Showing posts with label taxation. Show all posts
Showing posts with label taxation. Show all posts

Wednesday, September 21, 2011

"Most of Us" Recognize Divisive Rhetoric When We See It



Elizabeth Warren, Candidate for Senate, Massachusetts 2012
"I hear all this, you know, 'Well, this is class warfare, this is whatever.' No. There is nobody in this country who got rich on his own -- nobody.
"You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory -- and hire someone to protect against this -- because of the work the rest of us did.
"Now look, you built a factory and it turned into something terrific, or a great idea. God bless--keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along."
I agree very much in principle with Elizabeth Warren's passion, but I'm sorry, Ms. Warren, your comments DO INDEED sound like "class warfare."

Who paid to build the roads?  You say, "the rest of us."  I say, "most of us, including ME!"  In fact, some of us paid MANY TIMES MORE for those very same roads than did the majority of Americans.

Who paid to educate my workers?  You say, "the rest of us."  I say, "most of us, including ME!"  In fact, some of us paid MANY TIMES MORE to educate my workers and my children than did the majority of Americans.  At my company, we provide fairly expensive training for employees after they come on board so that they can be productive, internationally competitive, that my company can be successful, and that all of us can be happy, productive taxpayers.  My employees and I volunteer at local public and private schools to enhance math, science, and technology classes.  Yet, some failed politicians vilify us for not paying or doing our "fair share" (which mysteriously has never been explicitly defined).

Who paid for police and fire protection services?  You say, "the rest of us."  I say, "most of us, including ME!"  If fact, some of us paid MANY TIMES MORE for the very same police and fire protection service than did the majority of Americans.

If you look at the FACTS--not the feel good rhetorical bullshiloney from certain Progressives--the MAJORITY of upper-income taxpayers pay their "fair share" of taxes and more.  In 2002, 2003, 2004, 2005, 2006, 2007, and 2008, federal, and state taxes were my single largest expense item--greater than my mortgage payment, insurance, food, and car payment COMBINED.

Don't take my word for it.  Check for yourself.  The data is readily available to all.  You can start your education here.


Never mind that President Obama's "Buffett Test" tax plan is a side-show and a distracts from needed, real tax reform.  Never mind that an estimated 46% of households will PAY ZERO INCOME TAX in 2011.  Never mind that taxpayers paid $4.2 BILLION in tax incentives to people who are in the United State illegally.

Every taxpayer I know would actually agree to pay more IF (and it's a very significant IF) we actually believed that giving more money and more power to the state and federal governments would actually help solve the problem. Most taxpayers are appalled at the dysfunction, corruption, and absolute lack of leadership in our state houses and in Washington, D.C.

I'm sorry, Ms. Warren, but "most of us" recognize your statement as yet more divisive rhetoric.

See also ...

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Thursday, August 25, 2011

CHART: Average Federal Income Tax Rate by Income Group (1998-2008)

(Click image to enlarge)


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Wednesday, August 24, 2011

Is Warren Buffett Paying His "Fair Share"?

I have tremendous respect for Warren Buffett. I own shares in Berkshire Hathaway and he and his group of companies have generated some reasonable gains over the years.

But, is Mr. Buffett right? Do the superwealthy like him pay less than their "fair share" of taxes as he seemingly claims is his New York Times editorial? Mr. Buffett's non-scientific technique was to ask 20 of his employees how much tax they pay.

Likewise, Mr. Buffett didn't distinguish between income taxes, sales taxes, corporate taxes, estate taxes, or payroll taxes. I'll focus on federal income taxes, which generates one of the largest shares of revenue for the federal government. Payroll taxes (Social Security and Medicare) are another matter that I'll cover in a later post. Likewise, Mr. Buffett didn't distinguish between MARGINAL tax rate or EFFECTIVE tax rate. The MARGINAL rate is the amount that you pay on each additional dollar of income. The EFFECTIVE rate is how much you pay in total taxes, divided by your total income. The EFFECTIVE rate is nearly always less than the MARGINAL rate, although most people remember the MARGINAL tax rate because it usually seems so extreme. See "Pretty Pictures and a Political Rorschach Test" to see how marginal rates have changed over time.

Unfortunately, Mr. Buffett's non-scientific sample of 21 taxpayers represents just 0.000015% of the total population of 140 million taxpayers, or about 1 in 6.664 MILLION taxpayers. In statistics, this is called a non-representative sample. Given that Mr. Buffett by himself is also a member of an elite group, the Top 400 taxpayers, any result will be highly skewed.

Wouldn't it be great if we could use real IRS data and could validate if wealthy taxpayers were indeed not paying their "fair share"? Oh wait, we can! The IRS provides freely downloadable summary statistics for all income taxes filed by year, income group, etc. Groups like the Tax Foundation and the Tax Policy Center use this data to report on how the tax burden falls on taxpayers.


According to Warren Buffett's editorial, he paid $6,938,744 ($6.938 MILLION) in federal income taxes in 2010, representing 17.4% of his taxable income. So, is Warren Buffett scamming the system? The average tax bill for all taxpayers in 2008 (the latest year of data from the IRS), was $7,373, down from $7,911 in 2007. The average taxpayer paid 12.24% of his taxable income in federal income tax in 2008. Taxpayers in the Top 0.1% population paid an average $1,357,143 in taxes in 2008. Warren Buffet paid over $5 MILLION more! The Top 0.1% also paid 22.7% of their total income as income tax. Warren Buffet paid about 5.3% less. However, Mr. Buffett is 80 years old and like many others his age, he likely receives considerable income from long-term capital gains, which are presently taxed at 15%. Likewise, being a shrewd investor and having lived through prior times with much higher tax rates, Mr. Buffett likely has an extensive portfolio of tax-free municipal bonds and U.S. Treasuries, but this is conjecture.

To summarize ...
  • Warren Buffett paid significantly more in absolute dollars than did the average taxpayer ($6.938 MILLION vs. $7,373).
  • Warren Buffet paid a higher percentage of adjusted income in taxes than the average taxpayer (17.4% vs. 12.24%) but less than those in the Top 0.1% of taxpayers (17.4% vs. 22.7%)
(Click image to enlarge)

QUESTION: Does Warren Buffett pay more or less of the total share of income taxes than his total share of income?

Let's determine how much he made last year. He claims that he paid $6.939 MILLION in taxes and had a 17.4% effective tax rate. Divide $6.939 MILLION by 17.4% and you derive that his adjusted gross income was around $39.878 MILLION (a nice job, if you can get it!). Because 2010 tax data isn't yet available, I'll mix some apples and oranges using the top-line 2009 tax summary data. In 2009, the total US adjusted gross income (for tax purposes) was $7.63 TRILLION. The total 2009 federal income tax bill was $865.95 BILLION.
  • Warren Buffett's share of total U.S. income = 0.00052% ($39.878 MILLION / $7.626 TRILLION)
  • Warren Buffett's share of total U.S. income tax bill = 0.00080% ($6.939 MILLION / $7.626 TRILLION)
As do most wealthy taxpayers, Warren Buffett also pays a higher share of the total tax bill than his total share of US income. In fact, Warren Buffett pays 53% more in taxes than his share of income ((share of taxes / share of income) - 100%). A number greater than 0% indicates that the taxpayer is taxed on both income and on a fraction of accumulated wealth. A number less than 0% indicates that the taxpayer potentially receives government services that are subsidized by all other taxpayers.



(Click chart to enlarge)

Using 2008 historical data for the Top 0.1% taxpayers (again, Mr. Buffett is in the Top 400 group or the Top 0.0003%), his share of taxes versus total income should be around 85%. His tax payments current are more in line with the Top 1% to 5% of taxpayers. If this Top 0.0003% taxpayer wants to keep up with the Top 0.1% of taxpayers, then his 2010 tax bill should be in the neighborhood of $11.128 MILLION instead of a "measly" $6.939 MILLION. However, if he wants to pay 22.7% of his income as tax to match the Top 0.1%, then he only needs to contribute another 5.3% of his income or $2.144 MILLION. Instead of waiting for the slow-moving Congress to take action, Mr. Buffett is free to voluntarily write a check for an addition $2.114 MILLION or $4.189 MILLION or more, unless perhaps he has better use of that money such as investing in the U.S. economy and creating jobs--two actions that the federal government that is seemingly incapable of doing.

The last time that Congress attempted to address "inequalities" in the U.S. tax code, it created the ill-conceived and poorly-constructed Alternative Minimum Tax (AMT). AMT was originally targeted at just 155 high-income taxpayers, who paid $0 in income tax but broke no law and merely followed existing U.S. tax code. Ultimately, because AMT was not indexed to inflation, it impacted millions of middle-class taxpayers (myself included).

Back to our fundamental question: Does Warren Buffett pay his "fair share" of income tax? He pays significantly more taxes than the average taxpayer, both in total dollars, as a percent of his income, and as a percent of his share of total income. Could he pay more? Undoubtedly. Is he paying his "fair share"? First, tell me what your definition of "fair share" is.

You know what we're not discussing while wasting time on the definition of "fair share"? TAX REFORM! I believe that all sides agree that our current income tax system is antiquated and internationally un-competitive. Generally, you get less of whatever you tax. The U.S. government currently taxes work (jobs), investments, and savings. Instead, we should be taxing consumption! But, there will likely be no changes until the next major crisis.
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Wednesday, August 3, 2011

Matt Damon Needs a Wider Circle of Friends (and an Education on the U.S. Tax System)

I loved Matt Damon in "The Adjustment Bureau" where he played a likable, ambitious politician living in a world controlled by a higher-power that makes adjustments to reality. The movie's ending was a bit weak, but Mr. Damon delivered a solid performance. He's a very talented actor.

Unfortunately, Mr. Damon apparently sometimes confuses reality with acting when he plays politician, as shown in the following clip on taxation. Maybe Matt Damon now believes that he is part of The Adjustment Bureau. There are numerous factual mistakes with some of Mr. Damon's remarks and, I can speak from personal experience, that he is wrong about what some people actually did with their Bush Tax Cuts.


DAMON: [0:06] "The wealthy are paying less than they paid, you know, at any time else, I mean, certainly in my lifetime, and probably ... probably, you know, in the last century."

Okay, let's check a few facts.
  • FACT: The share of total income tax paid by upper-income taxpayers has actually INCREASED over time. (chart, data)

  • FACT: There is a difference between the marginal tax rate and the actual taxes paid by a taxpayer, called the effective tax rate. The effective federal tax rate for ALL taxpayers has dropped since at least the 1980s. The absolute drop was larger for upper-income taxpayers because they also pay among the highest effective rates. Taxes from upper-income taxpayers are also swayed by recession.


  • FACT: According to Wikipedia, Matt Damon was born in 1970.

  • FACT: The so-called Bush Tax Cuts reduced the top marginal tax rate on the wealthy from 39.6% to its current rate of 35%. Similarly, the bottom tax rate was reduced from 15% to 10% (though many often forget to mention this point). The top margin rate was reduced by 11.6% while the bottom marginal rate was reduced by 33%.

  • FACT: During Mr. Damon's lifetime, the lowest top marginal tax rate was actually 28%, passed by Congress in 1986. Although many refer to this as one of the Reagan Tax Cuts, this Legislation was co-sponsored by Democratic Congressman Dick Gephardt (MO) and by Democratic Senator Bill Bradley (NJ).

  • FACT: 28% is lower than 35%.

  • FACT: The "last century" includes the period from 1912 until today.

  • FACT: The modern income-progressive tax system started in the United States in 1913 after the passage of the Sixteen Amendment (see one author's take on the damage wrought by the Sixteenth Amendment).

  • FACT: Thanks to the Revenue Act of 1913, the top marginal tax rate was 7% until 1917 when dramatically Congress raised taxes to pay for the United States' entry into World War I, under the Wilson Administration.

  • FACT: During the last century, the lowest top marginal tax rate was 7%.

  • FACT: 7% is lower than 35%.

  • FACT: Technically, before 1913, there was no federal income tax (in modern times, hence the requirement for the Sixteenth Amendment so that income taxes would be considered Constitutional). Because 1912 falls within the "last century," one could argue that the lowest top marginal tax rate was actually 0%. But, I'd be quite happy with 7%.

  • For a more detailed look at recent tax history, see "Pretty Pictures and a Political Rorschach Test."
DAMON: [0:16] "Tax the really rich--you know, guys like me."

Mr. Damon, if you feel that you are not paying your "fair share" of taxes, and you feel that sending more money to the government is the best and most productive use of your excess capital, then there are plenty of easy ways to pay even more taxes.
  • Avoid taking any deductions or exemptions on your federal tax return.

  • Cut a check directly to the Treasury. Please see "Useful Information for Under-taxed Individuals."

  • Don't wait for slow-moving, ineffectual Washington, D.C. to take action!
DAMON: [0:34] "Well, I didn't go start a small business with my tax break, uh, and I don't know anybody else that did. ... Nobody went and started a business with their Bush Tax Cut. I don't know who would believe something like that. It just defies common sense."

Mr. Damon, I recommend broadening your circle of friends. What did I do with the extra money that I kept thanks to the Bush Tax Cuts? I started a business! You what else? That business generates taxable income that pays for things like roads, fire and police protection, public schools, etc. In an indirect way, it created jobs by freeing up my old job at a productive, profitable, tax-generating company, while I created a new position for myself and my employee.

And you know what I do with a portion of the profits from that company? I use it to help math, science, and technology education in my local public and private schools. I take an ACTIVE role in my community. I do not depend on a far-away, slow-moving government in Washington, D.C. to do the job for me.
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Thursday, March 4, 2010

The Problem with California Education Spending--It's Not Education

On March 4, 2010, students and educators around California protested against draconian cuts in education within the California state government budget. However, there are larger issues involved, namely the actual root cause of California's budget mess.

The following chart shows California's expenditures on education relative to the state's total expenditures. The education expenditures include funding for Kindergarten through 12th grade (K-12) plus funding for higher education. Note that the state's total expenditures have increased far faster than education funding.

The chart below shows the same data but this time adjusted for inflation. The expenditures are normalized to 1976 dollars (although not adjusted for California's increased population). In this chart, spending that tracks inflation appears as a flat line. Funding for higher education has essentially tracked inflation while K-12 and total education expenditures increased slightly faster than inflation.

However, notice that total state expenditures grew far faster than the inflation rate. This is the root cause of California's budget mess. While this chart is not normalized for both inflation AND population growth, spending did grow much faster than population. California's population increased by 24% from 1990 to 2009, or 29.76 million to 36.96 million. Meanwhile, inflation-adjusted spending rose 85% from 1990 to 2009 or three and half times faster than population growth!

California's budget problems do not necessarily reside within the education budget, although there is always room for improvement. Because of increased budget demands elsewhere, money is siphoned away from education. Fix the runaway state spending in other areas and the educational budget will fix itself. State spending must be reduced!

Similarly, California's overly-progressive Personal Income Tax mechanism relies too heavily on too few taxpayers and is therefore highly volatile, leading to massive swings in state revenues, depending on real estate returns and the stock market. California's tax structure must be revised to make revenues more consistent, dampening the year-to-year swings.

What is California's Legislature doing to fix these issues? Not much! Instead of focussing on balancing the budget or reforming California's out-of-control public-employee pension system, Legislators pass useless resolutions such as the Cuss-Free Week.

What can you do? Contact your California State and Assembly representatives and let them know that you want them to focus on sanely balancing the budget, cutting spending in areas besides education, and reforming the state pension system.

Find Your California Senate and Assembly Representative
http://192.234.213.69/lmapsearch/framepage.asp

Learn more on what other current and former state leaders have to say.

Former California State Assembly Leader, Willie Brown
soquelbythecreek.blogspot.com/2010/03/even-liberal-democrat-willie-brown-sees.html

California State Treasurer, Bill Lockyer
soquelbythecreek.blogspot.com/2010/02/california-treasurer-lockyer-scolds.html

See also ...

"Why The Student Protestors Are Wrong"
www.mindingthecampus.com/originals/2010/03/why_the_student_protestors_are.html

Sources:

California Program Expenditures
www.dof.ca.gov/budgeting/budget_faqs/documents/CHART-C1.pdf

Inflation Data from the Bureau of Labor Statistics (CUUR0000AA0)
data.bls.gov/cgi-bin/surveymost?cu

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Tuesday, February 23, 2010

"The Rich Don't Pay Taxes" Lie: Purposely Deceptive, Or Backed Up by Data?

The Center on Budget and Public Priorities (CBPP) recently released a report entitled ...

Tax Rate for Richest 400 Taxpayers Plummeted in Recent Decades, Even as Their Pre-Tax Incomes Skyrocketed
www.cbpp.org/cms/index.cfm?fa=view&id=3090#_ftn1

From the title alone, one can guess the conclusion. If not, here is an excerpt.



The top 400 households paid 16.6 percent of their income in federal individual income taxes in 2007, down from 30 percent in 1995. This decline works out to a tax cut of $46 million per filer in 2007, or a total of $18 billion in tax cuts for these households per year.


From this report, certain politicians will continue their lies that "the rich don't pay their fair share of taxes."

Let's look at the data with a bit more intellectual honesty.
  • The Top 400 taxpayers represent less than 0.00035% of the total number of taxpayers for the years mentioned, or about three taxpayers out of a million. Other than through political contributions, this group has little power at the ballot box to prevent runaway government spending.
  • Indeed, according to the data, the effective tax rate for these Top 400 taxpayers has decreased from a high of 29.93% in 1995 to 16.62% in 2007. Much of this is due to the Bush tax cuts and the decreased tax rates on capital gains and qualified distributions. The effective tax rate on the bottom 50% of taxpayers also trended downward. The CBPP chart above appears more dramatic because the Y-axis origin visually starts at 15%, which happens to be above the average tax rate. The average tax rate does have a slight downward trend over this period.


  • However, the effective tax rate for all taxpayers in 2007 was 12.68%, or less than the 16.62% rate paid by the Top 400. However, as reported by CBPP, the Top 400 did indeed pay less as a percentage (but not in absolute dollars) than other groups within the top 10% of taxpayers, as shown in Tax Foundation report (see "Average Tax Rate" in Table 1 and all of Table 6).
  • The average federal income tax bill in 2007 was just over $7,900 per taxpayer. The average income tax for the Top 400 was over $57,311,000 ($57.3M) per taxpayer, or 7,200 TIMES the average. The average tax bill for the bottom 50% of taxpayers was just $460. At that price, I certainly hope that the "rich" receive a better government than the rest of us for all that money.
  • The Top 400 taxpayers as a group in 2007, all 400 of them, paid nearly $23 billion in taxes. Meanwhile, the bottom 50% of taxpayers, all 70,535,485 of them, paid $32 billion. Think of it, 0.0028% of taxpayers paid an amount approaching that of half of the taxpayer population. At the ballot box on spending issues, this is 400 votes versus 70+ million. Guess who wins.
Congress can raise taxes because it can persuade a sizeable fraction of the populace that somebody else will pay.
-- Milton Friedman
A government with a policy to rob Peter to pay Paul can be assured of the support of Paul.
-- George Bernard Shaw

  • While the effect tax rate for the Top 400 has dropped from a high of 29.93% to 16.62%, the total income tax for Top 400 has increased 214% measured in inflation-adjusted dollars (or 365% without adjusting for inflation). Image that! Lower taxes might actually result in higher revenues. Over that same time period, federal spending doubled (non-inflation adjusted).
  • The Top 400 have consistently paid more in taxes than their fraction of the total income. In 2007, the Top 400 earned 1.59% of all income but paid 2.05% of all taxes.
  • Despite representing less than 0.00035% of the taxpayer population and despite a descrease in their effective tax rate, the Top 400 pay an increasing percentage of the total tax bill, approaching the amount and percentage paid by the bottom 50%.

  • Mathemetically, the Top 400 group is different than the others. It is an extremely small population, less than 0.00035%, meaning that high incomes from a few individuals will greatly skew the data. Similarly, whereas other taxpayer groups, such as the bottom 50%, fit within a defined income range, the income limit for the Top 400 is infinite. Again, extremely large incomes or losses from a few individuals will affect the results for the Top 400.
Multi-billionaire friends Bill Gates and Warren Buffet walk into a bar. A man at the bar yells out, "Bartender, I'd like to buy everyone a round of drinks!" After pouring the drinks and collecting the money, the bartender asked the man why he was so generous. The man replied, "Didn't you know? Now that Bill Gates and Warren Buffet are here, our average income is over a million dollars!"
Reports like the one from CBPP may lead politicians astray. They may buy into one or more of the following fallacies.
Fallacy #1: Money is better spent and benefits the society more when spent by the government instead of by taxpayers.

This is perhaps the greatest fallacy of all. Certainly, multi-millionaires or multi-billionaires may squander some of their money on foolhardy exploits. However, the government has not proven to be a virtuous spender either. Do you remember the infamous Bridge to Nowhere or the John Murtha Airport? There are countless other examples. At least the Top 400 taxpayers demonstrated the ability to generate (or hold onto) great wealth. Do we honestly believe that their money in the hands of government will benefit society or the economy more than if it is kept in the hands of the taxpayer?

Fallacy #2: Increasing the top marginal tax rates will increase revenues.

Increasing the top marginal tax rate may indeed increase government tax revenues -- temporarily. All intelligent beings move away from pain. Increasing the pain of taxation will cause high wager earners to take appropriate actions. At the state level, this may mean estabilishing residency in lower-tax states or moving assets overseas to tax heavens. At a minimum, it means employing the best accountants and lawyers to avoid taxation, sometimes by engaging in economically-inefficient activities just to generate tax benefits. Remember, for the Top 400, each 0.1% difference in their tax rate represents over $57,300. Wouldn't you attempt to avoid taxes as much as legally possible?

Fallacy #3: We need a special tax on these Top 400 taxpayers.

We've already tried a similar strategy in the past with the Alternative Minimum Tax (AMT). The AMT was originally created by Congress to target 155 taxpayers (yes, only 155 taxpayers) that "paid less than their fair share" while fully complying with all U.S. tax laws. This ill-conceived piece of -- er, well, let's call it legislation -- was never indexed for inflation and has since affected millions of middle-class taxpayers. The Stimulus bill (ARRA) provided one year's relief for most but it expired at the end of 2009.

Some readers may think, "Well, he must be one of the Top 400 taxpayers." To that I say, "I WISH!!!" I am not a fan of the so-called "progressive" income tax as I believe it to be anti-democratic and encourage excess government spending. Our elections are based on the principle of "one person, one vote" and not "one dollar, one vote". Politicians have a built-in incentive to increase spending in order to win votes. Those that pay the most taxes to fund government spending have the least say at the ballot box.

See also ...

Is Warren Buffett Paying His "Fair Share"?

Who Pays Their "Fair Share" in California?


The Oppressive Progressive Income Tax: California Editionsoquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html

Not All Money Is Created Equal
www.politicalmathblog.com/?p=270

Taxation Charts
perotcharts.com/category/charts/taxation-charts

Tax Foundation Data
www.taxfoundation.org/taxdata

Source Data:
[1] "The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2007," Internal Revenue Service
www.irs.gov/pub/irs-soi/07intop400.pdf

[2] "Summary of Latest Federal Individual Income Tax Data," Tax Foundation. See Table 1 and Table 4.
www.taxfoundation.org/news/show/250.html

Spreadsheet:

http://www.editgrid.com/explore/user/soquel_by_the_creek/Top_400_Taxpayer_Comparison_Data
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