Comparing the taxes of $100K and $500K W2 income

[mm1970]

So when I come here and see people rant about taxes, and how it's unfair that someone has to pay more taxes, and the "other 80%" has it SOOO easy, and are lazy, etc.  I think "what planet do you live on???"  Not my planet.

Yeah, that's another interesting point.  If I could find a 40 or 50 hour version of my job as an attorney, I could do it more or less indefinitely.  Definitely in to my 50s and even 60s if I was good. Even as a 16, 18, 20 year old working an eight-hour restaurant shift, everything freaking HURT.  I can't imagine how I'd feel by 45.  I think this is changing as many working class jobs become less physical (ie technical machinist, not factory line worker), but for most of the working class historically and a good chunk now, work is not something you can do for 60 years.

My dad was lucky to be able to work as a mechanic into his sixties (and my other BIL too).

But this BIL with all of the repetitive use injuries?  His back, his shoulder, multiple surgeries.  He retired from the job, was off work for a long time recovering, then got another job fixing cars.  But really, he can't get up and off the floor. So he had to quit that job.  And he has more surgeries to come.

I have several friends in their 30s who are in construction, and have lost quite a lot of work due to injuries and surgeries.  I have another friend who was hit by a car (not her fault), and is on year 2 of recovery and physical therapy.  She has a physical job, and thus, cannot work right now. 

I used to work more on the manufacturing floor.  10 hour days on my feet, bending, squatting, whatever.  Man, I'd ache all over when I got home.

[prognastat]

I have seen this a couple of times, and I am baffled by this idea.  What specifically do I benefit from moreso than my former self who made a lot less money?

Consider defense, for example, which makes up 20% of the budget. Defending the country benefits everyone; but it benefits the wealthy more, because they have more to defend. It's the same principle as insurance: if you have a bigger house or a fancier car, you pay more to insure it. Consider infrastructure—transportation, education, research & development, energy, police subsidies, the courts, etc. These, too, are more useful the more you have. Consider public education. Who profits? The wealthy business owner who hires publicly educated employees. Consider FDIC. Who benefits more when it's needed? Someone with $200k in the bank, or the poor guy with $50 in his account?

Its the same system for everyone. I derive no additional benefit.  This is why I hate this debate. Its based on perception and not fact.  Every high wage earner is the monopoly man who hates the poor.

Nonsense! This victim mentality is, frankly, disgusting. If you're fortunate enough to make extraordinary income, and have to pay a slightly higher tax rate as a result, instead of thinking of it as being punished, be grateful for all the tremendous opportunities you've had to see that success. Hell, you even get to keep the lion's share of your winnings! Just share some back with the society that gave you these opportunities, so that future generations can have the same shot you did.

1. If terrorists kill a guy with $10 or $100 both are still dead. It's a bogus argument. The benefit is being safe, you are not more or less safe depending on how much money you have, same with everything else you outlined. You don't have more access than any other American.

2. Slightly higher? Try exponentially more.  No one is suggesting that higher wage earners shouldn't pay taxes, despite you framing it that way. I still have not heard a credible argument to why it's fair, because it's not. Let's just be adults about it and call it what is, unfair,  instead of demonizing high wage earners. We should be celebrating them for underwriting society, not demonizing them. That's what most people don't understand. It's the taxes for sure, but more so it's the people demonizing high wage earners on top of being taxed disproportionately higher.  But it's a lot easier if you are a politician to demonize the monopoly man, since he is a small portion of the voting population to pull the wool over the eyes of the middle class who's tax dollars are wasted on all sorts of ridiculous research projects, that and of course throwing momma off the cliff.

1. If terrorist bomb a major metropolitan area affecting the stock market significantly due to reduced trust the person with a lot of money invested is going to be affected more. If the both people survive a bombing by an opposing nation, but one has a large estate and possibly an office in town, who lost more? With an argument like this I don't think you have a leg to stand on calling his argument bogus.

2. If it is unfair why don't all rich people want to be poor? When a game is unfair people stop playing. So long as people are still playing to win they would either be fools or the system is still fair.

[MDM]

Marginal tax is lower, but overall tax rate is higher compared to the standard tax calculation.  Everything else you said was spot on.

FWIW, the total (fed+SS+medicare; state is zero) tax rates for the OP situation is below.  With all the various credits, phaseouts, etc., there are many more marginal rates (left axis) than tax brackets.



Again, mostly just FYI but if someone spots an error that would be good to know. 

[Yaeger]

Nonsense! This victim mentality is, frankly, disgusting. If you're fortunate enough to make extraordinary income, and have to pay a slightly higher tax rate as a result, instead of thinking of it as being punished, be grateful for all the tremendous opportunities you've had to see that success. Hell, you even get to keep the lion's share of your winnings! Just share some back with the society that gave you these opportunities, so that future generations can have the same shot you did.

I find that attitude to be just as disgusting as the victim mentality of the poor or middle class pushing for tax redistribution. Society didn't provide those opportunities from public goods. The taxpayers did, namely the rich. You don't owe society, you owe the rich.

[tooqk4u22]

Nope, not saying that at all, although the first two and the third one until more recently would be born by the companies and not the taxpayers.  And your statement actually displays that you view those jobs as shameful. I have many friends that work in grocery stores on the east coast and west coast....and a lot of them do make $100k as store managers.  All of them started as cashiers or stock people and worked their way up, but that won't be all or even most. 

I have no idea where you got that idea.  I grew up in a blue collar, small rural town.  I worked in a grocery store in high school and college.  Where I grew up, working at a grocery store was a good, honorable, decent job.  There was nothing shameful about it.

But back then, it came with full time hours and some amount of health insurance.  It doesn't necessarily come with that anymore.  So often, when I hear people complain about taxes, and lazy people without motivation, they point to people in the service industry with "no motivation". 

Why does working at a grocery store signify no motivation?  It doesn't.  You can be a cashier, or a bagger (I was a bagger).  You can move up from bagger, to cashier or stock person.  Or you could move up to the bakery, or the deli, or the meat department.  For sure, when I worked there, baggers did not work full time or get benefits.  But most of the other employees did. 

Too often I read that people with "menial" jobs aren't worthy of "X".  Like: if you want paid vacation, bootstrap  yourself to a better job!  Generally these refer to jobs like retail, restaurant, grocery stores, janitorial, secretarial.  When I hear, or read that, it sounds like it's coming from people who live in a bubble of privilege.  And then I wonder, how many people live in such a bubble?

My dad was an auto mechanic.  My mom stayed home until the trucking dereg in the 80s, when my dad lost his job.  She worked as a bank teller.  My sister works at the Gap.  My other sister is an office manager at an insurance company.  My brother drove truck, but now he's a prison guard.  My brother in law worked construction building mobile homes (in which several of my family members live), but at 50, his body was wrecked and he can't work anymore.   Many family members have served in the military.

We are/ were firm members of the blue collar class.  And there is nothing wrong with that. That doesn't make my family any less deserving of things like health insurance, paid vacation, and the like.  So I have to wonder, where did that attitude come from?  When did people start looking down on people working hard at whatever job they  had?  I admire people who work hard, at whatever they do - a lot more honorable that someone who slacks off at a high paying corporate gig.

So when I come here and see people rant about taxes, and how it's unfair that someone has to pay more taxes, and the "other 80%" has it SOOO easy, and are lazy, etc.  I think "what planet do you live on???"  Not my planet.

I agree with most of what you are saying but realize that entry level service jobs are just that - entry level so unskilled in nature and therefore less valuable because there is a larger population that can do it (supply and demand) - but all those jobs are highly respectable and provide life lessons, stepping stones, and typically motivation to do better.  As for your Dad, an A-tech mechanic can easily make $100k a year but a grease monkey (oil changer/lubber) cannot.

As for the when in the bolded part, I don't know I am sure it aligns with the continued migration to a services economy based on knowledge workers.  That said, I think because of that there are specialized labor oriented jobs that can leverage it into higher wages especially if they bring a clean service oriented approach to it.

[the_gastropod]

1. If terrorists kill a guy with $10 or $100 both are still dead. It's a bogus argument. The benefit is being safe, you are not more or less safe depending on how much money you have, same with everything else you outlined. You don't have more access than any other American.

In Europe, after WW2, the wealth gap was almost completely obliterated. Why? It was not because everyone suffered equally. The rich, owning most of the property that was destroyed, owning most of the, now wrecked, currencies, suffered massively. The wealthy have much more at stake when it comes to war.

2. Slightly higher? Try exponentially more.

The jump from the 2nd highest tax bracket to the highest is from 35% to 39.6%. So yes. Slightly.

  No one is suggesting that higher wage earners shouldn't pay taxes, despite you framing it that way. I still have not heard a credible argument to why it's fair, because it's not.

You have. It goes like this: the wealthy benefit more from government spending. Therefore it's fair for them to pay more into funding the government spending.

instead of demonizing high wage earners. We should be celebrating them for underwriting society, not demonizing them. That's what most people don't understand. It's the taxes for sure, but more so it's the people demonizing high wage earners on top of being taxed disproportionately higher.  But it's a lot easier if you are a politician to demonize the monopoly man, since he is a small portion of the voting population to pull the wool over the eyes of the middle class who's tax dollars are wasted on all sorts of ridiculous research projects, that and of course throwing momma off the cliff.

Again. Nobody is demonizing anyone. Suggesting that the progressive income tax that the U.S. has used for over 100 years is fair is not demonizing the wealthy. It's the victim mentality that equates "they believe I should pay higher taxes than them" to "they think I'm evil". I've said this in many of my previous responses. But I'll say it again: being rich is a choice. If one feels sufficiently demonized, they can simply donate most of their wealth to any charity they like. They can ask their boss to pay them less, or find a lower paying job, or stop working entirely. It's all an option. The wealthy don't do this, of course, because being rich is not one iota as bad as some on this board would like to make it seem...

[2buttons]

1. If terrorist bomb a major metropolitan area affecting the stock market significantly due to reduced trust the person with a lot of money invested is going to be affected more. If the both people survive a bombing by an opposing nation, but one has a large estate and possibly an office in town, who lost more? With an argument like this I don't think you have a leg to stand on calling his argument bogus.

2. If it is unfair why don't all rich people want to be poor? When a game is unfair people stop playing. So long as people are still playing to win they would either be fools or the system is still fair.

1. They both lost everything, it does not matter what they had before, all that matters is they both have nothing now. Again you are not drawing a larger benefit from defense whether you have $1 or $20m people and their assets are protected at the same level, this is why the government provided defense argument is completely bogus.

2. Are you kidding me? 

[prognastat]

2. Are you kidding me?

That is what I've been asking myself.

[2buttons]

1. If terrorists kill a guy with $10 or $100 both are still dead. It's a bogus argument. The benefit is being safe, you are not more or less safe depending on how much money you have, same with everything else you outlined. You don't have more access than any other American.

In Europe, after WW2, the wealth gap was almost completely obliterated. Why? It was not because everyone suffered equally. The rich, owning most of the property that was destroyed, owning most of the, now wrecked, currencies, suffered massively. The wealthy have much more at stake when it comes to war.

2. Slightly higher? Try exponentially more.

The jump from the 2nd highest tax bracket to the highest is from 35% to 39.6%. So yes. Slightly.

  No one is suggesting that higher wage earners shouldn't pay taxes, despite you framing it that way. I still have not heard a credible argument to why it's fair, because it's not.

You have. It goes like this: the wealthy benefit more from government spending. Therefore it's fair for them to pay more into funding the government spending.

instead of demonizing high wage earners. We should be celebrating them for underwriting society, not demonizing them. That's what most people don't understand. It's the taxes for sure, but more so it's the people demonizing high wage earners on top of being taxed disproportionately higher.  But it's a lot easier if you are a politician to demonize the monopoly man, since he is a small portion of the voting population to pull the wool over the eyes of the middle class who's tax dollars are wasted on all sorts of ridiculous research projects, that and of course throwing momma off the cliff.

Again. Nobody is demonizing anyone. Suggesting that the progressive income tax that the U.S. has used for over 100 years is fair is not demonizing the wealthy. It's the victim mentality that equates "they believe I should pay higher taxes than them" to "they think I'm evil". I've said this in many of my previous responses. But I'll say it again: being rich is a choice. If one feels sufficiently demonized, they can simply donate most of their wealth to any charity they like. They can ask their boss to pay them less, or find a lower paying job, or stop working entirely. It's all an option. The wealthy don't do this, of course, because being rich is not one iota as bad as some on this board would like to make it seem...

1. When you lose everything, it does not matter how much you had before.  You still lost everything.

2. I went from less than 15% to 35%

3. Again its a false argument. You don't derive any additional benefit from government when you are a higher wage earner, you do at the no taxes and lowest brackets. If anything at the higher tax brackets, you are less likely to utilize things like public schools. 

4. Occupy wall street, Bernie sanders, enough said.  No one is suggesting that being wealthy sucks. What we are suggesting is that the progressive tax system coupled with knuckle heads asking for free everything and saying someone else should pay for it and attacking the 1% is completely unfair. 

[onlykelsey]

2. I went from less than 15% to 35%

This makes no sense.  You went from 20K/year to 413K/year in reportable income in a year??  Seriously?  What sort of raise is that? 

Or are you saying over your life?  If so, yes, that is certainly my goal.  This year I am definitely hitting 33% which is pretty sweet because it means I'm earning 300K.

[2buttons]

2. I went from less than 15% to 35%

This makes no sense.  You went from 20K/year to 412K/year in reportable income??  Seriously? 

Looking back at my taxes the last two years I was at 28 marginal, 22.6 effective, then 28 marginal, 23.7 effective.  2015 will be higher, but hasn't been calculated.

Over time, but in less than 7 years. Yes. Now self employed, and my business sky rocketed. I worked a ton of hours and sacrificed a lot to get here, so yeah I take it personally as do a lot of other Americans who worked there way to this point. I came from close to nothing. Parents were immigrants. Nothing is more enraging than being told your hard work was "lucky."

[prognastat]

2. I went from less than 15% to 35%

This makes no sense.  You went from 20K/year to 413K/year in reportable income in a year??  Seriously?  What sort of raise is that? 

Or are you saying over your life?  If so, yes, that is certainly my goal.  This year I am definitely hitting 33% which is pretty sweet because it means I'm earning 300K.

That is not even calculating effective taxation though. If he is in those brackets he still isn't getting taxed at 35%. To be able to be taxed that much purely on federal taxes you would have to make about $600,000 or more.

For effective tax rate to go from 15% to 35% you would have to go from $25,000 to $600,000.

Also it is telling that he is uncomfortable addressing the massive luck factor involved with the ability to build wealth. As by ignoring the previous back and forth we started about just this.

[onlykelsey]

2. I went from less than 15% to 35%

This makes no sense.  You went from 20K/year to 412K/year in reportable income??  Seriously? 

Looking back at my taxes the last two years I was at 28 marginal, 22.6 effective, then 28 marginal, 23.7 effective.  2015 will be higher, but hasn't been calculated.

Over time, but in less than 7 years. Yes. Now self employed, and my business sky rocketed. I worked a ton of hours and sacrificed a lot to get here, so yeah I take it personally as do a lot of other Americans who worked there way to this point. I came from close to nothing. Parents were immigrants. Nothing is more enraging than being told your hard work was "lucky."

I went from 10% to 33% in five, and I don't think that came with a requirement to be upset about it.  Where would you rather live? I can't think of another system that would let me go from 10K a year to 300K in 5 years.  Truly. 

Also, I said nothing about anything being lucky. I know I worked my ass off and took on student loan debt for years for this.

[2buttons]

2. I went from less than 15% to 35%

This makes no sense.  You went from 20K/year to 412K/year in reportable income??  Seriously? 

Looking back at my taxes the last two years I was at 28 marginal, 22.6 effective, then 28 marginal, 23.7 effective.  2015 will be higher, but hasn't been calculated.

Over time, but in less than 7 years. Yes. Now self employed, and my business sky rocketed. I worked a ton of hours and sacrificed a lot to get here, so yeah I take it personally as do a lot of other Americans who worked there way to this point. I came from close to nothing. Parents were immigrants. Nothing is more enraging than being told your hard work was "lucky."

I went from 10% to 33% in five, and I don't think that came with a requirement to be upset about it.  Where would you rather live? I can't think of another system that would let me go from 10K a year to 300K in 5 years.  Truly. 

Also, I said nothing about anything being lucky. I know I worked my ass off and took on student loan debt for years for this.

No where. I love this place, and agreed. It's the best environment in the world. Congrats btw on reaping the fruit of your hard work.

Just bothers me that people take aim at people like us - see post directly above your last one.  It's less the taxes, more the sentiment behind it.

It's also clear that when you get to this level, govt tax structure clearly, whether intended or not, is promoting you maximizing investment to reduce your taxes in any way possible.

[onlykelsey]

It's also clear that when you get to this level, govt tax structure clearly, whether intended or not, is promoting you maximizing investment to reduce your taxes in any way possible.

That is definitely true.  For me there's also an honest inability(?) to spend all the money I earn (at least this year at 300K).  Inability isn't the right word, I could certainly give it all away or buy 5-star dinners for a few months, but I feel like once you hit maybe 100K, if you grew up modestly, you'll start wondering where to put your money. 

I hear kids help take care of that problem, though.

[2buttons]

I hear kids help take care of that problem, though.

In a HCOL area, it's absolutely brutal. I understand why people have their kids room in a closet in NYC.

On the former, I am sure you have to have decent suits. Hard to be Mustachian there.

[onlykelsey]

I hear kids help take care of that problem, though.

In a HCOL area, it's absolutely brutal. I understand why people have their kids room in a closet in NYC.

On the former, I am sure you have to have decent suits. Hard to be Mustachian there.

There really isn't.  My last suit for client events I bought without looking at the price.  Obviously I saw it later in my account, but I just couldn't acknowledge it.  Oh well.  As I get more senior, those things matter more for my progress (and my mid five figures bonus).

[Undecided]

I didn't bother to read all the other responses. But you're ignoring a few things here. One is that the deductions for the $500k earner will be significant. They will almost certainly itemize. The state tax deduction alone will be $30k if they are in a 6% tax state.

The $500,000 salaried worker is paying the AMT. 

Do they pay the AMT?  Based on the OP's scenario it appears not, but maybe there is an error in these calculations.

Not surprising, with no itemized deductions.

[lostamonkey]

In my opinion it comes down to tax fairness which people define differently.

One extreme believes that people should pay tax that corresponds with the amount of service they receive from the government. This would mean regressive taxes due to the fact that the $500K worker doesn't use 5x the government services than the $100K worker. It would also lead to abolishing the child tax credit, child exemptions, earned income tax credit, and maybe even the standard deduction.

The other extreme believes that people should pay taxes based on what they can afford. From each according to the means, to each according to their needs. This would result in extremly progressive taxes, and even a 100% marginal tax bracket at some point. It would also mean huge child tax credits and exemptions.

The correct tax system is somewhere in the middle of these two extremes.

[PhysicianOnFIRE]

I didn't bother to read all the other responses. But you're ignoring a few things here. One is that the deductions for the $500k earner will be significant. They will almost certainly itemize. The state tax deduction alone will be $30k if they are in a 6% tax state.

The $500,000 salaried worker is paying the AMT. 

Do they pay the AMT?  Based on the OP's scenario it appears not, but maybe there is an error in these calculations.

Not surprising, with no itemized deductions.

Right. I make less than $500k but I think I've paid AMT the last 9 years.  High tax state, itemized deductions.

[EnjoyIt]

OP here,

This is what I got out of all the posts here:
1)  There are a lot more high income earners on this forum than I originally thought (stupid me.)

2) Not every high income earner is against paying more taxes.  They would be willing to do it without complaint.

3) There seams to be a big divide between an us vs them attitude with people not really realizing where the line is.  For many I think the other side is some income higher without a real figure of how much.  I once talked to someone to a physician who is probably making well over $400K /yr based on specialty saying that he would increase taxes on the wealthy.  Thinking his income is not high and that others making more should be taxed.  Kinda funny.

4) Those making a high income are indeed somehow demonized for being lucky to make so much money, and should be happy at the privilege of paying higher taxes.

5)  Not a single person addressed if the specific question if it is fair to tax the $500K / yr person more, and how much more is fair.

6)  1 troll got banned

7) I did like one comment a lot.  I think it was by Yeager who (paraphrased) mentioned that just because we increase taxes on the higher income folks does not mean someone poor or less fortunate will have a better life or somehow have better fortune.



I have enjoyed reading the comments.  Thank you all for contributing to this discussion.

[Undecided]

I didn't bother to read all the other responses. But you're ignoring a few things here. One is that the deductions for the $500k earner will be significant. They will almost certainly itemize. The state tax deduction alone will be $30k if they are in a 6% tax state.

The $500,000 salaried worker is paying the AMT. 

Do they pay the AMT?  Based on the OP's scenario it appears not, but maybe there is an error in these calculations.

Not surprising, with no itemized deductions.

Right. I make less than $500k but I think I've paid AMT the last 9 years.  High tax state, itemized deductions.

But as you draw close to $500k (MFJ) and over it, AMT largely goes away because of the Pease limitations.

[MrDelane]

5)  Not a single person addressed if the specific question if it is fair to tax the $500K / yr person more, and how much more is fair.

I'll take a stab at it.

We keep talking about people being taxed more or less than each other, but I think there is an important distinction to be made.  People are not being taxed, income is being taxed.  And, in a progressive tax system, every single person is taxed at the same rate for the same income.

The person earning 500K a year pays the same amount of tax on the first 50K they earn as the person who earns 50K a year.  They also pay the same amount of tax on the first 200K they earn as the person who earned 200K a year, and so on.

Everyone is subject to the same tax rates, with the rates increasing on higher sections of income in an effort for everyone to make an 'equal marginal sacrifice.'

We all make the same exact 'sacrifice' on the same exact portions of income.

An important point to remember is that if and when lower income people grow in their careers and advance in income, the higher sections of their income will be taxed at the higher rate, just like everyone else.

The higher rates on the higher portions of income we earn are less of a sacrifice than if we had to pay those same rates on the lower portions of income we earn.  This also allows lower income people to sacrifice what they can to pay into the benefits our society offers (roads, police, etc) while increasing the odds that those people will be able to create opportunity for themselves to move up in income in the future (at which point they will pay the higher rates on the higher portions of their newly earned income).

Of course the real sticking point is where exactly the line of 'equal sacrifice' really is - and, assuming as a society we can at least agree that a progressive tax system makes sense, that is where the debate lives

[EnjoyIt]

Your comment about the $500K person being taxed the same on their first $50K is incorrect because the $50K person has many many more ways to deduct income since many exceptions and deductions are phased out for the higher income earner.

I'm ok with a progressive tax system. I am not okay with how extreme it has gotten, and how much more extreme many people want it to get. There were a few comments on this thread alluding to how the $500K person is lucky and should feel greatful to pay these taxes and should be willing and happy to pay more.

The real problem lies behind how 80% of the population can vote on how the other 20% get taxed. This is really unfair. Now don't get me wrong the richest of the rich are able to buy political laws and find/create some exceptions for their business. That is equally unfair. This is an extremely some group like the Coche brothers.

[starguru]

5)  Not a single person addressed if the specific question if it is fair to tax the $500K / yr person more, and how much more is fair.

I'll take a stab at it.

We keep talking about people being taxed more or less than each other, but I think there is an important distinction to be made.  People are not being taxed, income is being taxed.  And, in a progressive tax system, every single person is taxed at the same rate for the same income.

The person earning 500K a year pays the same amount of tax on the first 50K they earn as the person who earns 50K a year.  They also pay the same amount of tax on the first 200K they earn as the person who earned 200K a year, and so on.

Everyone is subject to the same tax rates, with the rates increasing on higher sections of income in an effort for everyone to make an 'equal marginal sacrifice.'

We all make the same exact 'sacrifice' on the same exact portions of income.

An important point to remember is that if and when lower income people grow in their careers and advance in income, the higher sections of their income will be taxed at the higher rate, just like everyone else.

The higher rates on the higher portions of income we earn are less of a sacrifice than if we had to pay those same rates on the lower portions of income we earn.  This also allows lower income people to sacrifice what they can to pay into the benefits our society offers (roads, police, etc) while increasing the odds that those people will be able to create opportunity for themselves to move up in income in the future (at which point they will pay the higher rates on the higher portions of their newly earned income).

Of course the real sticking point is where exactly the line of 'equal sacrifice' really is - and, assuming as a society we can at least agree that a progressive tax system makes sense, that is where the debate lives

Thanx for taking it back.  Good comments.  So what are the fair tax rates, or how do we get consensus on where they lie?

Also, if we think it is "fair" to tax "the rich", we should really move to a wealth tax, and we should tax capital gains as earned income.  That would allow us as reduce the marginal rates and keep everything even.  If anything could be called unfair, it's that people who have their incomes counted as investment income or people who make millions from various investments pay barely half what a wage earner pays. 

[EnjoyIt]

Also, if we think it is "fair" to tax "the rich", we should really move to a wealth tax, and we should tax capital gains as earned income.  That would allow us as reduce the marginal rates and keep everything even.  If anything could be called unfair, it's that people who have their incomes counted as investment income or people who make millions from various investments pay barely half what a wage earner pays.

2 points:
1)  Capital gains tax on the rich is 23.8%  It is not half of what a wage earner makes.  Remember they are rich and therefor almost all their income is taxed at 23.8%.  Any earned income is taxed at 39.6%

Most Americans fit in the 25% tax bracket and some in the 28% tax bracket.  Your comment above is inaccurate.

2) So you want to increase capital gains taxes?  Are you willing to cut your retirement expenses to this tax?  If you are already retired, you just cut your living expenses.  If you are trying to retire, you will have to now work longer because growth will decrease as well as the amount you will need to fund you expected lifestyle.

Or is your answer to increase taxes on everyone else who makes slightly more than you?

[starguru]

Also, if we think it is "fair" to tax "the rich", we should really move to a wealth tax, and we should tax capital gains as earned income.  That would allow us as reduce the marginal rates and keep everything even.  If anything could be called unfair, it's that people who have their incomes counted as investment income or people who make millions from various investments pay barely half what a wage earner pays.

2 points:
1)  Capital gains tax on the rich is 23.8%  It is not half of what a wage earner makes.  Remember they are rich and therefor almost all their income is taxed at 23.8%.  Any earned income is taxed at 39.6%

Most Americans fit in the 25% tax bracket and some in the 28% tax bracket.  Your comment above is inaccurate.

The top marginal rate on wages is 39.6.  The top marginal rate on investment income is 23%.  In my previous post I said "barely half".  I consider the statement 23% is barely half of 39.6% to be accurate.

If we taxed gains as income, it would follow the marginal income schedule, so the person who makes income thru investments pays the same as their equivalent wage earning counterpart.

2) So you want to increase capital gains taxes?  Are you willing to cut your retirement expenses to this tax?  If you are already retired, you just cut your living expenses.  If you are trying to retire, you will have to now work longer because growth will decrease as well as the amount you will need to fund you expected lifestyle.

Or is your answer to increase taxes on everyone else who makes slightly more than you?

Im saying, if we want things to be "fair" (whatever that means) and "tax the rich" (whatever that means) we should be taxing capital gains and wealth.  Why should the person making a million off investments pay 23.8 percent, while the person making a million off wages pays 39.6%?  How is that "fair" (whatever that means)?  Re the taxing wealth.  Anyone with, say, 1 million net worth is rich.  Im sorry, they are rich.  We should tax wealth above a million at 1%.   

[EnjoyIt]

Also, if we think it is "fair" to tax "the rich", we should really move to a wealth tax, and we should tax capital gains as earned income.  That would allow us as reduce the marginal rates and keep everything even.  If anything could be called unfair, it's that people who have their incomes counted as investment income or people who make millions from various investments pay barely half what a wage earner pays.

2 points:
1)  Capital gains tax on the rich is 23.8%  It is not half of what a wage earner makes.  Remember they are rich and therefor almost all their income is taxed at 23.8%.  Any earned income is taxed at 39.6%

Most Americans fit in the 25% tax bracket and some in the 28% tax bracket.  Your comment above is inaccurate.

The top marginal rate on wages is 39.6.  The top marginal rate on investment income is 23%.  In my previous post I said "barely half".  I consider the statement 23% is barely half of 39.6% to be accurate.

If we taxed gains as income, it would follow the marginal income schedule, so the person who makes income thru investments pays the same as their equivalent wage earning counterpart.

2) So you want to increase capital gains taxes?  Are you willing to cut your retirement expenses to this tax?  If you are already retired, you just cut your living expenses.  If you are trying to retire, you will have to now work longer because growth will decrease as well as the amount you will need to fund you expected lifestyle.

Or is your answer to increase taxes on everyone else who makes slightly more than you?

Im saying, if we want things to be "fair" (whatever that means) and "tax the rich" (whatever that means) we should be taxing capital gains and wealth.  Why should the person making a million off investments pay 23.8 percent, while the person making a million off wages pays 39.6%?  How is that "fair" (whatever that means)?  Re the taxing wealth.  Anyone with, say, 1 million net worth is rich.  Im sorry, they are rich.  We should tax wealth above a million at 1%.   

In response:
The thinking behind taxing investment income from unearned income differently is because investment income was once earned income that was taxed, and now being taxed again which many say is unfair to begin with. 

There comes a point where investing is not a profitable venture.  For example:  The market returns 8% a year nominal.  If I am taxed at 39.6%  The return is now 4.832%  Inflation is 3%, and you now have in growth is 1.832%.   As you can see at some point it just doesn't seam wise to take on the risk of investment for little gain.

The next point you made very clearly.  You said tax the people that have $1 million or more 1%.  Who gives you the right to judge and execute this line of $1 million and 1%?  Why not $999,999.99?  Why not $30K?  The only reason you said $1million is because it is more than you have.  How is that fair?  Where do you get that right?  This is exactly what is wrong with our tax code.  There are enough people making less who will continue to vote to make others pay more.  This is immoral.

[starguru]

Also, if we think it is "fair" to tax "the rich", we should really move to a wealth tax, and we should tax capital gains as earned income.  That would allow us as reduce the marginal rates and keep everything even.  If anything could be called unfair, it's that people who have their incomes counted as investment income or people who make millions from various investments pay barely half what a wage earner pays.

2 points:
1)  Capital gains tax on the rich is 23.8%  It is not half of what a wage earner makes.  Remember they are rich and therefor almost all their income is taxed at 23.8%.  Any earned income is taxed at 39.6%

Most Americans fit in the 25% tax bracket and some in the 28% tax bracket.  Your comment above is inaccurate.

The top marginal rate on wages is 39.6.  The top marginal rate on investment income is 23%.  In my previous post I said "barely half".  I consider the statement 23% is barely half of 39.6% to be accurate.

If we taxed gains as income, it would follow the marginal income schedule, so the person who makes income thru investments pays the same as their equivalent wage earning counterpart.

2) So you want to increase capital gains taxes?  Are you willing to cut your retirement expenses to this tax?  If you are already retired, you just cut your living expenses.  If you are trying to retire, you will have to now work longer because growth will decrease as well as the amount you will need to fund you expected lifestyle.

Or is your answer to increase taxes on everyone else who makes slightly more than you?

Im saying, if we want things to be "fair" (whatever that means) and "tax the rich" (whatever that means) we should be taxing capital gains and wealth.  Why should the person making a million off investments pay 23.8 percent, while the person making a million off wages pays 39.6%?  How is that "fair" (whatever that means)?  Re the taxing wealth.  Anyone with, say, 1 million net worth is rich.  Im sorry, they are rich.  We should tax wealth above a million at 1%.   

In response:
The thinking behind taxing investment income from unearned income differently is because investment income was once earned income that was taxed, and now being taxed again which many say is unfair to begin with. 

There comes a point where investing is not a profitable venture.  For example:  The market returns 8% a year nominal.  If I am taxed at 39.6%  The return is now 4.832%  Inflation is 3%, and you now have in growth is 1.832%.   As you can see at some point it just doesn't seam wise to take on the risk of investment for little gain.

The next point you made very clearly.  You said tax the people that have $1 million or more 1%.  Who gives you the right to judge and execute this line of $1 million and 1%?  Why not $999,999.99?  Why not $30K?  The only reason you said $1million is because it is more than you have.  How is that fair?  Where do you get that right?  This is exactly what is wrong with our tax code.  There are enough people making less who will continue to vote to make others pay more.  This is immoral.

1.  Only investment gains are taxed.  If $$ is earned, say 100k, and taxed, so say 70k, and that 70k is invest and grows to 200k, only the 130k is taxed.  There is no double taxation there.  Also, investments grow (well at least index funds) with no required effort other than to acquire the investment capital.  You could argue that investment income could be taxed higher, since wage earners are sacrificing their time to get their wage, whereas investments can grow with no effort on the part of the investment holder.   

2.  Nothing gives me the right.  Nothing at all.  I suggest it because liberals like the notion of "taxing the rich" so they "pay their fair share", whatever those terms mean.  I propose fine, well, anyone who has the spare capital to invest is rich, so tax them like wage earners.  Anyone who has a NW > $1M is rich.  Tax that net worth.  I suspect less people (not all) will like those ideas because it affects them, even though according to their own subjective definitions they should be taxed higher. 

I ask that maybe you read some of my other posts in this thread, or my journal, before replying. 

[maizefolk]

Also, if we think it is "fair" to tax "the rich", we should really move to a wealth tax, and we should tax capital gains as earned income.  That would allow us as reduce the marginal rates and keep everything even.  If anything could be called unfair, it's that people who have their incomes counted as investment income or people who make millions from various investments pay barely half what a wage earner pays.

2 points:
1)  Capital gains tax on the rich is 23.8%  It is not half of what a wage earner makes.  Remember they are rich and therefor almost all their income is taxed at 23.8%.  Any earned income is taxed at 39.6%

Most Americans fit in the 25% tax bracket and some in the 28% tax bracket.  Your comment above is inaccurate.

2) So you want to increase capital gains taxes?  Are you willing to cut your retirement expenses to this tax?  If you are already retired, you just cut your living expenses.  If you are trying to retire, you will have to now work longer because growth will decrease as well as the amount you will need to fund you expected lifestyle.

Or is your answer to increase taxes on everyone else who makes slightly more than you?

I don't know that this changes what you and starguru are arguing about but figuring out the tax burden is a bit more complicated than that. One of the things I'd complement the OP on was calculating the total federal tax burden for the two households, not just federal income tax.

If we add in federal payroll taxes and consider a self employed individual who is single and brings in say $54k/year (the median household income). They pay 25% income tax + 12.4% social security + 2.9% medicare = 40.3% on wage income. People in the top tax bracket pay a marginal rate of 39.6% income tax + 3.8% medicare = 43.4% on wage income. It's actually even more complicated than that since part of self employment taxes don't count for figuring out federal income tax, but this gives us a first approximation.

                                       Self Employed Tax Rate              W-2 Tax Rate            Investment Income tax Rate
"Median" Household                         40.3%                                32.65%                              15.0%
"Maximum" Household                     43.4%                                41.50%                               23.8%
Ratio                                              1.08:1                                 1.27:1                               1.59:1

[beltim]

When you talk about the need to help the poor when promoting more taxes, please acknowledge the negatives of helping the poor (i.e. you're okay with putting more of the population into long-term poverty).

You've asserted this before, but do you have any data to support this assertion?  It seems to contradict describe the experience of, say, 20th century Europe.

Who's experience? I hope you're not assuming that because they call themselves "Socialist" that they aren't using the benefits of capitalism to fuel their economy. In many respects, their governments have far less influence on their economy that ours does via regulations, corporate taxation, foreign income taxation, etc. Some of these countries rank higher than the US in terms of economic freedom, which I view as a more holistic measurement than looking at individual tax rates.

Here's an example of what Sweden did. They had dismal economic growth (stagnation) with their high tax rates in the 80's and early 90's. In the mid 1990's they started to lower taxes and encourage innovation and industry. Their GDP shot up.

Here are some articles about taxation and growth:
https://www.dartmouth.edu/~jskinner/documents/EngenSkinnerTaxEconGrowth.pdf
http://www.ntanet.org/NTJ/61/1/ntj-v61n01p57-80-robust-relationship-between-taxes.pdf
http://taxfoundation.org/article/what-evidence-taxes-and-growth

Wow, talk about moving the goalposts!  You said that "more taxes [puts] more of the population into long-term poverty."  Your evidence shows that increasing capital or labor income tax rates from ~10% to ~60% reduces GDP growth from ~3% to ~2% annually, while increasing taxes on consumption actually showed a positive correlation with GDP growth rate.  None of your sources address anything about poverty at all.

In contrast, to address what you actually said: there's a direct correlation between spending on anti-poverty programs and actually reducing poverty:
http://www.epi.org/publication/ib339-us-poverty-higher-safety-net-weaker/

[BBub]

1.  Only investment gains are taxed.  If $$ is earned, say 100k, and taxed, so say 70k, and that 70k is invest and grows to 200k, only the 130k is taxed.  There is no double taxation there.  Also, investments grow (well at least index funds) with no required effort other than to acquire the investment capital.  You could argue that investment income could be taxed higher, since wage earners are sacrificing their time to get their wage, whereas investments can grow with no effort on the part of the investment holder.   

While there may be no physical exertion required to deploy capital, there's risk of loss.  Investors must see sufficient rewarded potential before committing capital, and taxation plays into that decision.  At the extreme, say cap gains were taxed at 100%.  There would be no incentive to risk capital in that environment, and there would be a clear incentive not to risk capital.  Your argument suggests that by putting money into an index fund, an investor is just buying into some flashing numbers on a screen then sitting around collecting checks for free.  The reality is that investors are deploying capital into a mix of business assets: factories, storefronts, heavy equipment, tools, technology, customer relationships, intellectual property and the like, all of which has real tangible value.  The only reason an investor would decide to deploy money into such investments is that the reward outweighs the risk.  Raise taxes past a certain point & investors will deploy capital elsewhere or stop deploying new capital entirely.

That's not to say raising taxes by an incremental amount will discourage all investment, but there is definitely a tipping point where additional taxation will discourage capital investment.

[acroy]

“The State is the great fictitious entity by which everyone expects to live at the expense of everyone else" - Frederic Bastiat

Zing! true.
Unfortunately most of the commentators on here are arguing over how to arrange the deck chairs on the Titanic; ignoring the fact that decades of tax-n-spend non-GAAP State financial chicanery has us pointed straight at the iceberg.

[starguru]

1.  Only investment gains are taxed.  If $$ is earned, say 100k, and taxed, so say 70k, and that 70k is invest and grows to 200k, only the 130k is taxed.  There is no double taxation there.  Also, investments grow (well at least index funds) with no required effort other than to acquire the investment capital.  You could argue that investment income could be taxed higher, since wage earners are sacrificing their time to get their wage, whereas investments can grow with no effort on the part of the investment holder.   

While there may be no physical exertion required to deploy capital, there's risk of loss.  Investors must see sufficient rewarded potential before committing capital, and taxation plays into that decision.  At the extreme, say cap gains were taxed at 100%.  There would be no incentive to risk capital in that environment, and there would be a clear incentive not to risk capital.  Your argument suggests that by putting money into an index fund, an investor is just buying into some flashing numbers on a screen then sitting around collecting checks for free.  The reality is that investors are deploying capital into a mix of business assets: factories, storefronts, heavy equipment, tools, technology, customer relationships, intellectual property and the like, all of which has real tangible value.  The only reason an investor would decide to deploy money into such investments is that the reward outweighs the risk.  Raise taxes past a certain point & investors will deploy capital elsewhere or stop deploying new capital entirely.

That's not to say raising taxes by an incremental amount will discourage all investment, but there is definitely a tipping point where additional taxation will discourage capital investment.

I agree with you 100%, and I suggest that the wage earner has equivalent risks to investing his or her time in earning a wage.  Lack of promotion, loss of employment, risk of injury, opportunity cost of not being able to look for higher return on work while working, not being able to spend time with children, higher stress, etc.

Moreover, just as higher capital gains taxes might discourage investment, higher wage taxes might discourage incentive to earn a wage.  Being the top marginal rate, and with an effective total tax rate of 40%, right now Im ok.  It sucks, but it is till worth it to seek those extra dollars.  But if my effective tax rate went above 50%, I think I would decide my time becomes more valuable than making more money, so I would revert to being a contractor and work 6-8 months a year. 

Plus, is it really "fair" that someone can make millions off investments and pay 23% and the wage earner making the same amount pays 39%?  Or that something like carried interest exists?

[mm1970]

I agree with most of what you are saying but realize that entry level service jobs are just that - entry level so unskilled in nature and therefore less valuable because there is a larger population that can do it (supply and demand) - but all those jobs are highly respectable and provide life lessons, stepping stones, and typically motivation to do better.  As for your Dad, an A-tech mechanic can easily make $100k a year but a grease monkey (oil changer/lubber) cannot.

As for the when in the bolded part, I don't know I am sure it aligns with the continued migration to a services economy based on knowledge workers.  That said, I think because of that there are specialized labor oriented jobs that can leverage it into higher wages especially if they bring a clean service oriented approach to it.

1.  Who defines what an "entry-level" and unskilled job is?  Because, back in the 80s - you could for sure define that as baggers at the grocery store, people who worked at McDonald's (except the manager, who was salaried, made barely over minimum wage, and worked 60 hours a week).

These days, it seems like the "line" of what is unskilled has moved upwards AND the percentage of jobs available that are "unskilled" have gone UP.  I mean, in the 80s, McDonald's was considered unskilled, but cooking or bartending at a restaurant was not.  Now, it seems like the % of jobs available that are in fast food, etc. have gone up AND now we consider cashiers to be unskilled, and salespeople at the Gap to be unskilled.  That was not considered to be unskilled when I was younger, believe it or not.

2.  My dad has been dead for years, but his top pay was probably $30k per year, which looks like it the equivalent of about $80k today.  That's not terribly bad.  However, he was 56 when he lost his job and was unable to get another one, due to decreased opportunities and age.  (That $30k job became a $12k job.)

Now, for the most part, my blue collar family did not expect to live "high on the hog" on their jobs.  They had homes (frequently mobile homes), cars, and cable TV.  Nobody really went on vacation, aside from the occasional camping trip.  Gardening, hunting were the norm.  Expectations were lower.  But - we also didn't have health insurance, because many (if not most) small businesses did not provide it.  It's still that way in my home town.  I guess that's where I draw the line.  I don't necessarily think that anyone is more deserving of health insurance. 

People with high paying jobs get insurance.  People who don't work get Medi-Cal (or whatever your state's version is).  But the people in the middle?  Why do they get screwed?

Anyway, now I'm just going off on a tangent.  Need more coffee.

[Drifterrider]

Most of the people who complain about paying a lot of taxes are those who make less than 100K.  Complaining is what people with free time do.  Some people just can't be happy and see their glass half full.

Never gonna' change that.  Caine wasn't happy that God liked fruit.

[tooqk4u22]

1.  Who defines what an "entry-level" and unskilled job is?  Because, back in the 80s - you could for sure define that as baggers at the grocery store, people who worked at McDonald's (except the manager, who was salaried, made barely over minimum wage, and worked 60 hours a week).

This may be hash but it is pretty self evident what an unskilled job is....if almost anybody can do it with little to no training, it is unskilled.

These days, it seems like the "line" of what is unskilled has moved upwards AND the percentage of jobs available that are "unskilled" have gone UP.  I mean, in the 80s, McDonald's was considered unskilled, but cooking or bartending at a restaurant was not.  Now, it seems like the % of jobs available that are in fast food, etc. have gone up AND now we consider cashiers to be unskilled, and salespeople at the Gap to be unskilled.  That was not considered to be unskilled when I was younger, believe it or not.

The line has expanded - technology and automation has contributed to this.  A McD's cashier doesn't need to no how to count - just push the cheeseburger symbol on the register -Hell some even have touch pads for the customer to order and pay, no cashier even needed.

A salesperson at the GAP is not a salesperson, they are shirt folders that provide friendly service, a good attribute to have but hardly a skill. As I said we have become an ever increasing services economy that values immediacy, which combined with technological advances takes previously skilled jobs and turns them into unskilled or not even required.  This has happened for ages though - tools and the wheel were invented sometime and so was the plow,  robots replaced the assembly line at auto manufacturers. 

You touch on another thing, location - if you live in an area where unskilled jobs are considered good jobs it is likely very low COL and not an economically vibrant area - so you compete dearly for those jobs giving the companies the upper hand (supply and demand again) or you uproot and move to a more economically vibrant area - that takes guts, getting out of the comfort zone, risk, more expenses, possible failure, etc......not unlike prior desert nomads who moved around depending on what the land could or could not provide.  Once they settled too long it became challenging and charitable organizations would say we need to feed the children, bring them water, and what not....but those things don't solve the underlying issue....they still live in desert with no water and unless they move they will struggle and be dependent on others.

2.  My dad has been dead for years, but his top pay was probably $30k per year, which looks like it the equivalent of about $80k today.  That's not terribly bad.  However, he was 56 when he lost his job and was unable to get another one, due to decreased opportunities and age.  (That $30k job became a $12k job.)

Based on how you elude to your locale (ie Low COL) it would seem that your dad did very well.  As it has been mentioned by me and others location does matter - $80k in Irvine, CA that has a median income of $99k may be tough but in Jackson MS where median HH income is $33k it would be pretty sweet.....BTW I think this is where a lot of the "fairness" question comes from with taxes because it is so diverse. 

Now, for the most part, my blue collar family did not expect to live "high on the hog" on their jobs.  They had homes (frequently mobile homes), cars, and cable TV.  Nobody really went on vacation, aside from the occasional camping trip.  Gardening, hunting were the norm.  Expectations were lower.  But - we also didn't have health insurance, because many (if not most) small businesses did not provide it.  It's still that way in my home town.  I guess that's where I draw the line.  I don't necessarily think that anyone is more deserving of health insurance. 

People with high paying jobs get insurance.  People who don't work get Medi-Cal (or whatever your state's version is).  But the people in the middle?  Why do they get screwed?

Anyway, now I'm just going off on a tangent.  Need more coffee.

I suppose the health insurance question has been solved by ACA, which is being paid for entirely by high income earners and the wealthy....so pretty good deal if you work at the GAP.

Keep in mind that companies that provide health insurance still require their employees to pay a chunk of it - typically 25 to 30% - but the balance is really part of the compensation plan (like a 401k match or other benefits) although most don't view it that way.   If my company spends $10k on insurance for me and I cover $3k it would be no different than them raising my pay by $10k and making me get my own insurance - the problem is that ACA and the dragging economy has allowed companies to offload some of this without the increase in pay.

[BBub]

1.  Only investment gains are taxed.  If $$ is earned, say 100k, and taxed, so say 70k, and that 70k is invest and grows to 200k, only the 130k is taxed.  There is no double taxation there.  Also, investments grow (well at least index funds) with no required effort other than to acquire the investment capital.  You could argue that investment income could be taxed higher, since wage earners are sacrificing their time to get their wage, whereas investments can grow with no effort on the part of the investment holder.   

While there may be no physical exertion required to deploy capital, there's risk of loss.  Investors must see sufficient rewarded potential before committing capital, and taxation plays into that decision.  At the extreme, say cap gains were taxed at 100%.  There would be no incentive to risk capital in that environment, and there would be a clear incentive not to risk capital.  Your argument suggests that by putting money into an index fund, an investor is just buying into some flashing numbers on a screen then sitting around collecting checks for free.  The reality is that investors are deploying capital into a mix of business assets: factories, storefronts, heavy equipment, tools, technology, customer relationships, intellectual property and the like, all of which has real tangible value.  The only reason an investor would decide to deploy money into such investments is that the reward outweighs the risk.  Raise taxes past a certain point & investors will deploy capital elsewhere or stop deploying new capital entirely.

That's not to say raising taxes by an incremental amount will discourage all investment, but there is definitely a tipping point where additional taxation will discourage capital investment.

I agree with you 100%, and I suggest that the wage earner has equivalent risks to investing his or her time in earning a wage.  Lack of promotion, loss of employment, risk of injury, opportunity cost of not being able to look for higher return on work while working, not being able to spend time with children, higher stress, etc.

Moreover, just as higher capital gains taxes might discourage investment, higher wage taxes might discourage incentive to earn a wage.  Being the top marginal rate, and with an effective total tax rate of 40%, right now Im ok.  It sucks, but it is till worth it to seek those extra dollars.  But if my effective tax rate went above 50%, I think I would decide my time becomes more valuable than making more money, so I would revert to being a contractor and work 6-8 months a year. 

Plus, is it really "fair" that someone can make millions off investments and pay 23% and the wage earner making the same amount pays 39%?  Or that something like carried interest exists?

No, the wage earner does not have equivalent financial risk to an investor.  That's preposterous.  If a wage earner trades time for money, she is guaranteed to get paid for that time.  Sure she can be fired, injured, or loathe the job - but she can't lose money for time that she's already worked.  An investor can lose all of his investment.  So the probability of a total wipeout must be compared to the net upside.  If the net upside diminishes due to high tax rates, overall investment will slow down & innovation will be stifled.

Yes, I agree that increasing earned income tax past a certain point will discourage labor.

I do think long term cap gains should be taxed at a lower rate than earned income, yes.  That opinion is almost universally shared by economists and politicians in the US, excepting the extreme left and the economically illiterate.

[Undecided]

I do think long term cap gains should be taxed at a lower rate than earned income, yes.  That opinion is almost universally shared by economists and politicians in the US, excepting the extreme left and the economically illiterate.

But this thread has been framed in terms of "fairness," not consequences!

[starguru]

1.  Only investment gains are taxed.  If $$ is earned, say 100k, and taxed, so say 70k, and that 70k is invest and grows to 200k, only the 130k is taxed.  There is no double taxation there.  Also, investments grow (well at least index funds) with no required effort other than to acquire the investment capital.  You could argue that investment income could be taxed higher, since wage earners are sacrificing their time to get their wage, whereas investments can grow with no effort on the part of the investment holder.   

While there may be no physical exertion required to deploy capital, there's risk of loss.  Investors must see sufficient rewarded potential before committing capital, and taxation plays into that decision.  At the extreme, say cap gains were taxed at 100%.  There would be no incentive to risk capital in that environment, and there would be a clear incentive not to risk capital.  Your argument suggests that by putting money into an index fund, an investor is just buying into some flashing numbers on a screen then sitting around collecting checks for free.  The reality is that investors are deploying capital into a mix of business assets: factories, storefronts, heavy equipment, tools, technology, customer relationships, intellectual property and the like, all of which has real tangible value.  The only reason an investor would decide to deploy money into such investments is that the reward outweighs the risk.  Raise taxes past a certain point & investors will deploy capital elsewhere or stop deploying new capital entirely.

That's not to say raising taxes by an incremental amount will discourage all investment, but there is definitely a tipping point where additional taxation will discourage capital investment.

I agree with you 100%, and I suggest that the wage earner has equivalent risks to investing his or her time in earning a wage.  Lack of promotion, loss of employment, risk of injury, opportunity cost of not being able to look for higher return on work while working, not being able to spend time with children, higher stress, etc.

Moreover, just as higher capital gains taxes might discourage investment, higher wage taxes might discourage incentive to earn a wage.  Being the top marginal rate, and with an effective total tax rate of 40%, right now Im ok.  It sucks, but it is till worth it to seek those extra dollars.  But if my effective tax rate went above 50%, I think I would decide my time becomes more valuable than making more money, so I would revert to being a contractor and work 6-8 months a year. 

Plus, is it really "fair" that someone can make millions off investments and pay 23% and the wage earner making the same amount pays 39%?  Or that something like carried interest exists?

No, the wage earner does not have equivalent financial risk to an investor.  That's preposterous.  If a wage earner trades time for money, she is guaranteed to get paid for that time.  Sure she can be fired, injured, or loathe the job - but she can't lose money for time that she's already worked.  An investor can lose all of his investment.  So the probability of a total wipeout must be compared to the net upside.  If the net upside diminishes due to high tax rates, overall investment will slow down & innovation will be stifled.

Yes, I agree that increasing earned income tax past a certain point will discourage labor.

I do think long term cap gains should be taxed at a lower rate than earned income, yes.  That opinion is almost universally shared by economists and politicians in the US, excepting the extreme left and the economically illiterate.

Disagree strongly that the notion is "preposterous".  A wage earner is sacrificing a lot more by virtue of the fact that they can't do anything else while they are working.  Investments make money for investors and leave their time free.  I think there is an equivalence there.  This is especially true for low wage earners. 

Plus, investments are only taxed when profits are taken.  Someone who makes a million in the stock market in a single year has won the game.  Furthermore, at least for the average investor, there is little chance of a complete wipeout as long as the investor acts intelligently (diversification).  I agree that there is risk to the short term speculator, but the stock market is almost guaranteed to go up in the long term, so for the long term investor their risk is limited. 

[effigy98]

FYI, with the last change of tax codes due to Obama Care, the government decided that a family making over $250K is rich and all the phase outs and increase in taxes affects those families makin $250k and up.

A family making over $250k *is* rich. The top 1/5th of household income starts at around 110k. The 250k family passed the "rich" threshold a while ago.

To be fair, it depends on where you live. If in order to make $250k you have to live in San Francisco or NYC, the cost of housing is going to eat up a huge chunk of that income.
In most of the country though, yeah, $250k for a family is dang rich.

Yes in Seattle I do not feel rich... at all. I work 3 jobs and paid over 100k in taxes last year. I had to basically spend thousands of hours learning how to do my job while friends were out partying and working many of late nights. If that is EASY or fair, I cannot wait to be retired and let the other people subsidize me.

[EnjoyIt]

Starguru,
Just because your index funds have gone up over the years, there is no garuantee that will continue.

Also, not everyone invests in index funds. Investors invest in realestate, private equity, individual stocks, and they all can disappear in a blaze of smoke.

[starguru]

Starguru,
Just because your index funds have gone up over the years, there is no garuantee that will continue.

Also, not everyone invests in index funds. Investors invest in realestate, private equity, individual stocks, and they all can disappear in a blaze of smoke.

Sure there is no guarantee, but I would think if for some reason the stock market was lower in 30 years than it is now there would be larger problems with the world.  Besides, this is about "fairness" right?  Why is it "fair" for people to make millions one way and pay a lower tax rate than people making millions another way? 

[randymarsh]

The real problem lies behind how 80% of the population can vote on how the other 20% get taxed. This is really unfair. Now don't get me wrong the richest of the rich are able to buy political laws and find/create some exceptions for their business. That is equally unfair. This is an extremely some group like the Coche brothers.

I'm not sure I'd call one of the major ideas our government was founded on a "real problem". Majority rule, with some exceptions, is sort of our thing.

And no, it is not equally unfair. People like the Koch brothers using their billions of dollars to destroy the planet and buy elections is not the same as millions of people voting to tax them slightly more. It is many times worse!

[Undecided]

The real problem lies behind how 80% of the population can vote on how the other 20% get taxed. This is really unfair. Now don't get me wrong the richest of the rich are able to buy political laws and find/create some exceptions for their business. That is equally unfair. This is an extremely some group like the Coche brothers.

I'm not sure I'd call one of the major ideas our government was founded on a "real problem". Majority rule, with some exceptions, is sort of our thing.

And no, it is not equally unfair. People like the Koch brothers using their billions of dollars to destroy the planet and buy elections is not the same as millions of people voting to tax them slightly more. It is many times worse!

Fair enough, but as someone who is taxed in the same rates that apply to the Koch brothers, without any of their influence, I'll admit I feel a bit unfairly targeted by some of the vitriol directed at "the rich." Believe me, I understand how lucky it is to have these problems, and I don't have an issue with current tax rates (although I think some of the consequences of our tax system in the US are wonky, like the fact that my wife, who has societally valued skills, isn't really interested in going to work when she'd pay essentially 60% of her income in taxes), but although I have been lucky in many ways (and unlucky in many ways), I have had to apply myself in a way and for a duration that very few people could tolerate in order to capitalize on my luck, and I don't see much of myself in some common caricatures of "the rich." So to the extent those caricatures are part of someone's justification for supporting policies that affect me, I have a hard time crediting such a person's decision-making process.

[Yaeger]

The real problem lies behind how 80% of the population can vote on how the other 20% get taxed. This is really unfair. Now don't get me wrong the richest of the rich are able to buy political laws and find/create some exceptions for their business. That is equally unfair. This is an extremely some group like the Coche brothers.

I'm not sure I'd call one of the major ideas our government was founded on a "real problem". Majority rule, with some exceptions, is sort of our thing.

And no, it is not equally unfair. People like the Koch brothers using their billions of dollars to destroy the planet and buy elections is not the same as millions of people voting to tax them slightly more. It is many times worse!

I don't think you understand how our country was founded and how the majority of our country's history the tax code has worked. We're a Constitutional Republic and prior to the 1913 passage of the 16th Amendment, the federal government could only have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

Meaning, an income tax, much less a progressive one, was unconstitutional for most of our country's history. Taxes levied had to be proportional. Thus, you could not vote to raise taxes on someone else to benefit yourself. Which is why I love James Madison's quote from the Federalist Papers: "No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity. Meaning, we need to keep self-interest out of the government as much as possible for a fair and equitable system.

[Yaeger]

**Stuff about taxes and economic growth**

Wow, talk about moving the goalposts!  You said that "more taxes [puts] more of the population into long-term poverty."  Your evidence shows that increasing capital or labor income tax rates from ~10% to ~60% reduces GDP growth from ~3% to ~2% annually, while increasing taxes on consumption actually showed a positive correlation with GDP growth rate.  None of your sources address anything about poverty at all.

In contrast, to address what you actually said: there's a direct correlation between spending on anti-poverty programs and actually reducing poverty:
http://www.epi.org/publication/ib339-us-poverty-higher-safety-net-weaker/

I'll go more basic for you. What underlies economic poverty and how do you effectively combat it? Prior to 1965 and LBJ's Great Society programs, the US experienced a steep reduction in poverty, mostly due to a large jump in economic activity following WW2. Labor participation rate went up, more workers entered the workforce, and GDP per capita increased. This suggests, and has been proven over and over again in history, that the only REAL method of combating poverty is though economic growth, capitalism.

Think of this another way. Shortly after 1965 the decline of poverty in the US halted and we've seen little change to the poverty rate since. It hovers between 12-15%. However, anti-poverty spending as a % of GDP has increased DRAMATICALLY, an 800-900% increase. We spend FAR more today combating poverty than we did prior to 1965 where our poverty rate dropped like a rock. Other trends include a dropping labor participation rate (less people are working, even though they're capable) equal to levels in the 1970's.

Assuming current trends continue, we'll continue to increase the % spent on poverty, while having little effect on the overall poverty rate. As seen previously, more taxes means less growth, less growth means less tax revenue, lower labor participation and less opportunity. Which will equal a need for greater social spending as a percent of GDP. It's a self-licking ice cream cone, which these European countries are struggling with now. Economic growth, capitalism, is the only long-term solution to poverty. You can't tax yourself into prosperity.

[EnjoyIt]

The real problem lies behind how 80% of the population can vote on how the other 20% get taxed. This is really unfair. Now don't get me wrong the richest of the rich are able to buy political laws and find/create some exceptions for their business. That is equally unfair. This is an extremely some group like the Coche brothers.

I'm not sure I'd call one of the major ideas our government was founded on a "real problem". Majority rule, with some exceptions, is sort of our thing.

And no, it is not equally unfair. People like the Koch brothers using their billions of dollars to destroy the planet and buy elections is not the same as millions of people voting to tax them slightly more. It is many times worse!

Ahhh the Koch brothers. Yes they do indeed have enough money to influence politics and their own taxes by influencing law makers through corruption. Unfortunately somehow the guy working his butt off making $250K+ is equally vilified as Kochs. Although I don't make nearly as much as them, my taxes have gone up several thousand on the passage of the affordable care act, and implementation of the Pease exemption and person deduction phase out. We now have Clinton and Sanders who are stirring up the pot with the intention to tax me even more. I have absolutely no control over it. How is this morally just? How much more will I have to pay before the people making less than me will be happy and leave me alone?

I mentioned it in a previous post how I opted to not increase my business and hire on office help because the benefit of increased revenue that is taxed so much is just not worth my time for the extra money. The current tax code has cost this country one extra job. How many other business owners feel the same way I do?

[mm1970]

I'll go more basic for you. What underlies economic poverty and how do you effectively combat it? Prior to 1965 and LBJ's Great Society programs, the US experienced a steep reduction in poverty, mostly due to a large jump in economic activity following WW2. Labor participation rate went up, more workers entered the workforce, and GDP per capita increased. This suggests, and has been proven over and over again in history, that the only REAL method of combating poverty is though economic growth, capitalism.

So how do you do that?  From what I see of my small home town...
In the 80s, there were a few manufacturing plants.  A glass plant, and a couple of mobile home factories.

Now, they are all closed down, and there is a ... state prison.

So, what does that leave for everyone?  That glass plant shut down because a lot of jobs went overseas.
Jobs go out, meth comes in. Yay!

Oh, I guess there's some new hotels in town.  And a Walmart.  Yay, low paying service jobs!


On a similar note, I'm an engineer in semiconductors.  Not many high tech fabs left in this country, they're all in Asia.  I can probably stay employed for another 5-10 years if I'm lucky.  Then on to something else.  (retrain in my 50s whoo!) 


So what's the answer?

[Camarillo Brillo]

I didn't bother to read all the other responses. But you're ignoring a few things here. One is that the deductions for the $500k earner will be significant. They will almost certainly itemize. The state tax deduction alone will be $30k if they are in a 6% tax state.

The $500,000 salaried worker is paying the AMT. 

Do they pay the AMT?  Based on the OP's scenario it appears not, but maybe there is an error in these calculations.  See below for 2016 rates - and the AMT "tentative minimum tax" comes to $130,331, ~$1200 below the normal calculation. 

Category	Monthly	Comments	Annual
Salary/Wages for earner #1	$41,667		$500,000
401(k) / 403(b) / TSP / etc.	$1,500	At maximum	$18,000
Income subject to IRS tax	$40,167		$482,000
Federal Total Income	$40,167		$482,000
Federal tax	$10,962	2016 rates, MFJ, stand. ded., 4 exempt.	$131,549
State/City tax	$0	Guess, using 0.00% * (AGI - Exempt'n)	$0
Soc. Sec.	$612	Assumes 1 earner paying	$7,347
Medicare	$792		$9,500
Total income taxes	$12,366		$148,396

Filing Status	2	1=S, 2=MFJ, 3=HOH
# Exemptions	4
# Children <17	2
# Children for EIC	2
	Earner #1	Earner #2
Ages	40	40
# of earners	1
Total Income	$482,000
Std. Deduct.	$12,600
Act. Deduct.	$12,600
Exemption	$0
AGI	$482,000
MAGI	$482,000
Taxable	$469,400
1040 Tax	$131,549
AMT adder	$0
Saver's credit	$0
Tax after n-r credit	$131,549
NIIT	$0
EIC	$0
Child Tax Cred.	$0
Net Tax	$131,549
Monthly	$10,962
Item. Deduct.	$0
Version	V8.01x

This is my situation almost exactly.  I had wages of $465K, and I deferred another $350K.  I had $55K in itemized deductions; $123K in fed taxes; $31K in state taxes, leaving me with $256K.

I don't begrudge paying over $150K in taxes.  And, I feel those that make above $1M should pay even a progressively higher percentage.