I should pay more tax, says US billionaire Warren Buffett

Iriemon · Nov 5, 2007

DudleySmith said:
Taxes collected by the IRS also have an income ceiling, after which no data is recorded, at least that I have seen.

This is contrary to my understanding. I don't believe income taxes stop after you make a certain income.

A case in point are arguments involving percentages claims by one side or the other re Social Security payroll taxes. Are people today really paying more into SS than they did in 1970? Some will look at a 3.5% rate in 1970, at least if I recall that rate correctly, look at their paystubs today at 7.5% and say 'Hell yeah!", but in real terms they're paying less, and much less if you think the 'Official' inflation numbers put out by the Feds are utter bullshit and outright lies, as I do.

I think you are making an error applying the concept of inflation to a proportional variable like a tax rate. The only way 7.5% could be less than 3.5% is if incomes were less than half than they were previously, which is correct neither in actual or real terms. And in any event, the proportion of their income paid is of course higher by 4%.

DudleySmith · Nov 5, 2007

Quote:
Originally Posted by DudleySmith
Taxes collected by the IRS also have an income ceiling, after which no data is recorded, at least that I have seen.
This is contrary to my understanding. I don't believe income taxes stop after you make a certain income.

I looked at that, and see my mistake. It should read in essence, that after a certain income ceiling, there is no data on taxes collected and published by the IRS that I have seen. The ceiling used be $1 million, after which there is little or no differentiation in the data for the top 1% upwards.
I see lots of studies by tanks like the Economic Policy Institute and others that make assertions about the top 0.1%, but if you can find it from the IRS's maze of publications and stats pages, more power to you. Most of their tables seem to stop at something like '$300,000 and above' and such, and most of their data suffers from an equal lack of granularity above $1 million, or I read somewhere I don't recall that it may be $5 million now. Since I don't consider the data published by most of these Federal agencies put out under most administrations since Roosevelt as reliable anyway, I don't much care what the exact ceilings are now.
Insert url for IRS stats page

I think you are making an error applying the concept of inflation to a proportional variable like a tax rate. The only way 7.5% could be less than 3.5% is if incomes were less than half than they were previously, which is correct neither in actual or real terms. And in any event, the proportion of their income paid is of course higher by 4%.

Let's use $100 for an example. 3.5% is of course $3.50 in say, 1970 dollars. 7.5% is $7.50 in 2007 dollars. But if the $3.50 is in 1970 dollars, it is in dollars that were worth more than the $7.50 in the 2007 dollars. The rate is higher, but the adjusted dollar value being paid in is much less. According to this 'inflation calculator, $3.50 in 1970 dollars is equal to $18.81 in 2007 dollars:

CPI Inflation Calculator

Using these numbers, Social Security payroll taxes should be around 17% to 19% per $100 to equal what that payroll tax was in 1970 in real terms, not the current 7.5% or whatever it is today. Incomes for most workers are indeed less than half in real terms with regard to 1970 versus 2007, and by a significant amount which compounds the problems even more; I'm not sure what you mean by 'actual terms'.

Iriemon · Nov 5, 2007

DudleySmith said:
...

Let's use $100 for an example. 3.5% is of course $3.50 in say, 1970 dollars. 7.5% is $7.50 in 2007 dollars. But if the $3.50 is in 1970 dollars, it is in dollars that were worth more than the $7.50 in the 2007 dollars. The rate is higher, but the adjusted dollar value being paid in is much less. According to this 'inflation calculator, $3.50 in 1970 dollars is equal to $18.81 in 2007 dollars:

CPI Inflation Calculator

Using these numbers, Social Security payroll taxes should be around 17% to 19% per $100 to equal what that payroll tax was in 1970 in real terms, not the current 7.5% or whatever it is today. Incomes for most workers are indeed less than half in real terms with regard to 1970 versus 2007, and by a significant amount which compounds the problems even more; I'm not sure what you mean by 'actual terms'.

The problem with your logic is that you didn't adjust the wage base for 2007 dollars.

A guy making $10,000 in 2007 is effectively making far less than a guy making $10,000 in 1970. Therefore, while it is true that Mr. 2007's $750 tax is in inflation adjusted dollars less than the $350 paid by Mr. 1970; Mr. 2007's inflation adjusted income is also far lower, and he therefore should be paying a much lower amount of tax.

Solidus · Nov 5, 2007

Iriemon said:
"Here's an article showing that even those the wealthiest pay a little higher percent of the income tax rate, because the income taxes are a much smaller portion of overall revenues than they were 7 years ago, the wealthiest are paying less tax over and less of the total tax burden:"

While I concur with the article's findings that while share of the income tax 'burden' has increased, the amount of taxes paid has decreased. I disagree that "share of tax burden" is a useless measure of 'fairness'; mainly since I disagree with their definition of a progressive tax system.

Regardless, as the link I provided previously shows (and is the same source your source relies on) the effective income tax rate for the top 20% is 14.5%; which is more than double the 6.8% income tax rate paid by the next 20%. The income tax system remains sharply progressive.

Iriemon said:
"Because the taxes a corporation pays doesn't come out of the income going to Mr. Buffet."

I'll address this later, when I have time to do more research. While relevant when considering overall federal taxes, it is drawing away from the central argument over income taxes.

Iriemon said:
"Again, that is zero income tax. I don't doubty is true that the number of people paying zero income tax increased a bit. But they are still paying an effective 15% payroll tax."

We're wandering from discussing income tax again. I'm assuming you mean SS and Medicare, which according to wiki are 7.65% ... unless you count the amount the employer pays as well (but we're trying to avoid mixing what corporations pay from what individuals pay). [1]

Regardless, while I agree that SS and Medicare are regressive taxes; when in conjuction with income taxes the overall effect is still progressive, as I have shown.

Iriemon said:
"However, given that he makes his billions on investing, and the top investment tax rate has been reduced to 15%, what is the basis to suppose he is fibbing?"

I'm willing to conceed that Mr. Buffett is a unique case and may pay lower than average (for his income bracket) income taxes. However, I feel he is making an improper comparison against his secretary in order to support the dubious assertion that the 'rich' do not pay a high enough tax rate.

Mr. Buffett's claimed effective income (+ payroll) tax rate of 17.7% is lower than the national average (20.4%) for his income bracket (top 20%). While the claimed 'office average' income (+ payroll) tax rate of 32.9% is nearly double the national average (17.6%) for the next highest income bracket.

While the Cato article I first reference attempted to address the exclusion of corporate taxes in Buffett's calculations (as they relate to overall federal taxes), I am happy to focus instead on income taxes.

Iriemon said:
"A lot of questionable presumptions there by the conservative Brookings institute."

Not really, the presumptions aren't really that questionable considering they are the same ones used by CBO, Treasury, etc. I find it laughable that you label Brookings as conservative (and thus questionable) and then link to another group who relies on the same Brookings research.

Iriemon said:
"They reach this result, again, by attributing the corporate tax as part of the tax an individual pays, as you can see in the table. For example, they attribute an effective 11.9% tax rate to the wealthies .1% based not on their income, but on the tax a corporation pays on its profits."

No they don't. They isolate individual income in the first column. I refered to both overall taxes, and the portion you quoted me on (and I restate above) refers to individual income taxes only.

Iriemon said:
"Take those factors out and a different picture arises. Conversely, if it is fair to include corporate taxes, then why are not the 1/2 of individual's payroll tax paid directly by a company included in the effective tax and individual pays?"

Again, no the picture remains the same. Individual income tax rates (not counting payroll or corporate taxes) average 14.5% for the top 20% of Americans, the next 20% have an average of 6.8%.

To address your converse assertion, when both corporate taxes AND payroll taxes (both sides) are accounted for the top 20% has an average effective rate of 25.9%, the next 20% an average of 18.8%. The 'rich' still pay at a higher rate than anyone else.

Iriemon said:
"But in any case, even if we accept this as true, it doesn't make sense IMO to give special tax breaks for the wealthiest folks with investment income, like Mr. Buffet."

Mainly because you seem to happily overlook the fact that a VAST MAJORITY of people have investment income. The notion that everyone must suffer just to get to Mr. Buffett is ridiculous.

Furthermore the implication that all the 'wealthies folks' are able to duplicate Mr. Buffett's situation is shown to be false, since the AVERAGE income tax rate on the top 1% is 19.2%. If it was "so easy" to pay only 15% with investments the average would be significantly lower.

Iriemon said:
"This is a rehash of the old "it's good for the country if the rich pay less (or no) taxes. Hogwash."

The 'rich' pay a higher rate of taxes than anyone else. To take measures that are bad for the economy in the name of equality is foolhardy.

Iriemon said:
"No, it benefits those wealthy enough to have investment income, at the cost of those who earn salaries and wages who effectively pay more so the very wealthy pay less."

Taxes are not a zero sum game. Increasing the tax rate on investment income, does not make things any easier on the poor. Nor does raising the tax rate on investment income accurately target the 'rich' either. The wealthy pay a higher percentage of their income in taxes than anyone else.

Iriemon said:
"So what, because the rich are rich they should pay a lower tax rate than everyone else?"

The rich pay a HIGHER tax rate than everyone else. Nor will further increasing their tax rate stop them from being rich.

Iriemon said:
"Fine. Then have those with LOW investment income pay a lower tax. The super rich should pay 35% on their investment income just like those who earn a salary do."

While I'm willing to agree with you on removing regressive taxes, I feel the system is progressive enough to forgo additional progressive taxes.

Iriemon said:
"Even assuming that is true, there is no reason to tolerate the outrageous situation of the Mr. Buffets out there."

Mr. Buffett misrepresents the situation, as I have shown.

Iriemon said:
"Mr. Buffet pays a maximum SS of 12.6% on $97,500 (2006). That comes out to $12,285. On income of approximately $5 billion in 2006, that works out to .00025% of his income.

Not a big factor in his tax rate."

Agreed, the concern I had (which I did not articulate well) was including SS (which is obviously in his 'favor' as a regressive tax), while not including corporate taxes (which are not in his 'favor' as a progressive tax). It also appears he was more 'off' in estimating his employee's tax rates (probably as a result of the complicated tax code), than his own.

Mr. Buffett's casual 'poll' does not agree with broader analysis.

[1] Payroll tax - Wikipedia, the free encyclopedia

Iriemon · Nov 5, 2007

Solidus said:
While I concur with the article's findings that while share of the income tax 'burden' has increased, the amount of taxes paid has decreased. I disagree that "share of tax burden" is a useless measure of 'fairness'; mainly since I disagree with their definition of a progressive tax system.

I don't think it is useless either, not do I think I contended it was.

Regardless, as the link I provided previously shows (and is the same source your source relies on) the effective income tax rate for the top 20% is 14.5%; which is more than double the 6.8% income tax rate paid by the next 20%. The income tax system remains sharply progressive.

Whether it is "sharply" or not is a matter of opinion. I agree the income tax system is generally progressive.

We're wandering from discussing income tax again. I'm assuming you mean SS and Medicare, which according to wiki are 7.65% ... unless you count the amount the employer pays as well (but we're trying to avoid mixing what corporations pay from what individuals pay). [1]

Because these tax are based upon a particular individual's salary, they are a lot more associated with an income tax than the corporate profit tax.

Regardless, while I agree that SS and Medicare are regressive taxes; when in conjuction with income taxes the overall effect is still progressive, as I have shown.

Generally speaking, I agree, though there are too many exceptions.

I'm willing to conceed that Mr. Buffett is a unique case and may pay lower than average (for his income bracket) income taxes. However, I feel he is making an improper comparison against his secretary in order to support the dubious assertion that the 'rich' do not pay a high enough tax rate.

Mr. Buffet is only unique in that his income is primarily derived from investment sources as opposed to wage and salary, which is not necessarily that unique.

Given that the top income tax rate is 35%, yet those in the top 1% are only paying an effective rate of 20%, it apparently is not that unique at all.

I don't see anything improper about him comparing his tax rate with his secretary. It is outrageous that he, who made billions, pays a lower rate of tax to any reasonable person's sense of fairness.

Mr. Buffett's claimed effective income (+ payroll) tax rate of 17.7% is lower than the national average (20.4%) for his income bracket (top 20%). While the claimed 'office average' income (+ payroll) tax rate of 32.9% is nearly double the national average (17.6%) for the next highest income bracket.

I don't have access to the specific calculations. But I don't find it surprising. If his secretary makes about 100 grand she is paying 7.5% on FICA and she would be in the 33% tax braket, for a top marginal rate of close to 40%.

While the Cato article I first reference attempted to address the exclusion of corporate taxes in Buffett's calculations (as they relate to overall federal taxes), I am happy to focus instead on income taxes.

I'm sure you would be if your goal is to make it look like the poorer are paying proportionately smaller taxes. But payroll taxes are taxes too.

Not really, the presumptions aren't really that questionable considering they are the same ones used by CBO, Treasury, etc. I find it laughable that you label Brookings as conservative (and thus questionable) and then link to another group who relies on the same Brookings research.

I agree my characterization of Brookings is inaccurate. I get them mixed up sometimes.

I haven't seen CBO apply corporate taxes when measuring the rate of tax individuals pay on their income.

No they don't. They isolate individual income in the first column. I refered to both overall taxes, and the portion you quoted me on (and I restate above) refers to individual income taxes only.

Look at the table in the bottom of your cite.
http://www.taxpolicycenter.org/publications/url.cfm?ID=1001091
The center column is "corporate income tax" which they apply (using God knows what formula) as if it were an individual income tax to make the total tax paid look more progressive than it is.

Again, no the picture remains the same. Individual income tax rates (not counting payroll or corporate taxes) average 14.5% for the top 20% of Americans, the next 20% have an average of 6.8%.

Well then we can leave corporate taxes out of it.

To address your converse assertion, when both corporate taxes AND payroll taxes (both sides) are accounted for the top 20% has an average effective rate of 25.9%, the next 20% an average of 18.8%. The 'rich' still pay at a higher rate than anyone else.

As a general proposition that is true from the data.

Mainly because you seem to happily overlook the fact that a VAST MAJORITY of people have investment income. The notion that everyone must suffer just to get to Mr. Buffett is ridiculous.

Again, given that the top 10% are only paying an effective 20% when they are in a 35% tax bracket, the VAST MAJORITY are somehow significantly reducing their tax liability.

But what difference does it make? Why should a minority of people who are wealthy enough to live on investment income instead of earning it have a tax favorded status? Why should Warren who made about 5 billion last year pay a much lower rate of tax as those who are paid wages?

Furthermore the implication that all the 'wealthies folks' are able to duplicate Mr. Buffett's situation is shown to be false, since the AVERAGE income tax rate on the top 1% is 19.2%. If it was "so easy" to pay only 15% with investments the average would be significantly lower.

The fact that it is 19.2% an not closer to the actual rate of 35% demonstrates this and other loopholes are prevalent. And the fact that other pay more taxes does not excuse a system that allows the Warrens to pay less.

The 'rich' pay a higher rate of taxes than anyone else. To take measures that are bad for the economy in the name of equality is foolhardy.

Tax the poor and not the rich blather.

Taxes are not a zero sum game. Increasing the tax rate on investment income, does not make things any easier on the poor. Nor does raising the tax rate on investment income accurately target the 'rich' either. The wealthy pay a higher percentage of their income in taxes than anyone else.

Those making investment income aren't.

It's not a zero sum game only because the Govt has borrowed $3.3 trillion over the past 6 years.

The rich pay a HIGHER tax rate than everyone else. Nor will further increasing their tax rate stop them from being rich.

Those who make investment income aren't. By definition. The investment tax max of 15% is less than payroll and income taxes.

While I'm willing to agree with you on removing regressive taxes, I feel the system is progressive enough to forgo additional progressive taxes.

That is your opinion. Obviously the tax based on investment income is regressive compared to payroll and income taxes, which is why folks with investment income pay lower rates of tax.

Be a trust fund baby. Then you're golden.

Mr. Buffett misrepresents the situation, as I have shown.

I disagree both that Mr. Buffet misrepresents anything or that you have shown it.

Agreed, the concern I had (which I did not articulate well) was including SS (which is obviously in his 'favor' as a regressive tax), while not including corporate taxes (which are not in his 'favor' as a progressive tax). It also appears he was more 'off' in estimating his employee's tax rates (probably as a result of the complicated tax code), than his own.

Mr. Buffett's casual 'poll' does not agree with broader analysis.

It illustrates that those wealthy enough to have investment income get a sweet tax deal that those who have to earn their money don't.

DudleySmith · Nov 5, 2007

The problem with your logic is that you didn't adjust the wage base for 2007 dollars.

I just used an example using $100 in 1970 dollars and $100 in 2007 dollars to illustrate a process at work; I didn't claim it was real life', hence my caveat “... Using these numbers, Social Security payroll taxes should be around 17% to 19% per $100 to equal what that payroll tax was in 1970 in real terms, not the current 7.5% or whatever it is today. Incomes for most workers are indeed less than half in real terms with regard to 1970 versus 2007, and by a significant amount which compounds the problems even more ...”

The flaw in your logic is assuming 2007 wages aren't lagging inflation. The flaw in my logic is I used and inflation calculator based on the CPI numbers based on Fed data, which, as I said earlier, are complete bullshit; actual inflation is at least double that for most people, but discussions on how the CPI index is calculated is for another thread.

A guy making $10,000 in 2007 is effectively making far less than a guy making $10,000 in 1970.

The same effects used in my example still applies, regardless; what you're saying is in fact a large part of what I'm getting at, but without your assumption that todays wages have been adjusted by actual inflation rates. You're hanging up on the percentage of the tax rate going up; I'm saying the actual value of taxes paid on $100 in wages are lower for the equivalent number of dollars in wages in comparison.

And I'm also going to discuss the 'equivalent job' situation, which is why I picked $100, since that was the weekly pay of my first full time job, working in a warehouse, in 1970. And I also don't know for a fact that the SS payroll tax was 3.5% then, but it is close enough to make a general argument from.

Therefore, while it is true that Mr. 2007's $750 tax is in inflation adjusted dollars less than the $350 paid by Mr. 1970; Mr. 2007's inflation adjusted income is also far lower, and he therefore should be paying a much lower amount of tax.

Which means we agree that wages, whether you realize it or not I can't say, should be much higher to account for inflation in order to actually pay in as much as a worker did in 1970 at the same rate.

In any case ...

$2.50 an hour in 1970 would be an hourly rate of $13.43 in 2007, or $100/wk versus $537..20/wk for an 'equivalent' 2007 pay rate. At the same SS taxrate, that's $3.50 in 1970 versus $18.80 in 2007. In a previous post, $3.50 in 1970 dollars came out to $18.81 in 2007 dollars. Pretty damn close, right? So superficially, at 2007's 7.5%, I'd be paying $40.29 in 2007 a little over twice as much, eh? No way, because ...

In the exact 'same job' in 2007, in the same area, the 'equivalent job' now pays $6.00 an hour, or $240 a week. At 7.5% SS, that's $18/wk; big difference compared to $40.29, right? Indeed it is. In fact, it matches pretty damn close to the $3.50 paid in 1970 for the 'equivalent job', right? Nope, because most of those jobs were full time, or 40 hours, in 1970. Now, they are almost entirely through 'temp agencies' now, and only 20 to 30 hours a week to boot, for $120 to $180 a week jobs, not 40; they are 'as needed'. Raises don't come into play, nor do benefits, etc. More often than not, they end up being below the poverty line for the year, and they aren't paying SS on food stamps and other outlays from the Feds that supplement this 'equivalent job', not that those amount to much anyway, but they do lower the effective tax rate if counted as 'income', also. Another reason the $18 a week is so close to the $3.50 is because of the CPI index being used ...

And there is more, I realize there are variables, like some workers get more than 40, some make more than $6.00 an hour, etc., and these factor raise the averages for that 'equivalent job' in 2007, but then those are more than offset by a number of other factors, like illegal alien 'subcontractors', who pay no SS security at all, and are getting paid under the table at less than $6.00/hr, what part of the country you're in, lumpers, Most people don't know what lumpers are, I'll wager. Ask if you want to know what that scam is all about.

But, as I said, the Fed calculations on inflation are complete lies; real inflation is much higher than the BEA or the Federal Reserve claims, and the reason they lie about it is politics, and COLA calculations. I personally consider it to be at least double the 'official' claims for most Americans, and by even their own cooked numbers minimum wage adjusted would be at least $8.70 or so, more like $10, which ought to give you some kind of clue.

HTML:

Iriemon · Nov 6, 2007

DudleySmith said:
I'm saying the actual value of taxes paid on $100 in wages are lower for the equivalent number of dollars in wages in comparison.

I'm saying, so what, because the actual value of $100 in wages is also lower.

Which means we agree that wages, whether you realize it or not I can't say, should be much higher to account for inflation in order to actually pay in as much as a worker did in 1970 at the same rate.

And they are.

In any case ...

$2.50 an hour in 1970 would be an hourly rate of $13.43 in 2007, or $100/wk versus $537..20/wk for an 'equivalent' 2007 pay rate. At the same SS taxrate, that's $3.50 in 1970 versus $18.80 in 2007. In a previous post, $3.50 in 1970 dollars came out to $18.81 in 2007 dollars. Pretty damn close, right? So superficially, at 2007's 7.5%, I'd be paying $40.29 in 2007 a little over twice as much, eh? No way, because ...

In the exact 'same job' in 2007, in the same area, the 'equivalent job' now pays $6.00 an hour, or $240 a week. At 7.5% SS, that's $18/wk; big difference compared to $40.29, right? Indeed it is. In fact, it matches pretty damn close to the $3.50 paid in 1970 for the 'equivalent job', right? Nope, because most of those jobs were full time, or 40 hours, in 1970. Now, they are almost entirely through 'temp agencies' now, and only 20 to 30 hours a week to boot, for $120 to $180 a week jobs, not 40; they are 'as needed'. Raises don't come into play, nor do benefits, etc. More often than not, they end up being below the poverty line for the year, and they aren't paying SS on food stamps and other outlays from the Feds that supplement this 'equivalent job', not that those amount to much anyway, but they do lower the effective tax rate if counted as 'income', also. Another reason the $18 a week is so close to the $3.50 is because of the CPI index being used ...

I don't know what you mean be an "equivalent job", which is key to your entire argment. You 2007 equivalent job paying $6.00 is barely over the minimum wage, but the 1970 salary of $2.50 an hour is signifcantly over the then MW of $1.60 an hour. Also, since 1970 real (inflation adjusted) wages have increased, which belies your contention.

But, as I said, the Fed calculations on inflation are complete lies; real inflation is much higher than the BEA or the Federal Reserve claims, and the reason they lie about it is politics, and COLA calculations. I personally consider it to be at least double the 'official' claims for most Americans, and by even their own cooked numbers minimum wage adjusted would be at least $8.70 or so, more like $10, which ought to give you some kind of clue.

Click to expand...

Everyone is entitled to their opinion. Without more explanation as to why you believe the govt's (the Fed does not calculate inflation, I don't think) inflation are complete lies and a demonstration of what you think is a more accurate gauge of it, I'm not very inclined to see merit in your opinion.

metreon · Nov 28, 2007

The point Buffet was initially making (and he backed it up with a $1,000,000 bet), is that the U.S. has a progressive tax rate, and in theory, the very rich should be paying a greater percentage of their income than someone in a lower tax bracket, like his secretary. But they are not. There are too many loopholes that allow the rich to pay far fewer taxes.

That being said, he may also be suggesting that since the progressive tax rate tops out with people whose incomes are "only" $336,550, there are increasingly many who make much more and perhaps should also be subject to increasing rates.

I suspect, however, he is mostly just referring to the fact there are still too many ways for the rich to avoid taxes legitimately, forcing the burden of tax paying to fall on those making far less.

Iriemon · Nov 29, 2007

metreon said:
The point Buffet was initially making (and he backed it up with a $1,000,000 bet), is that the U.S. has a progressive tax rate, and in theory, the very rich should be paying a greater percentage of their income than someone in a lower tax bracket, like his secretary. But they are not. There are too many loopholes that allow the rich to pay far fewer taxes.

That being said, he may also be suggesting that since the progressive tax rate tops out with people whose incomes are "only" $336,550, there are increasingly many who make much more and perhaps should also be subject to increasing rates.

I suspect, however, he is mostly just referring to the fact there are still too many ways for the rich to avoid taxes legitimately, forcing the burden of tax paying to fall on those making far less.

Warren Buffen makes his income off his investments. Investment income is now taxed at a maximum of 15%. Compare that to taxes on income, which include both the income tax (with a top rate of 35%) plus payroll taxes (effective rate of about 15% until you make 100k then it drops down to abouyt 3% (for medicare)).

Folks who are wealthy with investments (think trust fund babies) now get a special low 15% tax rate compared to folks who earn their income, without having to use one "loophole" at all.

It's not tricky to get this low special tax rate. Just live off your investments. Don't have a few million in investments to live off? Sorry Charlie. This special low tax rate doesn't apply to you.

Seems kind of backwards to me.

metreon · Nov 29, 2007

"backwards" is exactly my point. Mutual Fund Managers, for example, also claim the 15% limitation on their earned income because they claim it is in fact investment income, even though it wasn't their money they invested. Is that a loophole or simply a valid application of the 15% rate cap rule?

I am considering anything that lowers the basic tax rate on a given amount of income as a loophole, so I am not sure what point Iremon is making exempting the 15% cap as something other than a loophole. There are tax adjustments available to almost all people of any form of income, but none are more beneficial than large reversals in base tax rate, such as with investment income rate caps.

Besides, fixed tax reductions based on specific expenses, such as mortgage interest, are always quickly compensated for by prices in the associated marketplace. Marketplaces which deal in those expenses have no reason to ignore such windfalls and have absorbed the benefit long ago in the form of higher real estate prices. Mortgage interest deductions have become a yoke around the neck consumer, not a boon, and simply are a means to perpetuate the belief by naive buyers that they are getting a discount. Sure it is a discount, a discount on a higher relative price.

So, to add to the injury, not only are the "loopholes" available to the wealthy more effective, but "loophole" most often used as tax-salvation for people with average incomes is less effective.

Kushinator · Nov 29, 2007

Not only that, but a very high % of people believe you save more money in taxes if you can write off mortgage interest.

This typically applies to people who have enough money to pay in full for a home.

Stinger · Nov 29, 2007

Goldenboy219 said:
Not only that, but a very high % of people believe you save more money in taxes if you can write off mortgage interest.

This typically applies to people who have enough money to pay in full for a home.

Next April 16th go around and ask people how much they had to pay in income taxes, many.............if not most will reply "Oh I didn't have to pay I'm getting money back".

Kushinator · Nov 29, 2007

I actually know a couple of people who think like this. They purchase everything (big ticket capital goods) on credit, and consider their interest paid a good hedge against paying to high of taxes.

Little do they know that there are much more effective ways to hedge against taxes.

oldreliable67 · Nov 29, 2007

Iriemon said:
the Fed does not calculate inflation, I don't think

Correct.

metreon said:
Besides, fixed tax reductions based on specific expenses, such as mortgage interest, are always quickly compensated for by prices in the associated marketplace. Marketplaces which deal in those expenses have no reason to ignore such windfalls and have absorbed the benefit long ago in the form of higher real estate prices. Mortgage interest deductions have become a yoke around the neck consumer, not a boon, and simply are a means to perpetuate the belief by naive buyers that they are getting a discount. Sure it is a discount, a discount on a higher relative price.

On the whole, this is a non-sensical argument. A change in the economics of home ownership is reflected immediately in a one-time shift in the market-clearing prices. The deductibility of mortgage interest occurred long ago (as you correctly observe), hence the shift occurred many years ago.

Have you ever had the opportunity to observe the impact on real estate prices of a reassessment for property tax purposes? If substantial, it can be brutal. But once prices have made the initial adjustment, all the other usual factors (location, location, location) once again dominate.

Mortgage interest deductions were once only one of many deductions available to taxpayers. Under the various tax reforms dating back to '86, IIRC, the number of deductions have been drastically reduced along with the top rates, in what were initially sold as 'revenue neutral' reforms. Today, the mortgage interest deduction is one of the few remaining deductions, as compared to those available previously. It became something of a "sacred cow" and was retained because of the incentive it provided to middle- and lower-income groups to home ownership.

The mortgage interest deduction is now, in the aggregate, much less valuable today, to homeowners as a group, than it was in times past. As more and more taxpayers have become subject to the AMT, that deduction-along with all others-has been effectively lost to those taxpayers. I haven't run the numbers on it, but there is no doubt in my mind that the increasing numbers of taxpayers subject to the AMT has gone a long way toward offsetting the Bush tax cuts. Just how far, I'll leave to someone else to figger out!

oldreliable67 · Nov 29, 2007

Goldenboy219 said:
consider their interest paid a good hedge against paying to high of taxes.

Interest expenses paid by consumers have not been deductible for some years.

You should tell your friends.

Stinger · Nov 29, 2007

oldreliable67 said:
Interest expenses paid by consumers have not been deductible for some years.

You should tell your friends.

I have taken the standard deduction for several years now because most deductions have been taken away and I pay more principle than interest on my home so that doesn't get me there anymore. But listening to some around instead of paying cash or using very short term credit I should take all the equity out of my house and pile up debt against it so I can have a DEDUCTION!!!!!!! I know people who have taken all the dinners, and drinks and new TV's they loaded up on their credit cards and put them on a home equity note so they could get a DEDUCTION and think they have done something really good financially.

oldreliable67 · Nov 29, 2007

Stinger said:
I have taken the standard deduction for several years now because most deductions have been taken away and I pay more principle than interest on my home so that doesn't get me there anymore. But listening to some around instead of paying cash or using very short term credit I should take all the equity out of my house and pile up debt against it so I can have a DEDUCTION!!!!!!! I know people who have taken all the dinners, and drinks and new TV's they loaded up on their credit cards and put them on a home equity note so they could get a DEDUCTION and think they have done something really good financially.

Right, the interest expense on most home equity loans is deductible. Interest on credit cards and other types of consumer installment debt is not deductible and hasn't been for several years.

Actually, your friends have done something good financially, if: one, their rate on their home equity loan is lower than that on their credit cards, which it almost always is; and two, their tear up their credit cards afterward, or perhaps save one or two for an emergency but don't run up the balances again. So often, we see that within 12 - 18 months after paying them off, those balances are right back up there.

Stinger · Nov 29, 2007

oldreliable67 said:
Right, the interest expense on most home equity loans is deductible. Interest on credit cards and other types of consumer installment debt is not deductible and hasn't been for several years.

Actually, your friends have done something good financially, if: one, their rate on their home equity loan is lower than that on their credit cards,

Their first dumb move was putting such debt on themselves. The second is putting your house in hock to cover such senseless debt. The third is thinking it's a deal because they got a sacred DEDUCTION. And usually it strings the debt out even further meaning that $60 dinner you put on the card now has your house in hock and will end up costing you $100 less the 15% deduction you might get on the interest.

But then the whole tax change enticing people to do exactly that, transfer such debt to your home, is another prime example of why we should get away from taxing income, get away from a tax system the politicians can us to try and force behavior. What was the point of eliminating credit card and consumer debt direct deduction and making you put it on your home to get it.

A flat tax or NST gets rid of such dangerous games the tax laws entice people into.

metreon · Nov 29, 2007

oldreliable67 said:
On the whole, this is a non-sensical argument. A change in the economics of home ownership is reflected immediately in a one-time shift in the market-clearing prices. The deductibility of mortgage interest occurred long ago (as you correctly observe), hence the shift occurred many years ago.

Have you ever had the opportunity to observe the impact on real estate prices of a reassessment for property tax purposes? If substantial, it can be brutal. But once prices have made the initial adjustment, all the other usual factors (location, location, location) once again dominate.

Mortgage interest deductions were once only one of many deductions available to taxpayers. Under the various tax reforms dating back to '86, IIRC, the number of deductions have been drastically reduced along with the top rates, in what were initially sold as 'revenue neutral' reforms. Today, the mortgage interest deduction is one of the few remaining deductions, as compared to those available previously. It became something of a "sacred cow" and was retained because of the incentive it provided to middle- and lower-income groups to home ownership.

The mortgage interest deduction is now, in the aggregate, much less valuable today, to homeowners as a group, than it was in times past. As more and more taxpayers have become subject to the AMT, that deduction-along with all others-has been effectively lost to those taxpayers. I haven't run the numbers on it, but there is no doubt in my mind that the increasing numbers of taxpayers subject to the AMT has gone a long way toward offsetting the Bush tax cuts. Just how far, I'll leave to someone else to figger out!

My statement never excluded other factors in real estate pricing. I pointed out the value of tax deductions which are based on items bought in a marketplace are quickly absorbed into the value of the item sold, in effect neutralizing any benefit from that windfall. You agreed with that apparently. What is your confusion?

The only new point you added was that the tax burden for the middle class is likely worse in recent years due to continued erosion of middle-class tax "loopholes" (mostly Schedule A deductions) through the AMT. That is not in conflict with my reasoning either.

Even if a wealthier taxpayer is subject to AMT, AMT itself is limited at 26/28% which is far less than the top tax rate of 35% which would otherwise be applied. Either way the rich pay less and the middle class are paying more. And based on Buffett's statements there are apparently ways in which the wealthy avoid the AMT also, if in fact he is paying a smaller proportion of his income as taxes than his secretary, as he stated.

oldreliable67 · Nov 30, 2007

metreon said:
My statement never excluded other factors in real estate pricing. I pointed out the value of tax deductions which are based on items bought in a marketplace are quickly absorbed into the value of the item sold, in effect neutralizing any benefit from that windfall. You agreed with that apparently. What is your confusion?

Any confusion that I might have results from the way in which you characterized the impact of the mortgage deduction. First as "quickly compensated," but then as a "means to perpetuate," suggesting a long-lived process. My impression of your statements is that you were suggesting the former (correctly, IMO) as rapid market-clearing shift while the latter as a continual, long-lasting process , which is of course, rather contradictory (IMO). Perhaps it is just my interpretation of your presentation, maybe I am reading something into it that you didn't intend.

Even if a wealthier taxpayer is subject to AMT, AMT itself is limited at 26/28% which is far less than the top tax rate of 35% which would otherwise be applied.

But lets not ignore that fact that had the AMT been indexed for inflation when it was enacted, many of these millions of taxpayers who are far from "wealthy" but nonetheless now find themselves subject to the AMT would not now be paying taxes which the legislation never envisioned.

Remember "bracket creep" due to inflation? The AMT was, unfortunately, ignored during the reforms which addressed that problem.

oldreliable67 · Nov 30, 2007

Stinger said:
What was the point of eliminating credit card and consumer debt direct deduction and making you put it on your home to get it.

Mostly as a way of realizing the appreciation in the value of your residence. Simply put, a way to take out in the form of cash some of the unrealized appreciation. At the same time, providing the wherewithal to continue consuming and contributing to economic growth. Not too subtle and of arguable sanity in the long run given the propensity of consumers to turn around and stack up the credit card debt all over again, but in the aggregate, very effective in the short run.

DudleySmith · Nov 30, 2007

Everyone is entitled to their opinion. Without more explanation as to why you believe the govt's (the Fed does not calculate inflation, I don't think) inflation are complete lies and a demonstration of what you think is a more accurate gauge of it, I'm not very inclined to see merit in your opinion.

The Bureau of Labor Statistics is not a Federal agency any longer? Who did they sell it to, or contract the official CPI out to? If you're referring to the Federal reserve, they use the official CPI numbers the Fed puts out, and modify it for their own uses.

Since the long term effects of inflation are obviously over your head, I'm not inclined to spend even more time on it.

Stinger · Dec 1, 2007

Originally Posted by Stinger
What was the point of eliminating credit card and consumer debt direct deduction and making you put it on your home to get it.

oldreliable67 said:
Mostly as a way of realizing the appreciation in the value of your residence. Simply put, a way to take out in the form of cash some of the unrealized appreciation. At the same time, providing the wherewithal to continue consuming and contributing to economic growth. Not too subtle and of arguable sanity in the long run given the propensity of consumers to turn around and stack up the credit card debt all over again, but in the aggregate, very effective in the short run.

There was not point and what we got was the law of unintended consequences. That banks came up with the home equity lines of credit, or at least began to market them heavily, due to the disappearance of the credit card and consumer interest deduction. What difference did it make if the taxpayer wrote of a credit card interest charge or a mortgage interest cost? But what it did do is entice people to mortgage their homes over consumption debt, not a smart thing to do. And that was a stupid thing for the government to do.

oldreliable67 · Dec 3, 2007

DudleySmith said:
The Bureau of Labor Statistics is not a Federal agency any longer? Who did they sell it to, or contract the official CPI out to? If you're referring to the Federal reserve, they use the official CPI numbers the Fed puts out, and modify it for their own uses.

Since the long term effects of inflation are obviously over your head, I'm not inclined to spend even more time on it.

The "Fed" is the Federal Reserve, nobody else. The "Fed" is not the BLS. I have never heard of the Fed modifying the CPI. The CPI and/or its various component indices are often used to perform various calculations,e.g., deflating some income concept to arrive at an estimate of that concept in deflated terms). But the Fed typically emphasizes one or more of the specific sub-index components that make up the CPI in doing so. I do not believe the Fed modifies the CPI. Or, if they do, I've never heard of it my 25+ years in the capital markets business.

jesushlincoln · Dec 3, 2007

The reason progressive income taxes are better is because store of value increases exponentially as money increases linearly.

An example is illustrated with a flat tax. Let's say we have a 20% flat income tax rate. Joebob who earns $20,000 per annum will lose $4000, and come out with $16,000. Bill who earns $1,000,000,000 per annum will lose $200,000,000, coming out with $800,000,000. Although the percent of income put into taxes is the same, the impact on their income as a store of value is nowhere near equal.

Equally impacting the raw figures simply does not work for this reason. When America had no income tax, seven people owned 1/8 of the US GDP, and Rockefeller alone owned 1/65 the GDP.

I should pay more tax, says US billionaire Warren Buffett

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