All this reminds me of what my Statistics professor always said.

"Figures don't lie, but liars figure."

I am not saying that anyone here is doing that, but the numbers can be manipulated to meet whatever criterion your are looking for.

I am glad that you think my plan is a step in the right direction, Geo. Sometimes, I think I can be too harsh in my desire for equality. Not enough to change mind you, but I am thinking about it.

geojanes wrote:

Ray Jay wrote:It has become a Democratic talking point, but it is a sinister manipulation of what is really going on here.

You and I have very different definitions of the word sinister!

The fact the numbers are even close enough for us to be discussing the impact of social security is a symptom of the problem. As reported in the article I posted several days ago, there are crazy loopholes (as well as standard operating procedure) that allow the very wealthy to either pay much less, less, or roughly the same in taxes as their working counterparts. You know this to be true.

I get where you are coming from on the big picture.

I'm just dealing with the detail of what Buffet is saying. If Buffett wants to use social security tax rates in his hyperbole, then he is showing his disapproval with the social security system. He seems to be saying that 15% income tax rates on married people who make $90,000 per year or a single who makes $45,000 is too high. (BTW, the rate is 40% in the UK for income of about $50,000.) Or he is saying that FICA taxes shouldn't exist, which puts him to the right of most of the Republican candidates.

But yes, sinister, is too strong a word. But it is not honest about lower income tax rates and the social security system. Do you agree?

Ray Jay wrote:It's close, but the more important point is that you are mixing apples and oranges. I've looked at social security tax rates vs. benefits, and it is a very progressive program on its own.

Except that each tax and benefit programme does not exist in a vacuum.

For people who make about $10,000 per year for their lifetime, their annuity is at 90% of earnings. For people making between about $10,000 and about $60,000 per year, their annuity drops down to a 32% of earnings level. For people making from about $60,000 to about $120,000 the annuity level is at 15%.

So, the lower paid employees will be getting a check from ages 67 to whenever which becomes a very good deal. You couldn't buy an annuity that good. However, people who make more than $60,000 are not getting a good deal as it relates to social security.

Of course you need to factor in that people on lower incomes tend to live shorter lives.

Also that those on higher incomes will also have been in a far better position to get a tax break on pension contributions for their private schemes and will benefit more from that as well.

Buffett's combining of social security with regular income taxes is slight of hand. It has become a Democratic talking point, but it is a sinister manipulation of what is really going on here.

"sinister"? It seems ridiculous to only look at one tax or another when we are looking at whether people on high/medium/low incomes are getting a fair deal. We should look across the whole picture.

It is not "sinister" to do that. It is, however, interesting that you say that it is and then make a partisan point.

I did walk back the word sinister, but my fundamental point is correct despite all this rhetoric. If you want to combine social security and Medicare taxes with regular income taxes in your analysis, then you also have to consider social security and Medicare benefits. The 7.65% that lower income workers pay is a good deal and in fact, to date, has had a high rate of return. So, Buffett's comparison to middle income taxpayers doesn't make sense. Why imply that lower-middle income taxpayers paying a top rate of 15% federal income tax is too high?

Ray Jay wrote:I did walk back the word sinister, but my fundamental point is correct despite all this rhetoric. If you want to combine social security and Medicare taxes with regular income taxes in your analysis, then you also have to consider social security and Medicare benefits. The 7.65% that lower income workers pay is a good deal and in fact, to date, has had a high rate of return. So, Buffett's comparison to middle income taxpayers doesn't make sense. Why imply that lower-middle income taxpayers paying a top rate of 15% federal income tax is too high?

Yes, but they only get that return after retirement (which is a shorter time for poorer people), and as I pointed out, there are tax benefits for the more wealthy that are also pretty good but only available if you have the disposable income.

And is that the only possible implication? I thought Buffett was largely saying that the wealthy and high earners are under-taxed.

Yes, but they only get that return after retirement (which is a shorter time for poorer people),

You've mentioned this before so I'll respond. Although there may be a difference of a few years, I don't see that as changing the progressivity of the Social Security system. If upper income taxpayers have their additional dollars "matched" at 15%, and then have most of that taxed so it nets to about 10%, and lower income taxpayers have their dollars matched at 90%, you are looking at a very progressive policy. A few years of life expectancy may reduce the progressiveness, but it doesn't eliminate it by a long shot if you do the math. Social Security is a very popular Democratic program because of its progressivity. You do support it in the main, right?

And is that the only possible implication? I thought Buffett was largely saying that the wealthy and high earners are under-taxed.

We are conflating 3 different issues which is why this conversation isn't going anywhere.

Issue 1: There are unreasonable loop holes and provisions in the U.S. tax code.

I think we all pretty much agree on this; if this is the sum total of Buffett's comment, then no harm. However, there are a couple of items that I do not view as loopholes, but Geo and you do. Namely, the lower tax rate on capital gains per se can be reasonable. If you hold an asset for 20 years, you may have a large gain, but in reality it's just inflation and there was no real gain at all. In a sense, your tax rate is infinite as you are paying all of your profits and then some on a break even investment.

How you correct his is complicated. If you hold an asset for just 1 year you should not have that same favorable rate. But changing the rate depending on every gradation of holding period is intensely complicated (and was tried in Mass.), as is inflating the basis of the asset.

Qualified dividends also receive special tax treatment because the corporation has already paid tax on that income. In theory that makes sense because the corporate tax rate is 35%.

In both the cap gains and qualified dividend examples, wealthy individuals find loopholes which we all agree is a problem. However, the theory behind the favorable rates is sound.

Issue 2: Lower income people are over-taxed in the U.S.

I don't agree. I've lived under both your country and my country's tax regimes. Under identical situations a middle income taxpayer could be taxed at 15% over here (23% if you want to include FICA) and 40% in the UK. There are lots of other differences, but in the whole this impact of our income tax system is very progressive. If Buffett is implying otherwise, I think he is creating problems by suggesting that lower income workers are overtaxed.

Issue 3: Upper income taxpayers pay tax at too low a rate. Here we just disagree. I think 40% is high enough. More than that is counter productive. However, Sanders talks about the Eisenhower rates (50% - 70%).

ray

ssue 2: Lower income people are over-taxed in the U.S.

I don't agree. I've lived under both your country and my country's tax regimes. Under identical situations a middle income taxpayer could be taxed at 15% over here (23% if you want to include FICA) and 40% in the UK. There are lots of other differences, but in the whole this impact of our income tax system is very progressive. If Buffett is implying otherwise, I think he is creating problems by suggesting that lower income workers are overtaxed

.
What you also have to consider is what you get for your taxes. In the UK taxes include access to health care at virtually no cost.
For middle class families in the US the cost of health insurance and uncovered health care costs due to deductibles and caps can be large... Not so in the UK .

RJ, you seem to be under a certain misapprehension as regards the amount of tax paid by middle income earners in the UK. Take-home pay for somebody earning £40k (which is well above the median wage in the UK) works out at £30287.20, so in actual fact we only pay about 25% tax. For that we get, among other things, a fully-funded health service which is free at the point of delivery. Even when you get up to an £80k salary you still come out with £53541.22, so even then you're only paying about 33%.

http://www.netsalarycalculator.co.uk/80000-after-tax/

There's a difference between gross and marginal rates of taxation. I'm sure you realise that, but it's important to emphasise.

Sassenach wrote:RJ, you seem to be under a certain misapprehension as regards the amount of tax paid by middle income earners in the UK. Take-home pay for somebody earning £40k (which is well above the median wage in the UK) works out at £30287.20, so in actual fact we only pay about 25% tax. For that we get, among other things, a fully-funded health service which is free at the point of delivery. Even when you get up to an £80k salary you still come out with £53541.22, so even then you're only paying about 33%.

http://www.netsalarycalculator.co.uk/80000-after-tax/

There's a difference between gross and marginal rates of taxation. I'm sure you realise that, but it's important to emphasise.

Yes, I get all that all. I've lived in the UK and have paid taxes there. I'm just using it as an example to explain that lower income people are not overtaxed in the US.

In the UK system, would there be any taxes in addition to what you have outlined above, such as for pension or health care?

No. There are other taxes of course, like VAT, inheritance tax, duties on fuel and alcohol and tobacco and what have you, but there are no further income taxes. National insurance contributions are what we notionally pay towards our pensions and to fund the NHS (although in reality all the money goes into a central pot), but these are included in the breakdown I just gave you.

When did you live here ? There have been changes over the years. The most obvious recent one is a substantial increase in the personal allowance that's happened over the last Parliament. It used to be that the first £3600 was tax free but that's now up to £10000, which is a hefty jump.

edit: in fairness I ought to point out that there's council tax as well, which is a local property-based tax which goes to your local authority. This is banded according to the value of your home and payable by the household rather than the individual. I'm in a very low banding and for me it comes out at £800 a year, but it can get up to several thousand for those who live in more expensive properties. This doesn't get deducted at source but I suppose it's silly not to include it since this is very much non-discretionary.

Sassenach wrote:No. There are other taxes of course, like VAT, inheritance tax, duties on fuel and alcohol and tobacco and what have you, but there are no further income taxes. National insurance contributions are what we notionally pay towards our pensions and to fund the NHS (although in reality all the money goes into a central pot), but these are included in the breakdown I just gave you.

When did you live here ? There have been changes over the years. The most obvious recent one is a substantial increase in the personal allowance that's happened over the last Parliament. It used to be that the first £3600 was tax free but that's now up to £10000, which is a hefty jump.

edit: in fairness I ought to point out that there's council tax as well, which is a local property-based tax which goes to your local authority. This is banded according to the value of your home and payable by the household rather than the individual. I'm in a very low banding and for me it comes out at £800 a year, but it can get up to several thousand for those who live in more expensive properties. This doesn't get deducted at source but I suppose it's silly not to include it since this is very much non-discretionary.

I lived in the UK from 1999 - 2001 ... with that same income level, the comparable income taxes in the US would be a bit lower than what you describe (about 13%; if you include the 7.65% FICA you get to just over 20%. There are many deductions here, esp. if you have children which would substantially reduce that 13% effective tax rate. Naturally we would also have state taxes which include some combination of income, property and sales, depending on the state. The former 2 are deductible for federal taxes. We do save a lot by not having VAT.

Our prices tend to be about 50% lower than yours, except of course health care costs and university. Also, I recall that massage, flowers, and beer are all cheaper in the UK. I remember those years fondly.

University tuition costs have gone up here recently as well, although it's still far cheaper than in the US and in fact as a proportion of your monthly pay the repayments have probably declined. The repayment scheme, although not officially confirmed as such, is effectively a graduate tax these days. As your pay goes up so does the amount you repay from your student loans, which is deducted at source. My student loans were paid off in a different way, you either paid nothing or, once you got above a certain earning threshold, quite a lot each month. Current students start paying back right away but until they get to a very significant salary the amounts they pay back are barely enough to cover the interest. Most of them will probably never repay their loans and will just become accustomed to that little bit extra being deducted from their pay every month. I'm guessing the system is very different over there.

Ray Jay wrote:

Yes, but they only get that return after retirement (which is a shorter time for poorer people),

You've mentioned this before so I'll respond.

That was my hope when I first mentioned it.

Although there may be a difference of a few years, I don't see that as changing the progressivity of the Social Security system. If upper income taxpayers have their additional dollars "matched" at 15%, and then have most of that taxed so it nets to about 10%, and lower income taxpayers have their dollars matched at 90%, you are looking at a very progressive policy. A few years of life expectancy may reduce the progressiveness, but it doesn't eliminate it by a long shot if you do the math. Social Security is a very popular Democratic program because of its progressivity. You do support it in the main, right?

I am not an expert on the US system, but I do support the principle of social insurance that includes people contributing while in work (the idea is that employers also contribute which they do in the UK) and this goes towards providing both working age benefits (time limited benefits to those who lose their jobs for example) and a pension that means they are able to retire and not be in poverty.

Yes, that is progressive, and yes it mitigates inequality in society. But it is still part of a wider picture - those who benefit less than they contribute may resent it, but they also have other means to benefit from tax policy on pensions.

And is that the only possible implication? I thought Buffett was largely saying that the wealthy and high earners are under-taxed.

We are conflating 3 different issues which is why this conversation isn't going anywhere.

I am trying not to conflate them. But at the same time the questions are not unrelated. The one issue you are not including is actually key: even if the budget is balanced, there is a large public debt that the US has to address. There are various ways to do it, but tax policy and the effect on people's finances are also a part of it.

Issue 1: There are unreasonable loop holes and provisions in the U.S. tax code.

I think we all pretty much agree on this; if this is the sum total of Buffett's comment, then no harm. However, there are a couple of items that I do not view as loopholes, but Geo and you do. Namely, the lower tax rate on capital gains per se can be reasonable. If you hold an asset for 20 years, you may have a large gain, but in reality it's just inflation and there was no real gain at all. In a sense, your tax rate is infinite as you are paying all of your profits and then some on a break even investment.

How you correct his is complicated. If you hold an asset for just 1 year you should not have that same favorable rate. But changing the rate depending on every gradation of holding period is intensely complicated (and was tried in Mass.), as is inflating the basis of the asset.

Qualified dividends also receive special tax treatment because the corporation has already paid tax on that income. In theory that makes sense because the corporate tax rate is 35%.

In both the cap gains and qualified dividend examples, wealthy individuals find loopholes which we all agree is a problem. However, the theory behind the favorable rates is sound.

Perhaps. On the other hand, is it beneficial to the economy to reward people whose assets grow without them actually doing anything to improve them. That not only is unearned income that can often also be taxed at a lower rate than earned income, but it represents economic inactivity. If that is incentivised over using an asset to generate an income, then it impacts the economy - why do things that create growth (and jobs)?

Now that is also an argument that would support lower corporation taxes than other taxes, perhaps.

Issue 2: Lower income people are over-taxed in the U.S.

I don't agree. I've lived under both your country and my country's tax regimes. Under identical situations a middle income taxpayer could be taxed at 15% over here (23% if you want to include FICA) and 40% in the UK. There are lots of other differences, but in the whole this impact of our income tax system is very progressive. If Buffett is implying otherwise, I think he is creating problems by suggesting that lower income workers are overtaxed.

I think that at a Federal tax level you are right. The regressive taxes that hit lower income people tend to be levied at State and local level (Sales Tax, I am looking at you).

But still on this I see more of your inference than I do Buffett's implication, which you then use (and I don't see you citing where Buffett makes this implication, just you telling us it is there) to try and shoot down the whole thing.

Well, that is my inference ;-)

Issue 3: Upper income taxpayers pay tax at too low a rate. Here we just disagree. I think 40% is high enough. More than that is counter productive. However, Sanders talks about the Eisenhower rates (50% - 70%).

Ah, yes Eisenhower, that awful Republican President who saw high growth and increasing purchasing power for ordinary Americans. I can see why you would not want to return to the booming economy of the 1950s.

[/sarcasm]

Why were the tax rates under Eisenhower counterproductive then?

Danivon:

I am not an expert on the US system,

I grok that.

Danivon:

(the idea is that employers also contribute which they do in the UK)

Here too ... the employer also contributes 7.65%.

Danivon:

On the other hand, is it beneficial to the economy to reward people whose assets grow without them actually doing anything to improve them.

You make it sound easy. Picking assets that will increase in value vs. assets that will decline in value is very hard.

Danivon:

The one issue you are not including is actually key: even if the budget is balanced, there is a large public debt that the US has to address. There are various ways to do it, but tax policy and the effect on people's finances are also a part of it.

Yes, lower tax rates; reduce regulation; expand free trade. That's the key. (And no doubt we can argue about that forever.)


Danivon:

Now that is also an argument that would support lower corporation taxes than other taxes, perhaps.

Yes.

Ah, yes Eisenhower, that awful Republican President who saw high growth and increasing purchasing power for ordinary Americans. I can see why you would not want to return to the booming economy of the 1950s.

[/sarcasm]

Why were the tax rates under Eisenhower counterproductive then?

It is quite a puzzlement that the US economy did so well in these years in spite of crazy high income tax rates ... perhaps it was the state of the world in 1950 ... perhaps it was that the capital gains rate was not nearly as high ... I remember my tax professor in the early 80's telling me that most of the internal revenue code, regs, and court cases are about converting income tax to capital gains. In any case, no doubt you would agree that the world today is different than it was 60 years ago, and what may have made sense then may not make sense now.

Philosophically I am against such high tax rates. I also think it is bad economics. (But you and I can argue about that forever)

Ray

It is quite a puzzlement that the US economy did so well in these years in spite of crazy high income tax rates ..

.
Its an observed fact.
Whats puzzling about it? (or is it just that it contradicts conservative dogma?)

And not just in the 1950s.

Today's income tax rates are strikingly low relative to the rates of the past century, especially for rich people. For most of the century, including some boom times, top-bracket income tax rates were much higher than they are today.
Contrary to what Republicans would have you believe, super-high tax rates on rich people do not appear to hurt the economy or make people lazy: During the 1950s and early 1960s, the top bracket income tax rate was over 90%--and the economy, middle-class, and stock market boomed.
Super-low tax rates on rich people also appear to be correlated with unsustainable sugar highs in the economy--brief, enjoyable booms followed by protracted busts. They also appear to be correlated with very high inequality. (For example, see the 1920s and now).
Periods of very low tax rates have been followed by periods with very high tax rates, and vice versa. So history suggests that tax rates will soon start going up.

http://www.businessinsider.com/history- ... tes-2012-5