A friend visiting from Berkeley had recently completed his taxes. As a Millionaire for Obama, he complained that he didn’t pay a very high percentage of his income in tax. Most of his money came from dividends paid by U.S. public corporations and the tax rate on “qualified dividends” is only 15 percent, so he thought he hadn’t done his fair share for our new Washington-run command economy (and more importantly that other fatcats hadn’t paid their share). I explained that, as an investor in these companies, his profits had already been taxed at some of the highest rates in the world (source) through state and federal corporate profits taxes. The final 15 percent tax at the personal level was just an icing on the cake that gave the federal government close to a 50 percent share of any profits earned by a U.S. corporation. Not to mention California state income tax at 9.3 percent.
“It should be more,” he noted. How much more could it be before the company would move offshore? Or stop paying a dividend and use the money to repurchase its shares (thus driving up their value for eventual cashing in as a capital gain)? “Tax rates used to be a lot higher on guys like me,” he noted. thinking of himself as a truly rich guy. Back in the FDR days, the top rate was indeed high, but it started at $5 million per year in annual income, equivalent to a $75 million/year salary today (AIG wages! (source)).
philg… Ref: “Not to mention California state income tax at 9.3 percent.”
Note: “Effective with tax years beginning on January 1, 2009, the State [CA] temporarily increased its personal income tax rate for both regular tax and alternative minimum tax (AMT) purposes. With a 0.25 percent rate increase, the maximum tax rates are 9.55 percent (regular tax) and 7.25 percent (AMT).”
Also, CA property taxes (airplanes) very high. This from the CA Pilot Association:
“There has been a recent increase in aircraft personal property taxes for many California aircraft owners. A 40% increase over that of last year is not uncommon. While the law has not changed, certain tax assessors are now updating their files to assess aircraft at their actual value.”
PS: Somali pirate-curfew brilliant. “World response” to Somali pirates = abysmal.
Back in the FDR days his “million dollars” of today was only worth about $20,000. The difference is due to inflation. An ounce of gold was worth $20 at the beginning of FDRs term and $35 at the end. And this comparison holds true across many commodities, including bread, number of bottles of beer, land, etc.
Tell him if he really wants to be a millionaire he needs to earn closer to $20M these days….
Your Berkely friend will be thrilled to know that the amount computed by tax forms is the *minimum* you must pay, but (here’s the exciting part) he can pay more if he wants! Everyone knows that one’s “fair share” has nothing to do with the number computed by tax laws, so this is his chance to correct that for himself.
He should also find comfort that he can write a check to the US Treasury any and every day he wishes. (This is the point at which I should say “People will appreciate your contributions”, but that would be a lie; people, especially those from where your friend lives, tend to think they have a vested right in taking your money, and keeping their own).
Oh yeah. The 9.55% is temporary. Remember when 8.25% sales tax was temporary?
I dunno about the U.S. having high corporate tax rates. At the last company I worked for, the actual Federal Tax rate was something like 13%, not the egregious 35%. Now what accounting and capital structure tricks and loopholes the CFO did, I don’t know. Since they’re a public company, this ought to be legal. But as a random data point, IBM and MSFT’s tax rate is 25%. So, your millionaire friend’s effective tax rate is something like 40%, which is ridiculous.
Why didn’t he believe your accounting?
Jeffrey: I will suggest that he mail in an extra check to the U.S. Treasury. Actually that isn’t a bad idea. The Federales are probably more efficient than many private charities.
Jeff: I think that he did believe my accounting (though perhaps you are right and it is closer to 40 percent on average rather than 50), but somehow he thought that being an investor he wasn’t entitled to whatever he got.
MIT’s Peter Senge (my hero) preaches “think in 2 dimensions”. Property taxes are like this…
Dimension-1: Rate (absolute)
Dimension-2: “Assessment” (assumption)
Senge also says (his #1 rule) “The #1 reason for system failure is faulty assumptions”.
Where am I going with this? Here…
Problem with “property taxes” = “wildly escalating”
Solution: Anytime you don’t like your property assessment, you can *force the tax-agent to buy it from you at the assessed value*. The tax agent then *must* buy it. After all, this is fair. The tax agent told you (sometimes in court) “assessment was fair-market-value”.
This would IMO instantly stop inefficient localities from crushing the property owners (taxation) to satisfy (whatever) costs are being generated.
philg: Maybe this is worth inclusion in your save-America-econ-plan?
P.
Jeffrey Friedl: “I dunno about the U.S. having high corporate tax rates.”
See also:
http://krugman.blogs.nytimes.com/2008/08/18/pity-the-poor-corporations/
Krugman: “Now, the thing you have to realize about corporate taxes is that the statutory rate — the rate you pay after allowed deductions and all that — means very little. That’s because corporations have lots of potential deductions — and can hire the very best accountants to find them, and lawyers to justify them. So any time you see a table that compares the nasty 35% US rate with other countries, you know you’re being snowed.”
Russil: Maybe I wasn’t as smart as Paul Krugman, but when I was CEO of a U.S. corporation, I wasn’t able to find these clever deductions. We paid taxes at the published rates. Having a ridiculously high tax rate on C corporations (the standard) creates a huge distortion. An S corporation or an LLC pays no tax at all, with all profits or losses flowing back to shareholders for them to pay taxes at personal rates. Converting a piece of paper from an S corp to a C corp therefore can result in the difference between a company being viable or unviable.
It may be possible that we’ve set up a system where accounting wizards (such as the Enron guys!) can succeed. But the U.S. would probably be better off with a system in which managers who concentrate on business can succeed.
“Jeffrey: I will suggest that he mail in an extra check to the U.S. Treasury. Actually that isn’t a bad idea. The Federales are probably more efficient than many private charities.”
I’m willing to bet he either sends no extra money or a piddling amount to the US Treasury. Also let him know he can do the same for Massachusetts.
I too owned a C corporation ( bad advice) and could never find these magical loopholes I hear the tax sharks always talking about. These tax zealots also seem to forget the payroll and unemployment taxes that corporations pay in their diatribes. Combine the present corporate tax situation with the pending carbon tax push and we’ll all have to flip burgers for a living, or work for the government. That should work out great…..
“his profits had already been taxed at some of the highest rates in the world”
That’s a very simplistic argument, which can be used to argue pretty much against any tax. And in this case it’s an invalid argument since it isn’t the same entity being taxed (unlike say a sales or property tax). And I would argue that there are many taxes much more unfair than the paltry 15% tax on dividend income. In general I don’t see why investment income should be taxed any lower than income from working labor. After all, the investor relies as much on (and benefits as much from) government services as the working man.
For a great rebuttal on the myth of double taxation, see also Dean Baker in one of his blog posts:
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=09&year=2008&base_name=greg_mankiw_promotes_the_myth
Fabian: Thanks for the Dean Baker article. He fails to point out that limited liability is available to S Corps and LLCs, which are not subject to double taxation. He also says that an investor’s alternative is not to buy stock in corporations. He might want to add that the investor not investing in a U.S. corporation means that U.S. workers don’t get jobs. The money instead gets invested in a corporation in a country with a more favorable business/tax environment.
The unemployment rate in China is about 4 percent.