Asymmetrical Information

Yes, but the upper middle class, small biz owners, and folks like yourself don't support the right causes. Ms. Kerry does.

That's why govt has to take your money.

Which reminds me - shouldn't we set up a horse race track as a charity? Or, is there some rule that says that only rich-people entertainment (symphony, opera) can be tax-deductible?

How much of this is a result of the difference between the way we tax capital gains and the way we tax employment income?

Some, undoubtedly, but the capital gains and dividend rates are 15%, so a larger part of it has to be that she's sheltering considerable income.

Hey Jane, define "upper middle class and small business owners" in terms of an income bracket. I'm not for eating the rich or anything, but this class of "small business owners" strikes me as suspciously broad.

I suspect there's a class or two with income 200k/year small-business owners, let's call them the "very rich." At what income does wealth becomes fungible enough to arrange -- and avoid -- taxes? I agree that we can't eat the super-rich, and let's spare the small-business owners, too, but what about nibbling on the very rich?

Apparently, a large part of Heinz-Kerry's income that appears on her tax return is interest from municipal bonds, which the Code exempts from tax. The better question is why she has (relatively) so very LITTLE gross income (taxable or not) on her return, given her astounding wealth. It's being sheltered somehow.

contributor b:

Did you call those that make 200/k a year "very rich?"

Upper middle class of course varies by location. But I'd say that I don't think it's fair to take 40% off the top of the income of a management consultant living in Brooklyn, while taking such a trivial portion of Teresa Heinz Kerry's income . . . I support a weakly progressive tax code, but I think the same fairness concerns apply between that management consultant and Ms Heinz Kerry as do between me and the management consultant.

I think that the even more disturbing fact about Teresa's taxes is the fact that she shows only $6M in income when she is worth well in excess of $1B. Clearly, she is sheltering much of her income or (less likely) needs a new financial advisor.

Jane:

1. Just so I'm clear on this - there is no complaint from you if Ms. Heinz-Kerry pays 15% on her income. (Though I guess a complaint from John Edwards). So it's the 2.6% she's saved that is bothering you. (A significant amount, at that income level). Is this right?

2. You see three tax rate data points (Ms. Kerry, the management consultant, and yourself) and note that the slope of line between you and the management consultant is sharper (it's positive) than the slope of the line between the management consultant and Ms. Kerry. So to true the system, you want to move the first two data points down, rather than moving the last data point up. Right?

So are you arguing that the effective tax rate on the management consultant should be significantly less than 12.4%? And I guess you'd be a bit below that. I just don't think we'll generate enough tax revenue that way. I think I'm missing something.

how do you calculate the $6m in income? i get 2,781,791 in tax-exempt income from bonds and 2,291,137 from other sources (dividends, interest)

Actually, I picked a management consultant because the relationship between his income and teresa's, and his and mine, is the same:

Y = 5X

The slope of the line is the same.

My problem is that if we can't tax Ms Heinz-Kerry at a given rate, it's grotesque to double the rate on the guys farther down the tree in order to make up her share . . . just as it would be grotesque to triple my tax rate to make up shortfalls from the management consultant.

I think our government spending should be in line with what we can get out of a system that is actually progressive. A progressive system that started negative and sloped up to, say, 25%, wouldn't pay tax avoidance nearly as well, and therefore would get a lot less of it.

I'm actually for eliminating the corporate income tax, and then equalising the treatment of capgains and dividends. Unless you first remove the corporate tax, you provide a sharp disincentive to invest, which is what the capgains is supposed to remedy, although stupidly inefficiently. But if we can't eliminate the corporate income tax--and it's liberals who are preventing us from doing so--then, yes, I am in favour of lower capgains and dividend taxes. But that just highlights, to me, the folly of designing a big welfare state on the grounds that we'll get "the rich" to pay for it. We get the upper middle class to pay for it, and while I fully agree that they deserve to pay more of their income than the lower middle class (which I know will get me in trouble with many libertarians), I think there's a limit on what they should have to pay . . . and on a practical limit, I note that there is a limit on what they can pay. It seems to me that a lot of people look at the Teresa Heinz Kerry's of the world and conclude that there's plenty of money to pay for their pet programmes, when the reality is that they'll get precious little from her, and the extravagent costs of whatever they propose are going to be born by your lawyer, dentist, and 7-11 owner.

I'm puzzled; I've always thought of tax-free municipals as a way of subsidizing municipalities by letting them pay lower interest. Presumably THK gets some advantage from the arrangement or she wouldn't do it, but you seem to be assuming that she gets all the advantage, which strikes me as odd.

I'd expect that if such bonds were subjected to the same tax as everything else, she would restructure her investments. Her gross income would rise well above $6M, and her after-tax income would fall, say, to $6M-X, while bond-issuers would have to start paying $6M+Y in order to survive in the new market. Her current advantage is X; theirs is Y, and I have no way to compare them, but I wouldn't assume that Y is negligible. Is this totally off-base?

I agree- I thought muni's et al. payed a lower rate because of their favorable tax treatment. So that income on muni's could, conceivably, be considered after-tax income.

So the taxable income is only the $2.27m? and she is paying a 35% rate on that as outlined by the memo on the kerry website:

http://www.johnkerry.com/pressroom/releases/pr_2004_0511b.html

As a conservative but not a raving partisan hack I felt that those of us located within the uppermiddle class were shouldering a burden. Your position is vindicated.

Interesting comments and topic. Maybe the following would ass to the discussion(?). The following were released last week and reflect 2002 data. Percentiles are based upon adjusted gross incomes. "Tax Share" is of aggregate income taxes paid.
Income Group-Tax Share(%)
Top 1% - 33.7
Top 5% - 53.8
Top 10% - 65.7
Top 25% - 83.9
Top 50% - 96.5%
It appears (to me) that the "rich" are paying their "fair share" and then some.
Also, it appears that the tax rates are still progressive: The following are effective tax rates, i.e., taxes paid divided by income:
Income Group----Tax Rate(%)
Top 1% ---- 27.25
5% ---- 22.95
10% ---- 20.51
25% ---- 17.00
50% ---- 14.67
lower 50% ---- 3.22

The data also indicates that not only are the upper incomes are paying rates about as high as pre-tax cuts, those incomes are falling. Aggregate income for the top 1% is down by 26% from 2000 to 2002. Threshold for the Top 1% in 2000 was about $313,400. In 2002, it was $258, 400. Of course, tax-sheltered income such as that from Municipal Bonds and interests and dividends accumulating in IRA's and 401 plans are not included in the above. So, whose "very rich"? And what rate should "they" pay? One other thing, about 32% of the top 10% in 2002 were not in that group in 2000.

Sorry, "ass" above should be "add". Freudian?

Jane: Are you also for eliminating deductions? I know that's a major pipe-dream, but it seems that's really the only solution to this tax-sheltering business. A flat-rate without deductions would be ideal [I think, I could be wrong], but it's probably not practical to get through government whereas a weakly progressive structure that's better than the current system is, so you can count at least this libertarian on your side.

Tom: You aren't off-base. The intent is to make debt for municipalities cheaper. It isn't obvious to me that this is a good cause, but that is the intent. (I don't see anything that encourages local government to take on debt as being particularly beneficial.)

Back when the marginal tax rates were wildly progressive, this was a bigger subsidy to the rich than it is now. One can assume that muni debt pays less than similar risk debt to the bondowner. The people in the highest tax brackets would buy it first - they get the biggest break, in percentage terms. If the amount of investment capital of this type is such that the lowest bracket to invest in it is about 30%, then the discount on the interest rate will also be about 30%. Anyone paying more than 30% (ie in a higher tax bracket) will get surplus benefits. At one time this could be 50% or more, with high pre-Reagan tax brackets. Now it probably is only a few points, even for someone like Heinz-Kerry. She received about 2.8 million in tax-free interest. She probably could have bought other low-risk debt, pulled in (say) 4 million, but paid (say) 1.3 million in taxes, leaving her with 2.7 million. Her benefit I would guesstimate on the order of 100k, more or less. It makes her average tax rate look much smaller, but it really isn't that big of a boon to her. (These numbers are pulled out of thin air, I haven't compared them against actual returns or tax brackets, but they should be ballpark.) If we were comparing her burden to, say, mine, we would have to factor in at least part of that ~1.2 million subsidy to the Municipalities as part of her "burden" to be fair. (It depends on what the best alternative investment is how much of it to credit to her. There probably was a better alternative than the other debt instruments I mentioned above.)

I suspect her reported income was 5 million on assets of at least 500 million because the balance of her portfolio is in stock. Capital gains on stock aren't taxed or reported until the shares are sold. I assume she has huge outstanding capital gains on the Heinz shares from growth in those shares between the death of her first husband and now. (I believe the baseline would have been set then, after the estate was settled.) If she merely "cashed out" she would probably pay huge taxes. (This is a real problem for the efficiency of the stock market after a big gain, by the way. The return on the best "alternative investment" has to be pretty high relative to expected return on the current stock to make the tax hit of reallocation worthwhile.)

People like Heinz-Kelly probably do get off cheap on tax burden - a single "tax it all as income" tax replacing corporate, capital gains, dividend, and income taxes would be better, fairer, and more efficient. Comparing gross % of reported income isn't good for finding how much they underpay, though. Too much is left out of reported income and reported taxes.

There is no legal intent for why muni interest is not subject to Fed tax (US Treasuries are not subject to state income taxes either by the way), it's a constitutional thing. The theory is that that the Feds aren't allowed to interfere with the state's revenue raising activities, and vice versa. Imagine a Fed statute that taxed muni interest at %100, would basically make state borrowing illegal.

Also, what is the %12.4 that is Mrs. Kerry's effective tax rate, %12.4 of. Muni interest never gets on the 1040, it isn't a 'deduction'. Is it the AGI at the top of page 2. Does anybody know ?

Jane:

I'm not trying to be persnickety, but I seem to be misunderstanding your models and I've apparently badly stated my point above.

1. The data points I was talking about would be (income, tax rate); I'm not entirely sure what you're graphing in your slope reply. Since you've said that your tax rate is higher than Ms. Kerry's, and (I assume) the consultant's tax rate is higher than yours, there's an inflection point in there somewhere.

2. If the consultant's income is roughly five times what yours is, and Ms. Kerry's income is roughly 125 times what yours is, then Ms. Kerry's income is roughly 25 times the consultant's, unless I've misunderstood something.

3. Is the 12.4% figure from the data source for Ms. Kerry's income? I ask because I note that 12.4% of 6 mil. is roughly the same as 15% of 5 mil. If the 12.4% figure is calculated from the 6 mil. number, then Ms. Kerry is paying roughly the precise amount we'd expect (using your figure) on capital gains. In which case, her high priced legal and accounting teams are not doing her a lot of good. This seems more like the case John Edwards describes than anything else.

4. As for the level of progressiveness of the tax - well, Krugman's article on the income as lottery winnings as you move up the scale seems pretty convincing to me. I think the tax rates should be bound by total effect on total output. Other than total output, it's war among the interested parties. Cleaner structuring of taxes would be great, but it's going to be Republican tax lawyers fighting that one, I'd think.

> I suspect there's a class or two with income 200k/year small-business owners, let's call them the "very rich."

Why should we do something so misleading?

> I agree that we can't eat the super-rich, and let's spare the small-business owners, too, but what about nibbling on the very rich?

I'll bite - what fraction of the taxes paid should be paid by each income or wealth group? Would it be good if all of the taxes were paid by the top 5%?

It isn't obvious to me that money spent by a small biz owner is doing less good than the same amount spent by govt. Are we actually better off letting govt spend money?

I suspect that the folks employed by said small biz owner or by folks said small biz owner buys from prefer that the small biz owner have the money. Are they wrong? Evil?

Is this the best evidence you have for your claim? It's pathetic. Your triumphant whoop is absurd.

As others have noted, well over half of Heinz Kerry's income was municipal bond interest, federally tax-exempt as a matter of long-standing law. This tax exemption is not free. Munis pay substantially less interest than other equally risky bonds precisely because of this exemption. It is certainly correct to say that, had she invested in corporate bonds instead she would have had both higher income and higher taxes. In effect, munis transfer taxes from the federal government to the issuer.

It is astonishing that a Chicago MBA does not understand this simple point.

Note further that virtually all of the rest of her income was in the form of "qualifying dividends," that is, dividends that Mr. Bush and pals arranged to have taxed at only 15% starting in 2003. If you want to complain about the inequity I suggest that you address your complaints to the White House.

She also had $267K in itemized deductions. These are not specified, but since she lives in Massachusetts, it is a fair guess that this mostly represents state income tax.

Her total tax, $627K was about 31% of her non-tax-exempt income. The only reason it was that much is that she ran afoul of the AMT, probably because of the muni interest.

In other words, the Heinz Kerry paid a lower tax rate than you for two principal reasons:

1. Municipal bond interest, where she was effectively accepting a lower interest rate than she could have gotten elsewhere in exchange for tax exemption.

2. Her dividend income was taxed at the 15% rate which was part of Bush's tax cut.

Stop whining about it.

I have never read anything funnier. You have supported all of the Bush tax cuts, whined about income tax rates as being too high, and NOW are complaining that the super-rich pay less taxes, which was the Democratic argument in the first place. Do you see the irony?

Hats off to Mike. And I will say it again. Hats off to Mike.

It has always been cost-effective for the wealthy to pay to arrange their affairs to reduce their tax bill. Always will be. But to then say this justifies a massive give away to this top 2% and hand the bill to my children is some weird delusion.

What do you think Mrs. HK's bill would have been Jane prior to the Bush tax cuts? Do you imagine she saved about the same as the $650 you saved on your taxes this year? Do you think she was maybe able to buy a new refrigerator with her windfall?

I hope you enjoy your own new fridge Jane because I know my son and daughter are going to enjoy the hell out of paying for it for the next twenty years.

AI is triumphantly vindicated, just not in quite the way AI thought it was triumphantly vindicated. You should be happy to admit error on the immediate question; it's a small price to pay for getting an entire chorus line of lefties to insist, in the process of refuting you, that the tax rates apparently paid by rich people are in fact misleadingly low. Clip and save their arguments-- they'll come in handy some day.

Paul,

Tax rates paid by municipal bond holders are misleadingly low. No doubt about it.

Tax rates on dividends are NOT misleadingly low. They are just plain low, courtesy of Mr. Bush.

Martin, do you assume that whatever the federal government is spending must be okay and that adjusting tax rates is the only way to bring the budget in balance?

Also, for my edification, please define what you mean by 'massive give away.' Numbers if you please.

It's interesting to see people hold up THK's income tax as evidence of perfidious and complex methods of tax avoidance by a rich person and her squads of highly paid consultants.

In fact, tax-free munis are Personal Finance 101 material. It was in the course I took in college a decade ago, and I was an information systems major, not a finance major.

The dividend tax cut was a big win by Bush - except, he wanted to cut it to zero, and the 15% was a compromise.

Incidentally, I'm not sure I'd call muni tax rates "misleadingly low" when their tax-free status is pretty clearly described by their description as tax-free municipal bonds. They've been so described for years and years.

To the extent that THK's low tax rate looks unfair it's because you have to be pretty rich to afford enough munis and/or dividend-paying stocks to generate a noticeable income. Most stocks that pay dividends pay only in the $1-$2 per share range, per year. To get just $25,000 a year in dividend income, you'll probably need to hold between $1 million and $2 million in stock. (United Technologies, for instance.)

Thus, rich people can buy investments like these, and live off the income. Which, due to GOP policies, is privileged over income earned by working. No FICA tax, special tax rate or no tax at all, etc.

There's nothing keeping working stiffs from buying tax-free munis and dividend-paying stocks. We can get the same exact tax benefits that THK made use of. It's just that we won't get as much income from them. But they'll be good for beer money.

If THK engaged in any tax shenanigans, it's not described in the numbers on that tax form. As others noted, it's in the low $5 million in income she claimed. The tax she paid on that money is low, but IMHO straightforward and unremarkable.

Bernard writes: " These are not specified, but since she lives in Massachusetts, it is a fair guess that this mostly represents state income tax."

Is that where she filed?

I would have thought she'd put Pennsylvania as her main residence.

Many Muni bonds from the Heinz fortune would probably be Pennsylvania bonds. If she moved her state of residence to Massachusetts, she'd lose some of the tax benefits from the PA bonds.

Not a word from anyone yet, I see, on the possibility of replacing the income tax with a progressive consumption tax.

Jesus, why assume if Teresa's tax rate is low it means she's getting away with something, enjoying some excess wealth? It's easy to pay little or no taxes. Just take your money and invest in some total disaster, perpetual motion machines or something, and take a whopping huge loss, and there you go -- no taxes! Of course, no income either. The point being, a low tax rate could just as well indicate unprofitable investment decisions as anything more sinister.

Well and good, Bernard, but what's actually "misleadingly low" is not the rate paid on income from any particular instrument, but the effective tax rate paid by wealthy individuals on their income from whatever source derived. (And most of the other means used by the rich to shelter their income from taxes come at a price, just as the municipal-bond exemption does.) Now, whenever I've seen effective-rate numbers served up by class warriors, they've always been served neat-- just as Jane has done here in her ill-starred foray into the class-warrior role. No one's ever objected, by reference to munis or anything else. It's only when a rich Democrat comes under the microscope that the simple numbers suddenly start sprouting asterisks.

If Teresa's income was really only $5mn then that would be a pretty pathetic 0.5% return on her wealth. More likely she made a lot more than that but didn't have to report it as income because it was not deemed to be her income – i.e. held in trust.

As dividends are subject to double taxation both as corporate earnings and as dividend payments this has the unseen effective of reducing the actual dividend payment amount. The average dividend yield in the US is 1.6%. If you use Australia as a point of comparison where they do not have double taxation of dividends the average dividend payout is 3.7%. However the 1.6% would be further reduced buy the 15% personal income tax. Of course some of the difference could be explained for other reasons - except that valuations are similar in both countries and the spread between US and Australian yields was on average -10 basis points before the Australian 1987 tax reform that eliminated double taxation and a positive 150 basis point afterwards.

Interesting point about municipal bonds is that because the interest is tax exempt the interest rate, as mentioned, is significantly lower than corporates. As a side effect of this tax structure it effectively eliminates any competition from private industry for independent construction and operation of infrastructure. I talked to a company that invests in infrastructure globally. They cannot buy much in the US they said because they cannot compete with the ridiculously low cost of capital that municipalities have. I don't know how much of the cost savings from having extremely low capital costs are offset by bureaucratic inefficiencies but I would suspect that at least part of those benefits get passed on to the average consumer via lower fees, tolls, etc.

As for capital gains, the 15% rate is for long-term holdings (over 366 days) but the tax rate for individuals who aren't in the top 4 tax brackets only pay 5%. If she had held her stock for less than a year it would be subject to ordinary income rates. The idea is that this encourages long-term capital accumulation - a good thing for growing GDP. Although personally I would define long-term more like 5 years. Given that the average turnover in the market these days is less than 12-months and the average savings rate is negligible I'd say we could use all the tax incentives to save that we can get.

In response to the idea that $200k a year is very rich - as one other commenter said that depends on where you live. In Wisconsin you are very rich. In New York City you are squarely in the middle class. $800k (4 times income) in Wisconsin will buy you a 5000 sq ft home with all the upgrades on several acres with either waterfront or on a golf course. In Manhattan it will buy you an 800 sq ft, 3 room coop apartment in a tired old building, located in a less than desirable location that also has a monthly maintenance cost of $650. On top of that you will also have to pay $20k a year per kid for a decent school. The median price for a 2 bedroom apt. in Manhattan was approaching $1mn last time I checked.

What is rich? Imo its reasonable to define "rich" as those who earn in the top 25% of our income tax brackets. That would define rich as about $70,000 in yearly income.

What is "small" business? The US government considers all companies that have under 500 employees as small business. I think most Americans believe small business applies to a company with 10 or fewer employees.

I think if more Americans understood what "rich" really is in relation to income, and what defines a "small" business, there would be a large change in who is considered "rich", and what consitutes a "small" business.

I hardly think using a strict 25% cut off is a good way to measure who is rich. Of one family earns $70k with both spouses working and another earns the same amount with one spouse working do you think they are equally rich? Also as I just pointed out the cost of living varies tremendously across the country. The money you earn is only worth what you can buy with it. $70k in Manhattan means you can't afford to buy a home, a car or start a family. You would probably live in a small studio apartment or have roommates. I would hardly call that rich.

Additionally, I doubt you could apply that cutoff in most African countries. It would depend on the distribution of income in a particular country.

To Mike:

With respect to the tax rates, the rates looks progressive on paper, but they are much less so in practice. It's difficult to avoid paying taxes on wage income, but it's easier on investment income, and it becomes trivial as you make higher and higher amounts. The more of an individuals income comes from investments the less of the tax rate they pay. Also the tax rates you mention are only for Federal income tax, which excludes FICA. FICA takes a much bigger percentage chunk out of the incomes of people who earn less than about $100k a year. If FICA was used only to pay for Social Security (that damned lockbox) I might be more willing to exclude it, but it is pretty much treated as general income by the government (despite accounting tricks to the contrary). This adds about 12.5% of taxes paid on all money under about $100k a year (if I remember right from the last Self Employment Tax I paid.)

As far as Heinz-Kerry goes her numbers wouldn't include FICA, but it's not going to be a big percentage of what she pays. It's about $10k for her the same as everyone who makes over 100k.

Also related to the rich discussion, I remember seeing a study somewhere that discussed the differences in self perception of people as rich with respect to income. Republicans were less likely to identify themselves as rich at higher income levels then Democrats. So for instance in a group where they all made between $100k and $150k a year 75% of the Republicans would say they were middle class where 75% of the Democrats would say they were upper class. "Liberal Guilt" in action?

One last point, to really understand the taxation system it may be helpful to break down where the money goes. I went over the numbers one day (by no means suggesting that my research is complete or even accurate) given by the OMB and, as far as I could figure, most of the money that gets paid out by the government gets paid to corporations. For example interest on the debt is paid to companies and individuals who hold bonds. The defense budget is broken down between payroll and weapons, etc. Most of the money in the defense budget goes to defense contractors. The budget for the Department of Agriculture contains a good deal of money for crop support payments, etc. Most of which goes to big agricultural concerns. It goes on like that line, by line, by line.

I derive some benefit from these payments in the sort term, but people who have a lot more money invested benefit a lot more then I do. So is it fair to tax them at a higher rate so the government can pay it back to them?

If we're going to settle the question of who's rich and who isn't, how about applying a bit of revealed preference? Rhetorically pitting the rich against the middle class is part of John Kerry's stock in trade, and it's fair to assume that he's done a certain amount of focus-grouping besides.

Since he's decided as a result to promise a tax increase only for households making at least $200,000 a year, why not take that as a working definition for the next 12 days? If Kerry gets elected, and so is forced to confront the fact that said tax increase won't pay for more than a tithe of the things he says it's going to pay for, there'll be plenty of time to redefine "the rich" in line with Begbee's number.

"do you assume that whatever the federal government is spending must be okay and that adjusting tax rates is the only way to bring the budget in balance?"

This quote from David Anderson really gets to the heart of the current Libertarian and even Conservative problem. This failed notion that by slashing government revenues, expenditure savings will be forced upon an unwilling Congress did not work for Reagan nor for W. Sort of like going on a spending spree, buying new cars and taking vacations with money you don't have and then coming home to tell the missus there is no rent money. Oops, not sort of like, exactly like. Well no, not exactly like, because unlike the spendthrift couple above, the US government apparently has an unlimited credit limit. But that is another story.

I have no problem engaging with the Ayn Rand set in an honest national discussion of the role of government and our assumptions about what we spend public funds on. This would be incredibly healthy for the country. But somehow they act as if they believe that the country is not ready or mature enough to engage in this discussion of where and how we might cut expenses. So they arrive instead at this totally dishonest solution. Personally I find this disrepectful of the democratic process and enormously condescending towards the electorate. And this coming from a liberal intellectual.

Guess you can take that as a "yes", David.

martin,

why not cut spending growth from 4% to 0%. I realize much of gov't spending they don't have any control over (at least, that's what the left says), but it would still make an enormous difference of 30 years.

I understand there are very different costs of living throughout the country. But imo its reasonable to define the uppermost 25% of the tax brackets as rich, the middle 50% as middle class, and the bottom 25% as lower class. The NYC, Bostons, LA's, etc could be set aside and measured with consideration to the higher cost of living in these areas. But as long as specific numbers arent attached to a specific class, the politicians are free to distort the numbers as much as serves their purpose. And Im not saying either party has a monopoly on these sort of income distortions.

Imo all domestic politics are class warfare. And right now the only two classes represented by either party are the upper middle class, and the upper class.

Who is the 'liberal intellectual' to whom you refer??

You seemed to have over read my question a tad bit. Earlier you wrote:

"But to then say this justifies a massive give away to this top 2% and hand the bill to my children is some weird delusion."

To which I said:

"Martin, do you assume that whatever the federal government is spending must be okay and that adjusting tax rates is the only way to bring the budget in balance?

Also, for my edification, please define what you mean by 'massive give away.' Numbers if you please."

My questions were honest ones. Your statement implies to me that you think federal spending is at an appropriate level and therefore to 'give away' (which I would term 'refund') tax dollars to the top 2% is to underfund that spending and stick our children for the bill. I don't think we should do that to future generations, even though generations before have done it to mine, big time (I'm 36).

I think the government massively overspends, misallocates, and wastes money. I don't think a single federal government entity - not a single one - is free of this. I think taxes should drop significantly while still being able to pay for the overextensions of past generations (social security, general debt), I think many programs and departments should be phased out, and all remaining should be cut to reasonable levels.

Furthermore, I wish we would have this sort of conversation at the national level, but the two political parties are either opposed to cutting anything except defense (hmmm, wonder who?) or only pay it lip service.

Now, I'd really like you to define what a 'massive give away' is while keeping in mind that the top 40% earning households in America pay almost all of the income tax and the top 2% pay well over 1/3rd. Seems to me these groups would be the first logical choice for a refund if there is going to be one.

I have a problem with a tax system where 60% of the country free-loads on 40%. If our budget, and consequentially the tax burden, were much lower, this would bother me less, but then again, with a lower aggregate tax burden, nearly everyone could afford to pay the same small, reasonable amount.

I think that the even more disturbing fact about Teresa's taxes is the fact that she shows only $6M in income when she is worth well in excess of $1B. Clearly, she is sheltering much of her income or (less likely) needs a new financial advisor.

Imagine she has $900M in stocks that do not pay dividends. In the course of a year she may have plenty of paper gains and losses but the only income would come from her actually selling shares. If she didn't sell many shares she would have little or no income for the year.

I understand Jane's frustration at Teresa earning $5M a year and paying 12.4% while Jane knows if she was paid $5M a year she would pay much more. Whose policy is that really? You right wingers advocate making income from savings tax exempt. Well guess what?! Someone who earns their money sitting on a large savings account will pay less in taxes than someone who earns money by working.

At some point, though, someone had to pay taxes on that $1B. If it is all in stock appreciation then the taxes are 'locked in'. In other words, if she purchased $100M in stocks (or inherited it or whatever) and they increased in price by $900M then she has a huge tax liability when and if she sells. At some point she will pay a lot of taxes so that may make you feel better.

But then again, Bush has phased out the inheritance tax so if she leaves those earnings to her kids they will pay 0 taxes.

"Bush has phased out the inheritance tax..."

And Congress. Let's try to be honest about responsibility. It's oh so easy to confer blame or responsibility to the President when Congress must also act.

"At some point she will pay a lot of taxes so that may make you feel better."

Not me. I'd rather see more business investment, more charitable contributions, and more personal spending which keeps businesses running and productive people employed.

Here's the thing:
if you want to tax the wealthy, tax _wealth concentration_ not income. This is exactly what Ralph Nader wants to do--remove taxes on all income under $100,000--and tax estates of over $5 Million.

In practice this would mean taxing real estate and securities--other wealth can be hidden easily but anyone that gets very big has to start owning real estate or securities at some point.

> Imo its reasonable to define "rich" as those who earn in the top 25% of our income tax brackets.

By that definition, a lot more than 25% of the population is "rich" at one point in their lives. (At any moment in time, a huge fraction of the population is at 0 due to being children. When they become employed, they're well on their way to "rich" by the above definition.)

Our host posted a breakdown of income tax burden by income cohort. How is the existing breakdown be changed and why?

Begbee, are you saying that the top 25% of the population should be counted as "rich" whatever the state of the economy? That whatever happens, one out of four people will be "rich"? I am sorry, but I'm reminded of the old dodge of defining the poverty level as the bottom 10% (or whatever), and then complaining that poverty hasn't decreased at all under Administration X; in fact, the number of poor people has almost certainly increased as the total population has risen. (I don't mean that official poverty stats are calculated like this, but I have seen activists do this.)

Jane, you seem to have forgotten that the Kerrys file separate tax returns.

Looking at John Kerry's 2003 return (see his amended return at http://www.taxhistory.org ), he paid total tax of $102,152 on taxable income of $346,664 (AGI $395,338). Since the top bracket for married filing separately was $155,975.00, it is fair for Kerry to say he benefits from the Bush tax cuts (though I think he didn't get the full benefit of the bracket cuts since he ended up subject to the AMT).

On the other hand, John Kerry's tax cut is nothing compare to his wife's. Teresa Heinz Kerry had over $2.2 million in qualified dividends in 2003 (from her return on the same site). Without the Bush dividend tax cut (to 15%), I think she would have paid top-bracket income tax rates of 35% (i.e. 20% more) on at least $2 million of that (dropping $200,000 because I'm not sure of the low-bracket effects). So she gets over $400,000 from the Bush tax cuts (more than her husband's entire income).

I would have prefered eliminating or reducing the corporate income tax and treating dividends as income. That would have made companies a lot more competitive, and would make taxation of foreign income for companies less of an issue. The problem in my book is not double taxation but excessive taxation for the profits from which dividends are paid out on. With the old tax structure, a person in the highest tax bracket receiving dividend income from a company would see over 57% of the companies profits going to the feds. And with previous tax income tax brackets, it was over 60%. That is an exorbitant rate of taxation for no reason other than just distributing corporate profits to shareholders. Dropping the corporate tax rate to say 15% would bring the figure down to a still high but more reasonable 49%.

I think by bringing down the corporate tax rate and including a more modest reduction in dividend taxes, dividend payouts could have been increased because higher income tax payers who may hold a signficant stake in a company would be less likely to object to dividend payouts due to exorbitant taxation rates from double taxation, which would be good for shareholders in lower tax brackets since they would get more income. The lower tax rates would reduce the inclination for companies to hoard their profits or find inefficient ways of returning that money to shareholders, like through stock buybacks. It would encourage them to return excess capital directly to the their investors who could pursue reinvestment into the company themselves or look for other investment opportunities.

A Freeman I meant yearly income of more than $70,000 in a household. I didn't propose any change to the income tax brackets, Im not a tax expert, and I wont pretend to be one on the Net. But we throw words around like "rich" and "small business" and these words mean different things to different people. I find it absolutely ridiculous that income approaching $200,000 a year can be considered middle class, when the reality is that income level puts a person in the top 5% of earners.

Michele T I didnt say the top 25% of the population, I said the top 25% in terms of yearly income.

> I didn't propose any change to the income tax brackets

BegBee wants the "rich" to pay more, so his definition of "rich" tells us who he wants to pay more.

I'm still waiting for BegBee to tell us how much of the tax burden should be paid by each income cohort.

The current numbers have been posted. Begbee disagrees, so let's see his changes.

A Freeman I told you last post Im not a tax expert, and I have no interest in reading enough to provide an answer to your question that will just shut you up. What Im talking about is very simple. The top 25% of the US income brackets start at about $70,000. Imo its completely fair to describe a person that makes more than 75% of the population as rich. Both parties seem to have embraced the number of $200,000 a year to describe rich. Thats ridiculous. $200,000 a year is in the top 2% of earners, thats elite rich. If we are going to talk about the various classes, we should know the numbers that go with each class. Why dont you give me an idea numbers wise what rich is, A Freemen?

I dont understand why dividends shouldnt be taxed at the same rate as income, talk all you want about double taxation, checks sent to people for doing nothing should be taxed at least as high as people who work for their money are taxed. Dropping the Estate Tax is a good thing? Last I read, a few years back only the top 2% of estates paid any fed taxes. You reps with you Haratio Alger delusions. I will likely benefit from the removal of the estate tax, so this isnt envy of the rich, though Im certainly not rich. I just think these numbers are troubling, and it seems neither party is interested in talking about exact earnings numbers as related to class.

BegBee misunderstands. The goal isn't get me to shut up, it's to get him to support his position.

The taxes paid by income cohort numbers are in one of the comments above, yet he can't be bothered to make a substantive comment on how they should be changed.

> The top 25% of the US income brackets start at about $70,000.

As I've pointed out, a huge hunk of the population, way more than 25%, earn more than that at least one year in their lives. Does BegBee really think that 35-50% of the US population is rich at least once?

Note that BegBee's proposal is significantly less progressive than the current system, which he'd know if he bothered to look at the numbers above.....

> talk all you want about double taxation

Since BegBee admits that he doesn't know anything about the tax code, why is he so certain that dividends aren't unfairly taxed? (They are taxed twice, one time at a rate higher than most personal rates, so why shouldn't the other time be at a lower rate?)

Isn't any one else troubled that a Billionaire only made $5M? Her rate of return would have to be outrageouly low, or, the substantial part of her income is going unreported.

> Her rate of return would have to be outrageouly low, or, the substantial part of her income is going unreported.

Untaxed is not unreported.

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