Taxes Paid by the Rich

Stories like the one tweeted by Money:

bother me.  The reason is that if it is true that the 400 highest earners really are paying less than 15% (and many are paying less than 10%, as stated in the article), it does make one wonder why they are paying a lower rate.  Now granted, they are paying a lot more in taxes, which may justify it some, but still…..

What really bothers me about it though is that it makes no sense.  As far as I know, the dividend rate is a flat 15%, meaning that if you have dividend income, the lowest percentage you could be paying on that income which you actually keep is 15%, so there could not be anyone paying less than 15%.

I wonder if what they are doing is using income before deductions as the “income,” rather than the amount that remains after deductions.  For example, if someone made $100 M, but gave $90 M away, they might be able to deduct the full $90M from their income.  Their taxes, assuming this was all dividend income, would then be ($100M – $10M)*0.15 = $1,500,000.  This means that they paid 15% on their income, after deductions.

If you calculated the rate they paid based on their original income, this would be

$1,500,000/$100,000,000, which equals 1.5%.  That  would seem like a really low rate, but then again only $10M went into the gentleman’s pocket.  The rest was given away.  He therefore only really kept $8.5M, so he really only kept 8.5% of his income, having given away or paid out 91.5% in taxes.

To me, however, the whole point of deductions is to correct income for what really “should” be taxed  (here, “should” is based on whatever society has decided).  For example, if you give a lot of your money away as in the above example, and you give it to charities that provide many of the services that would otherwise be provided by the government, then it makes sense to not count that as income to the individual (since he did not actually receive that money – he gave it away).

My point here is not to start a debate on what should and what should not be considered a reasonable deduction.  My point is that if the calculation used to determine the percentage paid by high earners does compare the taxes paid to the income before deductions are subtracted, that is being really deceptive.  If the wealthy really do pay a lower percentage on their post-deduction income, however, I’d like to know how (Can  anyone explain this one to me?)!

If you think deductions should be eliminated, please lobby to pass that law (I’ll be right behind you, provided it means going to a Fair Tax or something that can reduce the time I spend worrying abut taxes).  While you’re at it, however, you may also want to remove the deductions for mortgage interest, children, college expenses, and medical expenses.  After all, why should those deductions exist if other deductions don’t?

Otherwise, if the wealthy are getting those great deductions by giving a lot of money away, or by doing the things like buying solar panels that the government wants them to do (that’s why they created those deductions int he first place), should we really be griping about the wealthy “not paying their fair share?” I suppose everyone could do the same thing.  Hey – if you give away 50% of your income, you could cut your taxes by 50% at least!  Anyone in the Occupy Camps want to do so?

2 thoughts on “Taxes Paid by the Rich

  1. People seem to be complaining about the lower tax rates on dividend income and capital gains vs ordinary income. One must realize that the capital invested to create dividend income and capital gains is really capital at risk and capital that creates jobs and productivity. If you tax risk capital at higher rates that would disincentivize this type of investment.

    • Absolutely. Another argument in favor of taxing dividends and capital gains at lower rates is that because their return is reduced by corporate taxes, investors are actually paying more than just the dividend or capital gains rate.

      Another question to ask also is why do we presume that the government should be taking a certain portion of each person’s income? Why not determine what things the government should be doing, tally up the costs, and then determine how to fund it rather than presuming that all income should be taxed at a certain rate and the income collected from that should determine how much the goverment spends (not that they actually limit themselves by how much is collected)? Again, I am a strong advocate for the Fair Tax, just because it would greatly reduce the difficulty in complying with tax laws, and it would also provide an incentive to save more and remove the disincentive to earn more.

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