Social Question

plethora's avatar

Are the rich taxed less than their employees, so asked Yahoo News today. (details)

Asked by plethora (9555 points ) September 20th, 2011

According to Timothy Geithner, no less, we have a clear answer on this issue at the bottom of this Yahoo News article The entire article is informative, but why turn to a news source who quotes tax experts? What does the collective have to say?

Observing members: 0 Composing members: 0

23 Answers

lillycoyote's avatar

First, in the service of truth, I don’t believe Obama actually said that “he wants to make sure millionaires are taxed at higher rates than their secretaries” as the first paragraph of the article states. The “Buffet Rule” as the article says is “People making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay,” not that we should make sure millionaires are taxed at a higher rate than their secretaries, just at the same rate. It really won’t make much of a dent in the deficit anyway, not enough millionaires. But they should pay their fair share, not more, not less.

Edit: If Obama actually did say that, please feel free to correct me. There’s always a chance I could be wrong.

Jaxk's avatar

It’s pretty clear that if you’re making your money from ‘Capital Gains’, you’re paying a lower rate 15%) than if you’re making a salary (35% top rate). But there are some interesting things about Capital Gains. Capital investments are the engine that drives the economy. Entrepreneurs that invent or start a business are rewarded with capital gains. But they are also taking a chance. It is more likely that they will lose thier investment than that they will gain from it. That is the flip side of capital gains, capital losses. Much is made of those millionaires that made a $million and paid no taxes. Most likely they were writing off the losses from previous years. If you lose a million and then make a million the next year, you will pay no tax (the gains are offset by the losses last year). But you will hear the screams about the guy that made a million and paid no tax. Selective facts, I guess.

We need to decide if we want more capital investment or less. There’s a simple rule for this. If you tax something, you get less of it.

JLeslie's avatar

“This IRS table” from 2006 I just posted to another Q shows those making $10m + are paying less of a percent of their income than those making $500k to $10m. Over $10m pays an average of 22.8% on adjusted gross income.

Tim is right that part of it has to do with ones profession and how they earn money.

tedd's avatar

If you’re looking strictly at income, then the rich are taxed more (up to 35%).

@Jaxk elaborated a bit on corporate gains, but he missed one very big point about them. The rich make the majority of their money on the stock market, that’s huge chunk of CEO’s money, it’s part of their golden parachutes, etc, etc. Warren Buffet doesn’t get his billions a year from paychecks or salary, it’s virtually all in the stock market. Now they are able to claim capital losses when they lose a bunch of money, like how the market tanked this year… But then on the flip side they have to claim when they make a bunch of money too, capital gains.

The problem is that the highest capital gains tax is 15%. Your average middle class American is probably paying in the 20–25% range, and his boss is paying 15% on most of his income. That is how the rich are being taxed less.

wundayatta's avatar

@tedd @Jaxk also defends the capital gains tax by saying it encourages investment and risk. This is an article of faith amongst the monied classes, but it doesn’t seem to be true. Right now, many large business are sitting on pools and pools of cash and aren’t investing a cent of it. Why? The economy is down and they don’t believe they can sell anything.

The economy responds to demand. There is always capital when needed. It can be borrowed or printed or whatever. Changing the capital gains tax rate will have no effect on investment whatsoever. Capitalists always go to where the best returns are available. When consumers are spending, capitalists will try to make more stuff for them to buy, no matter how much the government takes from them.

In fact, pooling money in the hands of capitalists instead of in the hands of consumers is the worst thing you can do to keep an economy going. You need to pool money in the hands of consumers. We need to tax it from the wealthy and give it to the poor, so they can spend it. And guess what? By doing this, we will make the wealthy far wealthier than they are if they just sit on their money.

Money needs to be constantly recycled. Reducing capital gains taxes encourages people to sit on the money, which stifles an economy. Lowering taxes is exactly the wrong thing to do, unless it is done for consumers. If it is done for the wealthy, then there is not enough for consumers and nothing will change.

This is not an anti-wealth diatribe. It’s just a put glasses on the eyes of the wealthy diatribe. It is in their own self interest to pay more taxes. In the long run, they will be better off. Unfortunately, the wealthy never seem to be able to look at their long term self interest, although that’s not surprising. Hardly anyone else does, either.

tedd's avatar

@wundayatta If that’s the argument he’s making then it’s certifiably false, since they lowered the rate in 2003, and we all saw the years of job making prosperity that followed.

marinelife's avatar

Yes, they are.

Jaxk's avatar

@wundayatta

I have no idea what you use to come up with your theory of capital investment. It certainly isn’t history. If you look at the history since 1950 of capital gains, you will see that every time we raise capital gains tax, economic activity slows and the tax revenue declines. Every time we lower the capital gains rate, economic activity increases and tax revenue increases. Your theory is simply backwards from reality.

The whole thing is quite simple. Any money available for investment is a risk/reward analysis. You can invest in CD or US bonds, etc. where the risk is minimal or you can invest in capital markets. where the risk is substantial. When you decrease the reward (increase taxes) you shift the investment to safer instruments (Bonds, etc.). When you increase the risk by increasing uncertainty, you shift the investments to safer instruments (bonds etc.). Currently we have large uncertainty and therefore lower capital investment.

Look at history and you may get a better idea of how it works.

tedd's avatar

@Jaxk I don’t even have to point back 10 years to prove the first part of your statement wrong. They lowered the capital gains rate in 2003, to 15%, and we saw stagnant job growth for the following 4–5 years, followed by the worst economic disaster since the depression.

As an investor I can tell you your second statement is just ignorant because CD’s and US bonds are capital gains just like common stock.

Even if they weren’t, you could double taxes on capital gains tomorrow, and it wouldn’t change the fact that you can get over 10% returns on a regular basis by investing in stocks vs 3% and under when investing in CD’s or Bonds. You would have to tax capital gains into the 70% and up range to make CD’s and Bonds more valuable, if they weren’t capital gains themselves which they are.

The simple fact of it is the rich found a way to cheat the system by paying themselves in stock options, and then getting those taxes lowered to 15%, rather than the 35% highest income tax bracket. It would be different if they had invested the money themselves and the returns were just their profit (though I don’t think it would be much less unfair)... but they are being paid with stock, that cannot be taxed at 35%.

It’s a giant middle finger to the regular common man.

jerv's avatar

Correlation confused for causation again, methinks.

Jaxk's avatar

@tedd

I’m not sure where you get your information, but it’s wrong. From 2003 to 2007 we added 8.3 million new jobs. Unemployment was 4.7%. There is nothing stagnant about those numbers. The uptick in virtually all economic indicators in 2003 was dramatic.

If you’re an investor, you should know that interest from either CDs or Bonds is counted as regular income. Also you don’t seem to understand the risk/reward of investments. The riskier the investment the higher the rewards must be. If you think a 10% return on investment is easy with stocks, you should be running your our mutual fund. Of course, you’d likely be in jail with Bernie Madoff.

The truth is there are several places where the capital gains rate needs to be eliminated. But it is in places where the capital gains rate should not be applied to begin with. Things like commodities investment. They are short term and should be taxed as short term. Why they are not is beyond me. Hedge Fund managers should not be using the capital gains rate. It is normal income for them and should be taxed that way. Raising the Capital Gains rate however will destroy the market and the economy. It’s simply wrong headed and the chart I supplied proves that.

tedd's avatar

@Jaxk Ok for starters, here’s a way to look at the jobs created for the last 100 years. http://www.tradingeconomics.com/united-states/non-farm-payrolls ... If you set it to January of 2003 – December of 2007… Why don’t you tell me how many of the months the economy created less than 200k jobs. Every single month under 200k is stagnant at best, since that’s the amount needed to keep up with population growth.

You also claimed that “The uptick in virtually all economic indicators in 2003 was dramatic”... Why don’t you adjust that same scale to look at 2003 as a whole. We had a negative net jobs gain for the year, and the largest month produced around 200k jobs.

Not to mention I’m not sure where you’re getting your numbers. Taking a look at this page http://en.wikipedia.org/wiki/Jobs_created_during_U.S.presidential_terms , will clearly show that during the _entire Bush presidency, a mere 1.1 million jobs were created (net total). So either he lost the majority of the “8.3 million new jobs” you’re talking about, or they didn’t exist in the first place.

Not to mention the capital gains tax and putting all those tax dollars in the hands of the rich really did us great, when they drove our economy into the ground as hard as they could. (see economic collapse of 2008)

And frankly you’re simply flat out wrong, CD’s and Bonds are capital gains http://en.wikipedia.org/wiki/Capital_gains

Oh and btw, 10% is a typical return for a wise investor. Heck with the ridiculously bad year the stock market is having in 2011, the DOW is still up 6%... And you don’t get a job at a stock brokers office if you can’t at least beat the DOW.

You honestly have no idea what you’re talking about, and it is showing very clearly.

tedd's avatar

And aside from everything just listed, you didn’t even try to refute the fact that CEO’s and multi-millionaires are side stepping the 35% tax rate, and even the same 25% tax rate that I pay… in favor of a 15% tax rate by simply being paid in stock options rather than cash!

Jaxk's avatar

@tedd

Wow, I’m not sure how to answer you. Bush passed his tax cut in the middle of 2003. He made it retroactive for the whole year. How fast do you expect jobs to rebound. I would think that if they start coming back within a year, that’s pretty damned good. Obama has had almost three years and you’re all complaining he hasn’t had enough time.

Yes the recession of 2000 cost us a lot of jobs. The attack on 9/11, cost us a lot of jobs. And the housing bust in 2008 cost us a lot of jobs. If you don’t know what caused the 2008 recession, I’m not really going to explain it to you here. It certainly wasn’t the capital gains rate.

Capital gains are created when something increases in value. Interest on CDs and Bonds is not capital gains. If you have a bond that increases in value that increase is capital gains. I’m not sure if you need me to explain how a bond might increase in value. Either way, the interest is normal income.

Here is a typical return for mutual funds. As you can see few make the 10% number you so fervently believe is typical. Those that approach that number become highly volatile. Some years with negative return and some with higher than average returns. This volatility is the risk factor. You may think that making money in the market is easy but your expectations are unreasonable. If you find someone that can make 10% regularly, snap them up. They are very good at what they do but likely to leave you disappointed.

jerv's avatar

@Jaxk “How fast do you expect jobs to rebound.”
True, but if eight years isn’t enough, isn’t it time to call it quits and try something else?

Also, every definition of Capital Gains I’ve seen does include bonds, at least conditionally. Long story short, a blanket statement saying that bonds either are or aren’t Capital Gains is erroneous; it depends.

jerv's avatar

A picture is worth a thousand words though skeptics may prefer to look at the data themselves.
Here are a thousand more

Note that the tax cuts seem to have made the situation worse, only to be mitigated and somewhat reversed by something that happened in early-2009. Hmm…

tedd's avatar

@Jaxk lol… you listed a mutual fund return rate to show the return rates on the stock market? You really do have no clue what you’re talking about.

A Mutual Fund is required to branch out into as many fields as possible. More often than not you won’t see a mutual fund do much better than the DOW or S+P, simply because they have stocks from all of those companies and a few more. There is so much exposure to the market and different companies, that way if one or more of them tanks the overall fund doesn’t really suffer, and can still grow even.

Actual investors on the market do not branch out like a mutual fund. An avid investor may have 20–30 stocks, where a mutual fund will easily have several hundred. The trade off in this is that the investor may have 20–30 stocks that saw huge gains in the past year, whereas the mutual fund may have those same 20–30 stocks, but also 400 stocks that broke even pulling down the average. Investors are able to take those risks because they don’t have the weight of thousands of people who invested in the mutual fund, requiring them to have enough stocks to provide security.

So no, it doesn’t shock me at all that mutual funds you listed have difficulties approaching 10% returns on an annual basis. Though for comparison, mine is sitting at 11% gain on the last 12 months.

Man, I’m going to have to start charging you for this education.

jerv's avatar

At this point, I think it safe to say that discussing the economy is only really good at separating the idealists from the realists. We already have a pretty good idea of what doesn’t work, so the real debate here is simply whether we go with the great sounding theory that fails epically in the really real world, or do we ignore the proponents of Supply-side economics and do the right thing?

I’ll give you a hint: “Horse and Sparrow” was discredited over a century ago ;)

plethora's avatar

@tedd @jerv If you guys both have jobs, hang on to them. Will keep you occupied from meddling in the economy.

Jaxk's avatar

@tedd

I hope you were shorting the market these past few days.

tedd's avatar

@Jaxk For the sake of my wallet, I wish I was (or that I had the money to do that in the first place).

For the sake of my conscious, I’m glad I wasn’t. I think the practice should be out-lawed.

Answer this question

Login

or

Join

to answer.
Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
or
Knowledge Networking @ Fluther