Taxing the Rich – Will They Bend but Not Break?

July 15, 2009 by  
Filed under Taxes

Mr. ToughMoneyLove is not ready to launch a full-bore rant on the health care proposal that has emerged from the House. I will wait and see what the Senate does first.

But it is now clear that the fallback funding strategy favored by many Democrats in Congress is “tax the rich.”

[House Speaker Nancy Pelosi, from left, stands with House Democratic leaders Steny Hoye, Pete Stark, Henry Waxman, Charles Rangel, John Dingell announce health-care legislation.]

Here are many of our wise Congressional leaders lined-up together. If you have money – they want it. Can you see it on their faces? Somber and intense. When it comes to taxes, they don’t fool around. (Photo credit:  WSJ)

Many people don’t seem to like the rich. Many in Congress seem uncomfortable being rich while others are not.

There are also different opinions on who qualifies as being “rich” such that they should be paying for health care and other benefits for everyone. Small business owners are in for some serious trouble according to the House plan. I fear for the employees of small businesses that are forced into providing benefits they cannot afford.

For those who are embarrassed about being rich, I have a practical suggestion. Instead of projecting your feelings onto others by taxing them, just surrender your own wealth to the government to distribute. (That means you, Ted Kennedy. After all, the only thing you did to acquire your wealth was to be born into the right family.) That solves two problems. You purge yourself of wealth-guilt while saving the government the trouble of creating new wealth-targeted taxes.

If the government continues its trend of refusing to say “we cannot afford that”, the taxpayers – the “rich” included – will be stretched to the breaking point. Recent estimates are that only 47% of tax filers for 2009 will pay any federal income taxes. Is it sustainable for 53% of us to pay the costs of uncontrolled government spending for everyone?

At this point I’m not sure what will happen if the rich (and not so rich) “break” under an increasingly large tax burden. Tax revolts don’t work because you get put in jail. Some of us who are closer to retirement may accelerate our plans, because continuing to work will bring diminishing returns all the way around. Indeed, if the new plan provides part-timers and the non-employed with affordable health care options even before Medicare eligibility at age 65, who knows what might happen to fed-up, late stage baby boomers?

Or we may all just reluctantly trudge along with pre-Reagan era marginal tax rates.


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25 Responses to “Taxing the Rich – Will They Bend but Not Break?”
  1. andyg8180 says:

    so the whole “cut-government spending” still isn’t an option? They keep creating gov’t jobs… thats not the way to go IMO… it sounds nice, but wheres the money coming from??

    You keep dinging the rich, theyre gonna keep looking for even more loopholes and ways to hide money… I’m not “rich” but i really dont agree with taxing them like that…

  2. K-Roger says:

    Andyg8180,
    How do you know you are not “rich,” they keep moving the number down everytime we turn around. Pretty soon a married couple, both working at a burger joint, will be considered rich because of the dual income.

  3. TMN says:

    Taxes for the first couple decades after income tax started: the bottom 90% paid nothing.

    Taxes for most of the 50s – 70s: 90%-95% tax rate on the highest incomes. (and boy did our scientific and cultural progress suck during that time)

    Taxes for 2010 (proposed): something like 39% on the top bracket, rather than 35%. That’ll never work! Don’t you whippersnappers remember history? People won’t take it! Our economy will crumble! Wait…

  4. andyg8180 says:

    @K-Roger… youre absolutely right… i didnt even consider that…

    @TMN you should also remember that everything was able to be written off including interest from your credit card… 90% is a little extreme in your comment considering… 90% was taxed at a certain dollar amount… Anything afer X amount was taxed that high… similar to the way its done now… But remember, everything was written off… Theres barely anything that can be written off now adays…

  5. toltecs says:

    I agree on the fact that a majority of citizens should not get by tax free.

    However, everyone acts like the proposed change in the tax code would absolutely soak the rich to the point that they will “break”. Look at the numbers. From what I understand, they are proposing to change the highest tax bracket from 35% to 39%, correct?

    Let’s assume that a married couple filing jointly makes $450,000 this year. Unless they live in NYC or San Francisco, I think we could all agree they are pretty wealthy, yes? Under the current tax rates, they would pay a total of $127,862 without any deductions, which is an effective tax rate of 28.4%.

    If the proposed increase in rate for the top bracket was passed, this same family would then pay a total of $130,944 without any deductions, which is an effective tax rate of 29.1%. That is an increase in taxes of $3082 or 2.4%.

    Even with this increase, we would still have some of the lowest personal tax rates in the developed world.

    http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.svg

  6. TMN says:

    Even if they do live in SF or NYC, those are some ridiculously wealthy people right there. I personally know people who live in both cities and make something like 50 grand a year, and both consider themselves relatively well off.

    450000 6.8 times the median household income in San Francisco, the 3rd richest city in the country. Hell, it’s still 2.2 times the median household income in the richest census district in NYC, while it’s a staggering 45 times the median household income for the poorest census district in the same city.

    This whole, “oh, they’re not rich, they live in NYC,” thing is way out of control, especially on this blog. There are plenty of dirt poor people who manage to live in NYC, and the rich people who live there and complain about prices are living REALLY well while they do so.

  7. MasterPo says:

    TMN – Putting aside the Hollywood types, the “rank & file” millionare is not the glits and glamour Paris Hilton or Donald Trump type. There are *thousands* of millionares (people with a net worth of $1 million or more) who have worked very very very hard for decades to get there.

    And thet’s just it.

    WHY should anyone work so hard (and by fact of working so hard produce and achieve so much) if when they do rich the pinnacle of their success suddenly they become public enemy #1 and are practically burned at the stake?!

    Toltecs – If you think $3,000 is no big deal more to pay then why don’t you send a $3,000 right now to the IRS?

  8. TMN says:

    There are a lot of people who are millionaires who have worked and saved for a long time. But we’re not talking about millionaires. We’re talking about people with inordinately high incomes THIS YEAR.

    And we’re not talking about burning them at the stake, we’re talking about raising the taxes ONLY on the portion of their income that starts at multiple times the average household income in this country.

    That kind of gross over-exageration and misdirection is part of why it’s pretty hard to by sympathetic to the “poor rich” argument.

  9. MasterPo says:

    TMN – Show me where in Obama’s taxes there is a time limit on the tax increase? Show me were it expires and has to be re-voted on like the Bush tax cuts?

    It is NOT a “gross over-exageration” to ask why should someone work hard and achieve more this year or any other year if that extra is going to be signled out and targeted for extra taxation?? I sure as heck wouldn’t!

    BTW, define “inordinately high income”. I didn’t realize there was a standard income level to be compared to for “inordinately high” status.

  10. MasterPo says:

    ps – TMN:

    What is that “inordinately high income” person “THIS YEAR” is a salesman/woman who just made the grand sale of a life time? A one time event that everyone in his/her office dreams about doing in their career?

    Or how about the invenor that submits hundreds of ideas to industry and gets rejected but this year finally submits an idea that is accepted and gets the big payoff they’ve always wanted for their idea?

    You going to punish people like these for a one-time “THIS YEAR” achievement?

    Nice guy.

  11. toltecs says:

    MasterPro said:

    “It is NOT a “gross over-exageration” to ask why should someone work hard and achieve more this year or any other year if that extra is going to be signled out and targeted for extra taxation?? I sure as heck wouldn’t!”

    You wouldn’t? Are you still working minimum wage then? Why would you want to make anymore than minimum wage when you will be taxed a higher rates if you make more? Our tax system has been based on higher taxes on higher incomes for I don’t know how long.

    It is ridiculous to say that you wouldn’t want to make $50,000 more this year because your tax bill would increase by $1250.

    Also, I am not saying that $3000 is “no big deal.” I do think that an increase of $3000 in taxes is rather small for a family that is making $450,000 each year. My main point is that this soaking-the-rich argument and the idea that this proposed tax increase is going to break the wealthy is not accurate. In the grand scheme of things, this is a very small increase in taxes for people who make that much money.

    I make much less than $450,000 each year and live a very comfortable life compared to most people. For all that we get in return (both good and bad), I think our tax rates are very reasonable, especially when you compare our rates and quality of living to the rest of the world. Would you disagree?

  12. cjbr549 says:

    My problem with the tax the rich scheme is that it invariably eventually becomes a tax on the middle class. The AMT was a tax on the rich, 30 years ago. Now it’s hitting middle class families (by Obama’s definition). With the inflation that I think we can expect in the next few years since we are printing more money, how long will a tax on families making 500K be a tax on the wealthy? When we get several years of double digit inflation that brings the median income (not buying power) up to 120K? Then 500K meets what most people consider middle class. Besides, taxing the rich to pay for programs that will run for decades is a folly. They have the money to influence politics (that’s why they are called “Rich”) so they will ensure that there are loopholes or that they are just repealed when the Republicans take back over. I think if we stopped using the tax system for a welfare system and eliminated refundable tax credits, it would raise enough revenue to pay for the Dems pet projects. Heck, someday we may be able to actually pay down our debt if everyone that worked paid some income taxes.

  13. MasterPo says:

    CJ is right. Two years ago I had a one-time event that put me in AMT range and I got raped for it!!! :-(

    Toltec – What’s so magical about $450,000? Or any number for that matter? (after all, Obama had set his sights on $200k-$250k). What business is it of yours what your neighbor is making? Can you explain why you and other liberals feel the need to reach into someone else’s pocket?!

    No I don’t make min wage but I have turned down the chance to make more for several reasons, one of which high on the list is that the extra income AFTER TAXES just wasn’t worth it compared to the effort, risk and general stress of the job. And I’m NOT the only one in the country who has made that kind of decision in recent times.

    Explain to me how you turn an economy around, pull it out of a recession into a strong, growing, healthy economy while also limiting how much a person can make? How do you have a growing healthy economy without someone getting and staying rich??

  14. Rick Beagle says:

    MasterPo and CJ,

    Have you happened to take a peek out the window at our current economic situation? At what point do we actually buck up a penny and realize that the “fiscal conservative” thinking of the last few years were complete and utter failures? Shouldn’t we learn from our mistakes and go back to what used to work just fine? The taxes proposed on the wealthiest Americans will do little to impact their daily lives and will do a GREAT deal in closing our budget deficits, closing the gap between rich\poor, and help stop the erosion of the middle class.

    Additionally, let me take your motivation argument to task. How exactly has the erosion of our school systems and infrastructure inspired innovation and success? How exactly has the catering to the whims of mega corporations help inspire our youth and our future (FERC, FCC, SEC, EPA being prime examples)?

    What is wrong with a responsible business environment, and a tax policy that consistently reinvests in our future?
    Nothing.

    Anyone here think that people have heard the anti-tax message so many times that like Pavlov’s dog they respond to the stimuli in a predictable and irrational manner rather than thinking the issue through?

    Peace.
    Rick Beagle

  15. toltecs says:

    “Toltec – What’s so magical about $450,000?”

    Nothing special. Just the number I happened to pick that is in the top tax bracket and that most people would regard as “wealthy.”

    “What business is it of yours what your neighbor is making?”

    What? We are having a discussion about taxes. Taxes are currently (and have been for 96 years) dependent upon your income. We all pay and benefit from taxes. This is why we are talking about income. I am not interested in what my “neighbor is making.” I am just interested in our income-tax system.

    “Can you explain why you and other liberals feel the need to reach into someone else’s pocket?!”

    Again, what? We are talking about taxes. How would this country operate without taxes? You can call it “reaching into someone else’s pocket” if you would like, but that is the nature of taxes, and I don’t think the idea of paying taxes exclusively belongs to “liberals.” You are really reaching in your arguments now. Is your argument that we should not have to pay taxes???

    “Explain to me how you turn an economy around, pull it out of a recession into a strong, growing, healthy economy while also limiting how much a person can make?”

    No one is suggesting a limit on how much you make. We have had progressive taxation in the US since 1913. Based upon your statements, it sounds like you have a problem with progressive taxation instead of a slight increase in the tax rate of the highest bracket.

    “How do you have a growing healthy economy without someone getting and staying rich??”

    Again, no one is suggesting that there should not be any wealthy people in our country. As I said in my original post, we are talking about a 4% increase in tax on income over and above about $350,000. I do not believe that small increase is going to make any difference in the daily lives or initiative of people who make that much money. In other words, this proposed increase is not going to “break” the rich as the title of this post suggests.

    Your posts have completely strayed from facts or discussion into hyperbole.

  16. lurker carl says:

    toltecs, double checked your math. Raising the top tax rate from 35% to 39% is not a 4% increase as you suggest, the increase is over 11%. In my financial opinion, that kind of tax increase will result in a substantial net salary reduction.

  17. toltecs says:

    Carl,

    You don’t know what you are talking about. You simply calculated 35% of $450,000 as the tax due now and then calculated 39% of $450,000 as the tax due if the rate was increased. If you take that difference and calculate the % increase, you get 11%. Fortunately, that is NOT how taxes are calculated.

    For this year, the cut-off for the top tax bracket (35%) is $372,950. Therefore, only income over $372,950 is taxed at that rate.

    http://www.fairmark.com/refrence/index.htm

    $450,000 – $372,950 = $77,050

    That is the amount of income that is taxed at 35% currently and would be taxed at 39% if that rate was increased.

    In addition, I did not take into account any deductions, even the standard deduction ($11,400). Since a family that brings in $450,000 per year would likely have large itemized deductions, their taxable income would be smaller and the increase in their taxes would be even smaller than 2.4%.

    Again, this is not going to “break” the wealthy.

  18. lurker carl says:

    I know exactly what I’m talking about. You need to take a refresher math course.

  19. toltecs says:

    It is not related to my math skills. It is your accounting skills that are lacking. Didn’t you do exactly what I explained in the first paragraph?

    0.35 x 450,000 = 157,500

    0.39 x 450,000 = 175,500

    175,500 – 157,500 = 18,000

    100 x (18,000/157,500) = 11.4%

    This is not how taxes are calculated. You don’t understand marginal tax rates or tax brackets.

    http://www.econlib.org/library/Enc/MarginalTaxRates.html

  20. lurker carl says:

    “we are talking about a 4% increase in tax on income over and above about $350,000″

    These are your exact words. Tax on income over and above $350K does not describe or include the tax rates on income BELOW $350K. My math and accounting skills are just fine, along with my understanding of the income tax brackets.

    I have no claim as to what amount of reduced income will make or break any particular person. Nor does anyone else.

  21. toltecs says:

    Show me your calculations then and tell me where I made a mistake.

    Did you not do exactly what I described in the 2:56pm post?

  22. lurker carl says:

    Your math and your words do not correlate. I already described the error twice, that’s enough.

  23. toltecs says:

    You didn’t show anything to refute my numbers. All you have are vague criticisms without showing any calculations. You haven’t answered my question about your 11% number. You simply don’t know how to calculate income taxes.

  24. Rick Beagle says:

    Once again the people screaming about the tax increase are taken to task over their perceived expertise on the matter – only to be found wanting. Are you familiar with Pavlov’s dog? At what point do you stop reacting to external stimulus and engage your mental capabilities?

    Thing’s are not going so well in the U.S. and besides the response described above, the naysayers have provided nothing tangible to help us out of our troubles. Nothing. Nada.

    You spend so much time telling us how we are ruining the country, but have yet to provide a single idea that would help us out of the mess we are in.

    Peace.
    Rick Beagle

  25. toltecs says:

    With the 2009 tax brackets, a family with a taxable income of $450,000 filing as “married filing jointly” would pay the following:

    10% on income up to $16,700 = $1670
    15% on income up to $67,900 = $7680
    25% on income up to $137,050 = $17,287.50
    28% on income up to $208,850 = $20,104
    33% on income up to $372,950 = $54,153
    35% on income above $372,950 = $26,967.50

    That adds up to $127,862. You can verify my calculations with this income tax calculator:

    http://www.moneychimp.com/features/tax_brackets.htm

    Run these numbers again changing the highest bracket to 39%.

    10% on income up to $16,700 = $1670
    15% on income up to $67,900 = $7680
    25% on income up to $137,050 = $17,287.50
    28% on income up to $208,850 = $20,104
    33% on income up to $372,950 = $54,153
    39% on income above $372,950 = $30,049.50

    That adds up to $130,944. That is an increase in taxes of $3082.

    % increase = 100 x 3082/127,862 = 2.4%

    As I said, you don’t know how to calculate income tax.

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