Taxation policy

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Since a discussion on the benefits of various tax increases and decreases has erupted in some other threads, I thought I would start a new thread on that topic in particular. I'm not an accountant or anything, but I do have some thoughts that I'd like to share, and then watch the experts (and others) descend on me with rabid fury. Here goes:

1: I truly hate the idea of tax loopholes. I've always thought that dropping income taxes to a flat 20% for everyone, no loopholes, would be the best bet. Of course, there would have to be some gradation at the very bottom of the economic scale, but after that, you pay 20%. End of story. I know some say that would favour the rich, but so does the present system of loopholes up the wazoo, so maybe it would favour them less my way?

2: On an even more wild note, scrap income tax altogether. Go to consumption taxes. Here in Canada we have the wildy unpopular national Good and Services tax. Yet everyone pays the same bloody 5% on pretty well everything they buy. No loopholes there! However, there would be repercussions, yes? Please enlighten me as to what they would be if we scrapped income tax and jacked up sales taxes to 40%.

3: The middle class often feels that they are carrying the poor and subsidizing the rich. Yet I've read data (YEARS ago) that indicated the rich tend ot carry both in terms of raw taxes. Is this still true? Was it ever true?

Regardless, I am of the firm belief that the best way to both stimulate the economy and keep the populace happy is to let people keep their hard earned money and spend it as they desire, taking only enough for the government to provide essential services and ensure fair practices (regulation). Is this naive?

 

I remember hating the GST, because the taxes that were eliminated with it did not provide the reduced cost to consumers. Now that I'm older, I see it as the fairest way to tax. Those that consume more pay more. Those that save don't pay as much, and you get breaks when you need them to pay down your debts.

Honestly, I think that Obama should be looking at that as opposed to a tax increase on the rich. They'll pay more this way than they would through an increase in income tax...

 

The worst part about here in the states is it can vary from state to state(heck even county to county) as to how much tax you pay.
7 states don't tax income, 2 states only tax dividends and interest income & the other 41 fall between 3% - 10.3%.
Plus some states allow cities &/or counties to add an additional tax. NY city adds 4%.
Then the federal rate that goes up to 35%
It truly sucks having to give 1/3 - 1/2 of your income to the government !

Than the sales tax . . . . . it's gotta be the craziest thing, just look here
http://en.wikipedia.org/wiki/Sales_taxes_in_the_United_States
Every were from none to over 10% !
Here in nc we have different tax rates depending on what you are buying.
Non-food, prepared food, candy & soft drinks are at 7.25 - 8% while non-prepared food is 2% !

Just what qualifies as a loophole LKD?
I was able to reduce my tax burden by almost half by giving a bunch of stuff(almost 3 storage units of assorted goods) to goodwill & itemizing it all.
Now i know that some people would call that a loophole but i don't see it that way. How about some clarification>(thanks in advance)

 

I have terrible news for everyone who likes to live in the fantasy world that the rich use "loopholes" to avoid paying taxes and therefore stick it to the middle class. There is no such thing as a loophole. Many people live under the delusion that there is "magic" parts of the tax code that if you can just find them you don't have to pay taxes. It doesn't work that way.

Your tax is determined by your taxable income minus your deductible deductions.

 

It is true that the rich pay vastly more (even proportional to their income) income tax than anyone else in America. It's something like the top 5% pay 70% of income tax or something.

I support the Fair Tax Bill, which is what Gnarff was talking about (that's what we call it here), though it's really more a Libertarian horse than anyone else's. It's never gotten enough support in Congress to have a real chance. Anyway, the idea is to eliminate all federal taxes in favor of one single federal sales tax on all non-essential goods. Each state would still apply their taxes however they want, but federally, you'd just have the sales tax. Goodby IRS!

 

Wow, you just made "white-collar criminal" into a nonterm. Congrats. Care to go to the GAO and explain to them how they don't know a thing?

Seriously, cut down on the absolute claims.

 

I thought that the top 5 percent paid like 50 percent of the taxes, but that 5 precent also had something like 50 percent of all the private wealth in the country. So that makes sense. I could be wrong since I never bothered to research it. But my first wife handled trust accounts for some of the very wealthy and they had all kinds of deductions that the average person did not. I remember one guy loved race horses and owned a few. He used to write off on his taxes all kinds of race horse related expenses because his horses were considered "investments." But I certainly don't think that donations to Goodwill are loopholes.

Of course, it depends on your definition of "rich." I think the new benchmark, according to Obama's tax plan, is an annual income of 250K. But the obvious question always comes up about the rich and taxes: IF they pay so much in taxes, then why are they still so damn rich?

 

Well, it's nice to know that, at least in the US, the tax code is perfect. In Canada, it isn't. A number of years ago, Revenue Canada (now called Canada Revenue Agency, or CRA) introduced the General Anti-Avoidance Rule (GAAR), which basically said that if you twist the tax laws in such a way that, although not illegal, goes against the spirit of the Income Tax Act, and you reduce your tax liability accordingly, the CRA can "undo" what you've done and assess higher taxes. This is, in effect, addressing the problem of loopholes. There have been several instances where CRA has challenged tax structures on the basis of GAAR and won.

Having said that, I agree with Snook's general premise that many people think that using the tax laws as they were intended amounts to abusing a loophole. (Edit: The article The Shaman linked to seems to be a perfect example of this.) I remember someone a few years ago crying foul over the fact that manufacturing companies avoided taxes by claiming depreciation on their equipment (ie writing off the cost over a number of years), even though the tax laws are specifically designed to allow and even encourage this; after all, the more a company invests in equipment, the better it is for the economy.

First off, the are a number of exceptions to GST that make what should have been a very simple tax actually quite complicated. Plus there is the argument that consumption taxes discourage spending, and lower spending is one of the things that cause recessions. A 5% tax doesn't really matter; a 40% tax does.

Anyway, I oppose a more simplified tax system on the basis that such a move would put a lot of accountants out of work.

 

As Splunge mentioned, that article doesn't explain the entire story by a long shot. I'll give you an example. Let's say you are the 100% owner of a corporation that made $150,000 profit as of 12/30/xx. On 12/31/xx the corporation paid you a bonus of $150,000. Voila, now as of the end of the year the corporation has no income and therefore doesn't pay any taxes. According to your link something "bad" just happened. What they are failing to mention (or don't understand) is that your W-2 and your individual income tax returns just went up by $150,000. Considering that most corporations are small businesses this is standard operating procedure. The fact that so many corporations are paying any tax is surprising to me as I would have thought it would be much lower.

That article seemed to focus on "sales" which have no correalation with taxable income. Remember, you have to have income to pay taxes. If a corporation loses money, it doesn't matter how big it is, its tax will be $0.

As to who pays the taxes look at pages 5 and 6 of the .PDF. This data is as of 2006.

As to the guy who likes horses, good luck to him. In the code is a rule about "Hobby losses". If you have a pattern of losses which clearly show that the business is not a real business, the IRS will disallow the losses.

 

I have been educated. I will now share my feelings on the philosophy of taxation:

In a civilization, if we are all to live together as a group for the benefit, protection and progress of us all, there must be a way of funding things that benefit us all. That's why we pay taxes. Someone somewhere quoted Oliver Wendell Holmes as saying that "Taxes are price I pay for civilization." Assuming that the taxes that are raised are being used for the greater good, then I am happy with that aspect of things.

But who is to be taxed? Logic tells me that if everyone is benefitting from the money spent, everyone should contribute -- and should contribute his/her fair share.

This is where I get antsy. On the one hand, the rich should contribute their fair share. But when I hear the battle cry of "tax the rich!" it makes me wonder -- we want to punish those who have succeeded at the game of business? What then is the incentive to do well at business if the fruits of your labour will be taken away and given to others -- others who may not have worked as hard?

Of course, being middle class myself, I also don't want my money going to fund the amusements and investments of the rich or to the underserving lazy poor (which is not all the poor, I know that) -- I want infrastructure and public security that benefits poor, middle class and wealthy alike. So I want to see that the rich are paying their fair share and the lazy poor forced to work rather than suck off my labour.

So when it comes to tax breaks, I want ones that will benefit the largest number of people -- ergo, the middle class!

 

First of all, we need to define what "fair share" means. The same dollar amount? The same percentage? Or something else? Different people have different perspectives.

Also, I'm not sure that "punish" is the right word, although that's probably more a matter of semantics. Furthermore, you're assuming that the only reason people want to succeed at business is for the money. But there's more to it than just that - prestige, influence, a sense of accomplishment, etc. Not to mention the opportunity to get a trophy wife.

Personally, I don't have a problem conceptually with the current system of increasing marginal tax rates as your income goes up, nor with giving tax incentives to those who are willing to invest in the economy through job creation, equipment purchases, etc. Unfortunately, the implementation is generally far from ideal.

 

Well, it has always seemed to me that a flat percentage is fair -- everyone gives in proportion to what they make. Obviously, a flat dollar amount is not appropriate or fair to the poor. Most modern governments think that even the flat percentage is still unfair to the poor. Very few people are super enthusiastic about paying taxes, especially if they feel that they have little to no subsequent say in how the money is used. To the poor, however, it seems like their version of "fair share" is exactly what I mentioned earlier -- punishing the rich for being successful. To the rich, though, fair share would probably be a much smaller amount than the poor and middle class are willing to accept. Finding that balance is a difficult thing.

 

These numbers are about 5 years old though. It makes sense that they would pay more, since they have most of the money.

http://multinationalmonitor.org/mm2003/03may/may03interviewswolff.html

 

Just thought I'd add a bit of humour about the complexity of Canada's Income Tax Act, courtesy of the monthly CA Magazine for Canadaian CA's. (The "Numbers Game" section is one of my favorite features. Mainly because it's short. ):

189 - Number of words in one sentence of the 1989 Revenue Canada tax guide, according to the Canadian Law Information Council. The following year, the council held classes to help 15 tax department staffers simplify their language.

 

As an aside, even Milton effing Friedman favored the redistribution of wealth. Though he called it the 'negative income tax'.

 

I may have been wrong on the figure, which is why I stated it in uncertain terms.

The idea that taxing spending will discourage spending only works if you tax particular spendings (alcohol, tobacco, etc.) and not others. If you tax all non-essential spendings, the only other thing for people to do with their money is to invest or save it. This will likely increase (no complaints here), but it will hardly be severe. People are too addicted to their luxories and the good things money can buy. Also, when you consider the fact that the central idea is that they pay the same taxes in the end, just through a different method, I don't expect spendings would change that much. Yes, it costs more to see a movie, but your pay check is effectively bigger, too.

 

OK, it's stupid question time again -- is it a proven fact that taxing spending discourages spending more than income tax? I mean, if you tax my income, I DEFINITELY can't use that money for spending or saving. But if you tax spending, (in my case, anyhow) it would encourage me to save my money (that I otherwise wouldn't have had anyhow) and then spend it on big ticket items. I can see how some industries would be unhappy about that, but others would cheer.

Am I missing something?

 

Because we are talking about human behaviour it is of course not a proven fact. What it will however do is that people who are hoarding money will pay less taxes and I'd claim that the ones who usually hoard money are rich and high income earners. Meaning that the rich would under this system pay less taxes. Typically the poor put a bigger percentage of their income into spending than the rich and therefore under a system which taxes spending instead of income the poor would be worse off. You could claim that by taxing luxury products at a very high percentage you could even up the gap but in that case there is very little preventing the high income earners from acquiring their luxury beach houses or yachts from abroad where they are significantly cheaper since they are not so heavily taxed.

EDIT: As for my personal opinion on taxes I do support some sort of progression in income tax. In Finland we have a system where the state tax is progressive while the muncipial tax is flat. The current trend has been taxbreaks on the state level while muncipial governments have pretty much held on to their percentages or in some cases even increased the tax meaning a reduction in progression. I'm not sure where the ideal situation in my view is but I think this sort of a dual taxation system gives a lot of manouvering room for different types of tax policies.

 

Ah, but if you eliminate essential spending (food, clothing, housing, utilities, possibly with cost restrictions on each) then you give a big tax break to the poor. How many of the poor blow their money on movies and video-games and the like. If they do, it's their own fault for being poor at that point. On the other hand, the rich will spend a lot on luxory items, plus their food, clothing, housing, etc. is more likely to be excessive and thus taxed.

 

It certainly isn't proven (at least not to my knowledge). And I'm sure it wouldn't really matter if such a system had been in place for a long time. However, if you were to suddenly change from an income tax to a, say, 40% consumption tax, I think it would reduce spending, at least for the first few years until people got used to the new tax system. Psychologically, I suspect people would see a 40% increase in prices, and would buy less expensive versions of what they would normally purchase, or would just buy fewer things; the fact that their paycheque went up wouldn't really matter. Plus, people might be more inclined to save money, not for big ticket items, but for retirement, although this might be a good thing, particularly for those people whose retirement savings is too low.