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Thursday, September 22, 2011

Tax the Rich…or at least anybody but me!

The nation should have a tax system that looks like someone designed it on purpose. 
                                                           ~William Simon

The Bush tax cuts were enacted in 2001 and 2003. They are also scheduled to expire on December 31st 2011.  A fight has erupted over what to do next. Democrats lean towards letting them expire, Republicans tend to favor that they be extended.

The Bush tax cuts really helped folks in the upper middle class or “lower rich” range because the majority of their money is not derived from investment income.

If the Bush tax cuts were to end, the biggest losers would be individuals who earn over $200,000 and couples who earn $250,000 or more.  In certain parts of the country those sorts of numbers would identify you as rich.  Now, where I live (S.F. Bay Area) not so much.

Did the Bush tax cuts benefit the rich? Why or why not?

Most millionaires don’t get wages / paychecks.  For example, Warren Buffetts’ income as CEO of Berkshire-Hathaway is $100,000.

But to dig deeper, how much does Warren Buffett actually make?  Different question…different answer.  He makes millions of dollars but it is investment income from capital gains and dividends. That money is taxed at the capital gains rate of 15%. The average accountant pays a higher rate than that.

Last Monday in his White House address, President Obama called on Congress to increase taxes over a 10-year period by $1.5 trillion as part of a deficit reduction package.  He also proposed an overhaul to the tax code and introduced a plan that he referred to as the “Buffett rule” named after billionaire investor Warren Buffett.

This inspiration no doubt stemmed from Warren Buffett’s August 2011 op-ed piece in the New York Times. Since then political think tanks have been pondering whether or not millionaires are actually taxed less than average workers.

According to one Washington think tank (Tax Policy Center, I think) most people making over $1,000,000 pay 29% in federal income taxes but those earning in the $50,000 - $75,000 pay only15%.

The rest of the story is that middle class wage earners also pay payroll taxes that are not applied to those making over $106,800.

When you’re talking about incomes above $1 million, they can range up to several billion dollars and the bulk of that income is usually derived from capital investments. The top tax rate for dividends and capital gains is 15%.

Long story short, if you ended the Bush tax cuts, folks like Buffett wouldn’t feel a thing.

Closing the gap between capital and wage income is the real goal here.

What do you think? Should the Bush tax cuts expire? Be extended? Should the rich pay more in taxes? How do we determine who is really rich?

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