Tax laborers more than investors!” But several changes in the code since the early 1990s, including lowered tax rates on capital gains and lowered rates on qualified dividends, have conspired to produce that result. My high-income clients were dismayed last year by the new 3.8 percent net investment income tax, which applies to joint filers with modified adjusted gross incomes of more than $250,000 ($200,000 for singles), but that affects relatively few filers and, perversely enough, applies to non-tax-advantaged income such as rentals, as well as to dividends and long-term gains.

Neither political party gets sole credit or blame. President George W. Bush was most aggressive about pushing such tax changes, but breaks for unearned income were also passed and extended under both the Clinton and Obama administrations. Supporters argued that lower rates would benefit retirees living on fixed incomes and also spur investments. But the Center on Budget and Policy Priorities says that almost half of all long-term capital gains in 2012 went to the top 0.1 percent of households by income. For the nearly 60 percent of elderly filers who had incomes of less than $40,000 in 2011, the lower rates were worth less than $6 per household.

In 1924 — a different era to be sure — industrialist-robber baron-Treasury Secretary Andrew Mellon wrote in support of treating wages more favorably than investments. “The fairness of taxing more lightly income from wages, salaries or from investments is beyond question,” he wrote. “In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments.”

Well, that’s certainly not going to happen any time soon. But leveling out the tax treatment of wages and investment incomes would increase both the perceived and actual fairness of the tax code. It would eliminate preferences that distort investment and financial planning decisions. A fairer code might also increase respect for the system and improve tax collection rates overall.

 

By: Joseph Anthony, The Los Angeles Times (TNS); The National Memo, December 31, 2014

January 2, 2015 Posted by | Tax Code, Tax Rates, Wealthy | , , , , , , , | Leave a comment

“In Shocker, GOP Proposes Cutting Taxes For The Wealthy”: Don’t Believe The Baloney About Tax Simplification

For some time, I’ve been saying, perhaps naively, that we ought to have a real debate about tax reform, and maybe actually accompish something. Sure, Democrats and Republicans have different goals when it comes to this issue—Democrats would like to see the elimination of loopholes and greater revenue, while Republicans want to reduce taxes on the wealthy—but there may be a few things they could agree on somewhere in there. You never know.

So today, Representative Dave Camp, the chair of the House Ways and Means Committee, is releasing the latest incarnation of Republican tax reform. And it’s…exactly what you’d expect. Unfortunately.

In fact, though we’re waiting for details, it looks almost exactly like the plan Republicans released two years ago. The centerpiece is an elimination of most tax brackets, leaving only two, at 10 percent and 25 percent. In a total shocker, that means a huge tax break for the wealthy! I know—I too am amazed that Republicans would propose such a thing.

But they’ll make up the revenue, they protest. How? Well as always, Republicans say they’ll eliminate loopholes, but won’t say which ones. The reason for that is simple: everyone hates loopholes that other people benefit from, but everyone wants to keep their own loopholes. As long as you never say which loopholes you’d eliminate, nobody has reason to fight against your plan, since they don’t know whether the ox being gored is theirs or someone else’s. Furthermore, the really big loopholes are ones that lots of people love, like the mortgage interest deduction, a largely middle- and upper-class entitlement that cost the Treasury $82 billion in 2012, or the deduction for employer-provided health insurance, the largest tax expenditure at a whopping $184 billion. Think anyone’s going to eliminate those? Not on your life. But that’s where the real money is.

There is one new thing in this Republican proposal, a surtax on certain incomes over $400,000 a year, which would assumedly recover some of the money we’re losing by cutting those people’s taxes. But there are some devilish details. First, some kinds of high earners, like those in manufacturing, are excluded. And most importantly, it would only apply to wages over $400,000, and not investment income. In other words, as is usually the case with Republican proposals, they reflect a particular value: that work should be taxed at a higher rate than investments. And of course, the higher you go up the income scale, the greater the proportion of their income the wealthy get from their investments.

One final note on this. The part of the plan that will get the most attention is reducing the number of tax brackets to two. This is always offered in the name of “tax simplification,” but the truth is that the number of brackets is just about the least complicated thing about the tax code. Kevin Drum has it right:

I’m not encouraged by the fact that reducing the number of tax brackets is apparently a key feature of this “simplification” plan. That doesn’t simplify things by even an iota. The hard part of calculating your taxes, after all, is figuring out your taxable income. That takes about 99.9 percent of your time. Once that’s all done, the final step is to look up your tax rate and then multiply the rate by your taxable income. That part takes about 30 seconds.

In fact, we ought to have more tax brackets, not fewer, particularly at the high end. There’s no reason that someone making $400,000 a year should pay the same marginal rate as someone making $400 million a year.

Anyhow, the most consequential feature of this Republican tax plan, like those that came before it, is its attempt to relieve the nation’s wealthy of their burden of taxes, so terribly weighed down as they are. Maybe I’m forgetting something, but I can’t recall there ever being a Republican tax plan that didn’t propose precisely that. Ever. And they wonder why Democrats have so much success characterizing them as the party of the rich.

 

By: Paul Waldman, Contributing Editor, The American Prospect, February 26, 2014

February 27, 2014 Posted by | GOP, Tax Reform | , , , , , , , | Leave a comment

   

%d bloggers like this: