Wealth in America. Reality vs Ideal... Thoughts?

[Spork]

What I find particularly disingenuous is that there seems to be something terrible about wealth inequality in America.... but that wealth inequality among nations -- not such a big deal.

There is a whole army of 99 percenters that would love to redistribute wealth in America, but if you ask them about redistributing THEIR wealth to the 99 percenters of the world -- well, that's absurd.

If you live in the USA and don't live under a bridge: you're likely to be "wealthy" by a huge portion of the world.  Over time we have redefined the middle class and the poor.  Fifty years ago a middle class family probably lived in a 1600sqft house, had one car and one phone line and thought they were the luckiest people alive.  We now have a middle class living in 4000 sqft houses, 3 cars, even the dog has an iPhone, and we think we're a miserable lot that would be okay if the fatcats at the top were just not taking all our money.

Life is grand here.  We should just get over ourselves and see that.

I agree that life in any western developed world is grand.  At least for the middle class and above.

However, the fact that many people in other, less developed countries, have it worse off than we do shouldn't be used as an excuse to just "get over it" and just let the status quo be.  We should always be trying to better the world and the society in which we live.

You misunderstand me (or I am being too snarky to be clear).  More concise: if one believes in redistribution of wealth, prove it: Ship your stash to Bolivia.  If you're not ready to do that, I don't believe you.

[KGZotU]

I don't know if I'd say that it is, but I could possibly be persuaded to defend it as an acceptable failure of a system that has generated enough wealth to raise the vast majority to a standard of living inconceivable 10,000 years ago.

I disagree.

Yes the standard of living has increased over what it was 10,000 years ago.  I don't think that should be used as an excuse to dismiss failures of they system we have today.

Furthermore, the discussion at hand is not about "the system".  As if seeking to have a more equitable distribution of wealth is somehow akin to tearing down the entire Capitalist system and replacing it with something else.

I'm not suggesting that you're arguing against the entire capitalist system. If you look back to what I wrote, I was just warning you that a wealth tax taken too far would destroy capitalism in a much different way than an income tax taken too far. Specifically, capitalism is about leveraging massive ownership to create new wealth. If you sufficiently disincentivize ownership, then capitalism would die.

I agree with you that the productiveness of capitalism doesn't excuse the failures that you mention. But on the other hand, I know that every human system, no matter how finely tuned, will have some failures. The mere presence of a failure does not prove that the system should be replaced, or even that it can be more finely tuned. Given that capitalism is the greatest engine of wealth ever conceived, and that the US is among the greatest wealth-producing nations in the world, given that this wealth produced has raised standards of living for all people, I am inclined to approach the idea of changing these systems cautiously.

My question is not whether the current system is flawed, but whether we can knowably produce something better. What is an example of something that has worked, and what would be the path to getting there?

[PKFFW]

You misunderstand me (or I am being too snarky to be clear).  More concise: if one believes in redistribution of wealth, prove it: Ship your stash to Bolivia.  If you're not ready to do that, I don't believe you.

So another attempt to devolve the discussion down to opposite extremes.

It's either give all your money to Bolivia or you are lying and don't really want a system that shares opportunity and thus wealth more equally.

Discussion when one party does nothing but insinuate the other party is lying because they aren't willing to go to the extreme they dictate is not productive nor enlightening.  Therefore I wish you a good day and wont be replying to you anymore.

[PKFFW]

I'm not suggesting that you're arguing against the entire capitalist system. If you look back to what I wrote, I was just warning you that a wealth tax taken too far would destroy capitalism in a much different way than an income tax taken too far. Specifically, capitalism is about leveraging massive ownership to create new wealth. If you sufficiently disincentivize ownership, then capitalism would die.

That's an interesting concept but demonstrably wrong.

Up until the 1960's those earning over $400,000 pa in the USA were taxed at 91% and yet there were still people happy to go out and earn more than $400,000 pa.

To argue people would suddenly stop wanting to build businesses, invest and otherwise create wealth if we taxed wealth instead of realised income (GASP!!!) is simply not supported by past history.

People have been building wealth long before the idea that to tax the wealthy will destroy the world as we know it, or at least Capitalism entirely, gained popularity.

I agree with you that the productiveness of capitalism doesn't excuse the failures that you mention. But on the other hand, I know that every human system, no matter how finely tuned, will have some failures. The mere presence of a failure does not prove that the system should be replaced, or even that it can be more finely tuned. Given that capitalism is the greatest engine of wealth ever conceived, and that the US is among the greatest wealth-producing nations in the world, given that this wealth produced has raised standards of living for all people, I am inclined to approach the idea of changing these systems cautiously.

My question is not whether the current system is flawed, but whether we can knowably produce something better. What is an example of something that has worked, and what would be the path to getting there?

The US went off and declared independence and fought a war over it, then set up Capitalism as we know it today, all without knowing it would produce something better.  Why now the need to tread wearily and not rock the boat and heaven forbid try to make things better?

History is littered with examples of societies implementing change without the certain future knowledge that everything would be better as a result of that change.  In fact, amazingly enough, knowing the change absolutely will produce something better is simply not possible.  Yet it has never stopped anyone before.

Furthermore, change doesn't have to be abrupt and absolute and complete transformation of one thing into something entirely different.  It can be incremental and a step at a time and if the results show no improvement the changes can be undone.  That process too has been happening throughout human history.

[KGZotU]

Seems like we're not really working from the same premises here. Catch you in another thread.

[Jamesqf]

Yes the standard of living has increased over what it was 10,000 years ago.  I don't think that should be used as an excuse to dismiss failures of they system we have today.

The real problem here is that most of the properties of the system that you think are "failures" are only failures in your particular belief system.  I would argue that a) I don't see them as failures; and b) they might well be the engine that drives the system.  Certainly if we look at the history of the last couple of centuries, we see that the societies which have created wealth tend to have the greatest disparities in earned (or inherited) wealth, while those that profess to be creating a more eqalitarian society create little if any wealth, and leave everyone but the rulers poor.

Furthermore, the discussion at hand is not about "the system".  As if seeking to have a more equitable distribution of wealth is somehow akin to tearing down the entire Capitalist system and replacing it with something else.

But it is about "the system", because it rests on your opinion as to what is equitable.  Now if you think, as I do, that any person should be able to enjoy and accumulate the fruits of their labors, even if those fruits run into the billions, then you are more or less in favor of the system.  Now I'll admit that I'm not a 100% fan of the way things are - forget CEO pay, there is something drastically wrong when rap "artists" and celebrities can accumulate millions - but that rests on taste, not political economy.

Taking care of the less fortunate in a society by ensuring they have equal opportunity doesn't have to be thought of as an attack an everything good and right and the american way.

It may not be an attack on the American Way, but it ignores reality.  Of course there can never be absolute equality of opportunity.  If nothing else, genetics ensures this: my opportunity to be a pro basketball player or Hollywood heartthrob is effectively zero.  But for more reasonable expectations, there is plenty of opportunity.  The problem is not lack of opportunity, it's that a great many people are indoctrinated with social & cultural outlooks that keep them from taking advantage of many of those opportunities.

[PKFFW]

Seems like we're not really working from the same premises here. Catch you in another thread.

Perhaps so.

Kudos to you for discussing the issues in a reasoned and polite way without resorting to personal attacks and argumentative fallacies.

[Mike]

I think the biggest impediment to wealth is parenting or lack thereof. 

If you grow up in a stable household with parents who keep tabs on you during your developmental years and make sure you do well in school, you'll have as good an opportunity to succeed as anyone else in this society.  However, if you have the misfortune of being born to irresponsible douchebags/alcoholics/drug users/abusive people, then the deck is going to be stacked against you.

I feel like we could make a lot of progress on the poverty front simply by being much more aggressive when it comes to intervening with the shitty parents - getting kids out of those broken homes and into stable ones, and severely punishing the deadbeats who either don't take care of or who abuse their kids.

Subsidized school lunches, preschool and the like are simply slapping band-aids on the real problem.

[Jack]

I feel like we could make a lot of progress on the poverty front simply by being much more aggressive when it comes to intervening with the shitty parents - getting kids out of those broken homes and into stable ones, and severely punishing the deadbeats who either don't take care of or who abuse their kids.

The hard part about that is that kids who end up in the foster care system tend to turn out even worse.

[smalllife]

I think the biggest impediment to wealth is parenting or lack thereof. 

If you grow up in a stable household with parents who keep tabs on you during your developmental years and make sure you do well in school, you'll have as good an opportunity to succeed as anyone else in this society.  However, if you have the misfortune of being born to irresponsible douchebags/alcoholics/drug users/abusive people, then the deck is going to be stacked against you.

I feel like we could make a lot of progress on the poverty front simply by being much more aggressive when it comes to intervening with the shitty parents - getting kids out of those broken homes and into stable ones, and severely punishing the deadbeats who either don't take care of or who abuse their kids.

Subsidized school lunches, preschool and the like are simply slapping band-aids on the real problem.

This could be solved by proper birth control education and access, underscoring that a child will not solve your current problems, and de-mythologizing parenthood. 

[tooqk4u22]

First of all, if you can't even discuss a topic without resorting to such language then I wont bother replying in future.

First of all, get over it.

Secondly, do a little reading and learn the difference between "realised income" and "wealth".  That is the crux of my point and why I specifically referred to realised income.  It's got noting to do with paying tax on what you have accumulated by saving what you can after paying tax.  After that, if you still think it's all "bullshit" and can actually post a coherent and polite response I'd be interested in reading it.

I know the difference and my view is still the same and the fact of the matter is that income is not synonymous with wealth - which is fight here in the US as one side of the aisle keeps insisting that if you make over a certain amount then you are wealthy when in they are just high earners, which can certainly promote and lead to becoming wealth.  Also here in the US a large portion of the population actually pays no federal income taxes and some even have negative tax rates after the various deductions and credits are factored in.  Also, the high earners pay hte majority of all the taxes partly because they have the most income to tax and also because they pay at high tax rates. 

The whole point in working and investing and whatever is to accumulate wealth.  And I disagree with what I think you are implying that we should be taxing unrealized income.....unless if you choose to tax unrealized income then there has to be 100% credit for negative unrealized income (i.e. losses) in future years.  The fact that you believe it is more fair to tax ones wealth instead of income is just ridiculous.   

Furthermore I never said that all wealth is created through the social structures such as roads etc.  I said it would be impossible to create huge wealth without using those things.  If you think you could create a billion dollar empire without the use of any social institutions, services and products that would be quite an achievement.  Perhaps if you tried to actually understand a post rather than just reacting in anger the discussion might actually progress.

Sure you didn't specifically say that wealth was created through government infrastructure but by saying that it couldn't be created without it is basically saying the same thing.

However, if you think most of minimizing taxes comes down to and involves some sort of investment/risk and supports jobs then you are sorely mistaken.  Most tax minimization comes down to structuring ones wealth correctly through trusts and such so that the individual effectively owns nothing but controls everything.

While wealthy people absolutely do this I don't know that I put it in the category of "Most tax minimization"

Here in the states there is small investor named Warren Buffett who has accumulated a small net worth.  While his investing prowess is superb he is now supporting higher taxes for the super wealthy. I have discussed my view on this before and main issue is that it is 100% hypocrisy and to some extent supports your view - for the record I don't have an issue with his tax rate or how much he pays in taxes, I just have a serious issue with the hypocrisy. So what is the hypicrosy - it is the fact that as he approaches his death he is calling on or supporting the democrats view that more taxes should be paid by wealthy - nevermind that his effective tax rate is low because he has a low income that consists mostly of capital gains, which are even low as he doesn't sell much stock, and little dividends because berkshire doesn't pay a dividend, and he put all of his worth into a charitable trust pledged to the Gates foundation so that he avoids any estate taxes (although I would argue that it is a far better such wealth goes to a foundation that works to make the world better than to go to government that simply wastes it) and this is also part of the equation and that is that wealthy people give a heck of a lot of their wealth to charitable, non-profit, and civic causes.

So completely hypocritical but I am ok with it and the reality is that if he didn't give his wealth away then it would be excessively taxed - so in reality to avoid taxes he executed a 100% wealth redistribution plan.

[Forcus]

Opportunity equalization - well, I could support that as long as it doesn't create reverse discrimination.

This is a really good point that I did not go into.

Wish I could take credit, but it was a point made in the comments to one of the links posted.

[Forcus]

Wealth redistribution is an idiotic idea.
Income equalization is an idiotic idea.
Opportunity equalization - well, I could support that as long as it doesn't create reverse discrimination.

But as someone else noted, the poor here, compared to the poor in, say, Somalia - the poor here, using a US HHS 2012 numbers for a family of 3, would be at 88.65% percentile worldwide. (I am solid middle class and I was 99.3%). I have not seen any support from certain elements in purging all wealth from America to send to other countries which seems hypocritical at best.

So the choice must be between letting the status quo stand or purging all wealth from the USA and sending it to other countries?

To suggest there might be other options is hypocritical is it?

It's puerile reasoning like this that tries to bring a discussion down to polar opposite extremes that ensures no reasoned and rational discussion can even take place.

Absolutely not, It was simply an insight in to hypocracy of certain political groups (although, to the point, I don't necessarily agree that wealth or income disparity is even an issue).

By the way, congrats on the use of "puerile". I had to look that up. :D

[tooqk4u22]

That's an interesting concept but demonstrably wrong.

Up until the 1960's those earning over $400,000 pa in the USA were taxed at 91% and yet there were still people happy to go out and earn more than $400,000 pa.

To argue people would suddenly stop wanting to build businesses, invest and otherwise create wealth if we taxed wealth instead of realised income (GASP!!!) is simply not supported by past history.

I always love this citation, while it is technically true that there was a 91% marginal tax rate and people still earned income (keep in mind that $400,000 adjusted for inflation would be almost $2mil today vs. the $250k that Obama thinks is uberwealthy) the point you are trying to make using it could also be categorically false or at best misleading.  The tax code overall is far different today then it was then and while the tax brackets were higher there were far more opportunities to shield money from taxation.  The amounts paid in total fed taxation (personal, corporate, ssi, other) was about 18% of GDP then and now - and we know the burden that has fallen on the poor has decreased (even the poor back then paid some income taxes whereas today they pay negative taxes even when including SSI/Medi and their services have increase).

My question is not whether the current system is flawed, but whether we can knowably produce something better. What is an example of something that has worked, and what would be the path to getting there?

The US went off and declared independence and fought a war over it, then set up Capitalism as we know it today, all without knowing it would produce something better.  Why now the need to tread wearily and not rock the boat and heaven forbid try to make things better?

History is littered with examples of societies implementing change without the certain future knowledge that everything would be better as a result of that change.  In fact, amazingly enough, knowing the change absolutely will produce something better is simply not possible.  Yet it has never stopped anyone before.

Furthermore, change doesn't have to be abrupt and absolute and complete transformation of one thing into something entirely different.  It can be incremental and a step at a time and if the results show no improvement the changes can be undone.  That process too has been happening throughout human history.

First of all the US wasn't founded to create capitalism, it was founded to escape the tyranny of taxation without representation (sounds familiar) and fear religious persecution.  Capitalism was not on the agenda and infact didn't exist in any form in the 1700's.  THe system is not perfect but no system is - I think the system is now out of balance but not like either side here is argueing.  It is out of balance because the middle class has been destroyed.  Sure wealth distribution seems to concentrated on the top but again they pay most of the taxes which disproportionally benefit those at the bottom who then have no incentive to work harder, move up, etc.   The people in the middle are the ones losing ground and bearing the brunt of the burden.  If we increase taxes further on the wealth then it needs to come with increasing taxes/reducing social entitlements as well.  I don't want ot live like a poor person but the fact of the matter is that they live far better now then they did 30,40, 50 years ago.  Safety nets are fine, permanent entitlements are not - and that is where we are now and ever increasing.

As far as changing the status quo, I would be open to it and I suggest we devolve back to the intent of government (primarily security, but I would include education and infrastructure) and migrate back to community based support platforms as opposed to endless amounts of social entitlements. 

[Spork]

You misunderstand me (or I am being too snarky to be clear).  More concise: if one believes in redistribution of wealth, prove it: Ship your stash to Bolivia.  If you're not ready to do that, I don't believe you.

So another attempt to devolve the discussion down to opposite extremes.

It's either give all your money to Bolivia or you are lying and don't really want a system that shares opportunity and thus wealth more equally.

Discussion when one party does nothing but insinuate the other party is lying because they aren't willing to go to the extreme they dictate is not productive nor enlightening.  Therefore I wish you a good day and wont be replying to you anymore.

"Lying" is really not the right word.  I don't think anyone is intentionally hiding truth.  I just think that people are very interested in wealth equalization when it comes to other people's money and generally not so interested in it when it involves their own.

The differences between "ridiculous top end America" vs "poor America" are similar in scope to "Middle class America" vs "third world".  I hear lots of folks wanting the top end to save the bottom end... but only when it's someone else that is the top end.  To me, this is complainypants.

[randymarsh]

It seems like a lot of people think that those who support higher taxes (on those can afford them) think we should just take money from the rich and give it directly to the poor.

I don't think anyone is making that suggestion. Instead, the point of higher taxes is so that society as a whole can progress. We can use those taxes to make higher education cheaper. Those taxes can keep medical issues from bankrupting anyone. Etc.

At a certain point, wealth inequality is bad for everyone. Eventually you get people who have everything and people with nothing.

[capital]

Beyond the stated idealism here, the United States economy was built upon the redistribution of wealth in the form of land by force from the Native American tribes holding it. At various times in history, this land was redistributed in the form of royal land grants, auctions, railroad land grants, and homestead grants, but essentially all the land in this country was seized by men with guns who thought its previous owners weren't using it properly and distributed to those the government thought would use it to a higher purpose.

[Forcus]

It seems like a lot of people think that those who support higher taxes (on those can afford them) think we should just take money from the rich and give it directly to the poor.

Well, if we are talking redistribution of wealth, we are talking about taking assets a person already owns, and removing those assets. Unless I misinterpretted the video and paper, they never actually got to the point where they stated their "corrective actions". However it was clear to me that the implication was taking by force.

Higher taxes, closing loopholes, removing deductions, etc., were not what my takeaways were from the authors. It was a forced removal of assets to fit an economic distribution.

Correct me if I'm wrong.

[randymarsh]

It seems like a lot of people think that those who support higher taxes (on those can afford them) think we should just take money from the rich and give it directly to the poor.

Well, if we are talking redistribution of wealth, we are talking about taking assets a person already owns, and removing those assets. Unless I misinterpretted the video and paper, they never actually got to the point where they stated their "corrective actions". However it was clear to me that the implication was taking by force.

Higher taxes, closing loopholes, removing deductions, etc., were not what my takeaways were from the authors. It was a forced removal of assets to fit an economic distribution.

Correct me if I'm wrong.

Aren't taxes effectively taken by "force"? I don't think anything in that video is suggesting people with guns come to a rich person's house and start taking their furniture and nice china.

[DebtDerp]

It seems like a lot of people think that those who support higher taxes (on those can afford them) think we should just take money from the rich and give it directly to the poor.

Well, if we are talking redistribution of wealth, we are talking about taking assets a person already owns, and removing those assets. Unless I misinterpretted the video and paper, they never actually got to the point where they stated their "corrective actions". However it was clear to me that the implication was taking by force.

Higher taxes, closing loopholes, removing deductions, etc., were not what my takeaways were from the authors. It was a forced removal of assets to fit an economic distribution.

Correct me if I'm wrong.

I’ve been thinking a lot about this. Sure it might be a worthy goal to say that wealth should be more evenly distributed across the population but how do you achieve that? I said earlier that you could dramatically increase taxes on income from wealth (i.e. long term capital gains, municipal bond interest, etc.) or tax wealth directly, or a combination thereof. That could work.

However I thought of some other potential ways to make wealth more evenly distributed. One way could be to tax financial transactions. Tax every time a bond or stock is bought or sold. While a lot of the wealthy don’t trade stocks that often they do invest in funds that are constantly re-balancing their portfolios through financial transactions. You could tax each of those transactions. There are serious consequences to this though; you could force inexperienced investors to start buying and holding stocks directly. You could force fees on funds to increase. Then with the tax money, what do you do with it to increase the wealth of bottom 40%?

Another way is to force people with little or no wealth (say the bottom 40%) to save money and deny them credit. A lot of people with little wealth have good incomes. I am a great example of this, my income is larger than over half of the households in the US yet I fall in the bottom quintile on the wealth distribution (my net worth is negative). You could make 401(k) or IRA contributions mandatory (just call it a tax). You could force banks to deny credit cards, car loans, and other forms of credit to people below a certain net worth. This would have the effect of forcing people at the bottom of the distribution to increase their wealth but at what cost?

Now, I would be against any of these suggestions for obvious reasons (I think most Americans would be as well) but it is an interesting thought experiment to try and figure out how you would change the wealth distribution in this country. Finally, the most glaring problem is who would be in charge of defining wealth and measuring it? The IRS does a good job at defining and measuring incomes for people but do you really want them in charge of appraising your house, your car, or your engagement ring? The value of some of these things is not easily definable but would be required in order to tax it. That is most likely why you would have to go a round-about way instead of taxing wealth directly.

Like I said earlier I am on the side of increasing opportunity not trying to redistribute wealth.

Edit: missed a word.

[Forcus]

Aren't taxes effectively taken by "force"? I don't think anything in that video is suggesting people with guns come to a rich person's house and start taking their furniture and nice china.

I don't think the paper and video ever defined a solution. Based on certain folks I've interacted with, it could potentially be what you outlined...

I'm a capitalist pig and generally lean right but I do realize some elements of socialism (i.e., school systems, public highways) are necessary. I also think there are way too many loopholes that allow higher income folks to reduce their tax liability (the whole Warren Buffet 'I pay a lower tax rate than my secretary' story comes to mind). But the arguments in the paper and video are significantly underwhelming.

[Jamesqf]

...the whole Warren Buffet 'I pay a lower tax rate than my secretary' story comes to mind...

But why shouldn't Buffet pay a lower rate.  If the secretary pays (just for instance: I don't recall the exact figures) a 20% rate on an income of $50K, and Buffet pays a 10% rate on an income of $100 million, then he is paying a thousand times as much in tax as his secretary.  Why is this "fair"?

[Forcus]

...the whole Warren Buffet 'I pay a lower tax rate than my secretary' story comes to mind...

But why shouldn't Buffet pay a lower rate.  If the secretary pays (just for instance: I don't recall the exact figures) a 20% rate on an income of $50K, and Buffet pays a 10% rate on an income of $100 million, then he is paying a thousand times as much in tax as his secretary.  Why is this "fair"?

Because he makes two thousand times what his secretary makes?

[Spork]

...the whole Warren Buffet 'I pay a lower tax rate than my secretary' story comes to mind...

But why shouldn't Buffet pay a lower rate.  If the secretary pays (just for instance: I don't recall the exact figures) a 20% rate on an income of $50K, and Buffet pays a 10% rate on an income of $100 million, then he is paying a thousand times as much in tax as his secretary.  Why is this "fair"?

This was actually some "bad math to prove a point".  I have seen multiple analyses on this and the math is fuzzy.

The main point here is "capital gains are taxed at 15%" (there are tons of other sub points)... but that in and of itself is a half truth.  Capital gains are taxed differently because they have already been taxed.  It varies by corporation, but if you look at the effective rate (corporate tax + cap gains) it hovers around 50%.

The Buffet Rule argument is a mechanism to eventually do away with lower tax rates for capital gains* (and have double taxation).  If you are an investor (and god, I hope people here fall into that category) this should really start to bother you. 

*Yes.  I know the Buffet Rule applies to people with income > $1M.  But generally plans like these expand by lowering limits both through code revisions and inflation.

[randymarsh]

Not to get too far off topic, but can someone explain the whole "double taxation" issue? I've never quite understood that argument. Is it double taxation because a corporation, as a separate entity, pays income taxes? Then, individuals pay taxes when they sell shares/receive dividends?

Couldn't we argue that all money is taxed a million times? If I make $100,000 a year, I pay taxes on that. Then, when I buy something from a company, they have to pay taxes on that income. Then that company buys something from a supplier and the supplier has to pay income taxes. Etc.

[Spork]

Not to get too far off topic, but can someone explain the whole "double taxation" issue? I've never quite understood that argument. Is it double taxation because a corporation, as a separate entity, pays income taxes? Then, individuals pay taxes when they sell shares/receive dividends?

Couldn't we argue that all money is taxed a million times? If I make $100,000 a year, I pay taxes on that. Then, when I buy something from a company, they have to pay taxes on that income. Then that company buys something from a supplier and the supplier has to pay income taxes. Etc.

I am not a financial expert and someone can probably state this better (and more correctly) than me...

I guess you are somewhat correct in your "million times" example, but that's a different topic entirely.  You're talking about a million entities and getting taxed each time money changes hands.

In the example of a public corporation, it is the same entity being taxed.  For example, AT&T will pay some amount of tax on earnings.  They then distribute those earnings among all of their owners (i.e, the share holders of AT&T stock).  The share holders then pay tax on the same money.  It gets really fuzzy... because corporate income tax is a totally different animal and is computed in a totally different way. 

And... (probably further off topic here) if you consider sales of shares of stock, they're really sort of weird too.  You may buy and hold a stock for 20 years.  When it comes to sell it, you may make a profit of $100,000.  But it really doesn't make sense that you made $100,000 in stock sales for the year....  You actually made $100,000 of profit for 20 years (or $5,000/year).  It's one of those things that is taxed differently BECAUSE IT IS DIFFERENT.  We can argue that it is or isn't taxed correctly.... but I think we can agree that it just isn't the same thing as "salary" and probably needs to be handled differently than "salary".  Thus, comparing tax rates between investment earnings and salary earnings is really an apples/oranges thing.

We can still argue "Buffet doesn't pay enough".... but it's a slippery slope headed towards "more tax for investment income".

[DoubleDown]

The Buffet Rule argument is a mechanism to eventually do away with lower tax rates for capital gains* (and have double taxation).

There is no "double taxation" of capital gains for individuals. You only pay tax on the gains, not on the amount invested. The (false) argument is sometimes made that you already paid taxes on the money you earned, so you shouldn't have to pay taxes on it again. But you don't pay taxes on the earnings again, only the gains made after investing those net earnings. As it stands now, those gains are taxed at a lower rate than earnings through payroll, at least for high earners.

So, a wealthy investor with $1M in investment income would pay far lower taxes than a high earner with a  $1M payroll income.

I think the only squishy aspect of "fairness" is in the time aspect you've alluded to. If it took 20 years for your investment gain to be realized, those gains have likely suffered some substantial inflationary effects. As an example, if inflation averaged 3% for 20 years, and your investment returned 3% for 20 years, then when you sell after 20 years you've really made nothing (no gain) relative to inflation. Taxation then would really just result in a loss for you -- only the government made anything off your investment! Earnings on the other hand don't have that time/inflation dynamic.

[Spork]

The Buffet Rule argument is a mechanism to eventually do away with lower tax rates for capital gains* (and have double taxation).

There is no "double taxation" of capital gains for individuals. You only pay tax on the gains, not on the amount invested.

I think you're misunderstanding me.  (Or I am misunderstanding you.) 

Forget the amount invested.  That isn't part of this.  Yes, you only pay taxes on the gains.  But the gains have already been taxed at the corporate level.  As an owner (of a share) I already paid some amount of tax when the corporation paid their tax bill.

Now... the "double tax" may still be fair.  (That's arguable... it's a complex structure.)  But 15% isn't the only time the tax on that earning is being paid.  And it doesn't make sense to compare cap gains taxes to payroll taxes.  They're structured differently.

Simplified:
payroll taxes (ignoring deductions here) might be 25%.  (It's more complicated than that, but lets go with this.)
corporate taxes on earnings: might be 35% (again, more complicated than that) on earnings PLUS 15% on dividends.

[Jamesqf]

...the whole Warren Buffet 'I pay a lower tax rate than my secretary' story comes to mind...

But why shouldn't Buffet pay a lower rate.  If the secretary pays (just for instance: I don't recall the exact figures) a 20% rate on an income of $50K, and Buffet pays a 10% rate on an income of $100 million, then he is paying a thousand times as much in tax as his secretary.  Why is this "fair"?

Because he makes two thousand times what his secretary makes?

That's merely a statement of fact, not an explanation of why it's fair, or not fair.

Say Buffet and his secretary go to the local McDonalds for lunch.  Both order a burger, fries, and a shake.  The secretary pays $5, Buffet pays $5000.  Is this fair?

The main point here is "capital gains are taxed at 15%" (there are tons of other sub points)... but that in and of itself is a half truth. 

And in fact Buffet's capital gains almost certainly would be taxed at a higher rate than the secretary's capital gains.  Depending on the secretary's total income, s/he could even be paying zero tax on them:

In 2008–2012, the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets.
After 2012, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.
After 2012, the long-term capital gains tax rate will be 20% (0% for taxpayers in the 10% and 15% tax brackets).
After 2012, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

[Forcus]

Because he makes two thousand times what his secretary makes?

That's merely a statement of fact, not an explanation of why it's fair, or not fair.

Say Buffet and his secretary go to the local McDonalds for lunch.  Both order a burger, fries, and a shake.  The secretary pays $5, Buffet pays $5000.  Is this fair?

Fair, by my definition, is an equal percentage of income taxed, regardless of income. Of course, fairness could be argued all day long. I get what you are saying by your example, but its a non sequitar.

BTW I wasn't bring up the Buffett rule, which I really don't know much about. Just the point that someone who makes many multiples of what his employee does should be at least paying the same tax rate. Just so happened Buffett brought it up :)

[Jamesqf]

Can't see why it would be fair to pay the same rate, since both presumably get many of the same benefits.

[KGZotU]

One issue with Warren Buffet's taxes are that he's paying taxes on capital gains, not income.

Earning money through investment and earning money through work are very different. Specifically, Warren Buffets investments generate a lot of taxable events before he realizes any of his gains. For example, the corporations he's invested in pay an income tax on the money that will become his capital gains.

I think about it in terms of locus of taxation; his money is taxed in multiple locations; that the only one that has his name on it is the final capital gains tax doesn't mean that there aren't other taxes that cost him.

You might be able to argue the same thing about labor and income taxes. That's fine. Even if that's the case, there are still different taxes working "behind the scenes" on capital gains vs. income. And if there are different taxes working behind the scenes, then it makes sense that there should be different tax rates billed to the investor vs. the laborer. I don't know if capital gains should be lower or higher than income tax, but in any case it's not obvious that they should be identical.

[Jamesqf]

One issue with Warren Buffet's taxes are that he's paying taxes on capital gains, not income.

Well, so am I :-)  And so should you be, if you're accumulating more of a 'stache than you can shelter in your 401k/IRA plans.  I'd also bet that we're both sheltering a larger fraction of our income, and paying a lower rate on the capital gains we do have.

[PKFFW]

For example, the corporations he's invested in pay an income tax on the money that will become his capital gains.

I'm not sure if I'm understanding you correctly or not.  If I am, then you seem confused between capital gains and dividends that may or may not be reinvested.

Companies pay tax on profits.  Subsequently, in some cases, the profits that are left are then distributed as dividends.  Disregarding the difference in tax rates between companies and individuals for the sake of discussion, you could argue that this should then mean that Buffet shouldn't have to pay any tax on these dividends.  You would also have to disregard the fact that profits made by the company are classed differently to income made by the investor and as such fall under two different tax rules.

Capital gains on the other hand is simply the increased value the market as a whole deems the company to be worth.  If you buy a stock for $1 and it subsequently rises to $2 you have made $1 in capital gains.  The company has not paid any taxes on this increase in your wealth.  Taxes on capital gains are not paid unless the share is sold.

Therefore, the companies Buffet invests in do not pay any taxes on the money that "becomes his capital gains".

Many in this thread have argued vehemently against the idea of taxing wealth, which is predominantly a measure of capital gains, rather than realised income, which, in terms of investing, is predominantly dividend payouts.  Before arguing such, I think one should be clear on what the two actually are.

[tooqk4u22]

Companies pay tax on profits.  Subsequently, in some cases, the profits that are left are then distributed as dividends.  Disregarding the difference in tax rates between companies and individuals for the sake of discussion, you could argue that this should then mean that Buffet shouldn't have to pay any tax on these dividends.  You would also have to disregard the fact that profits made by the company are classed differently to income made by the investor and as such fall under two different tax rules.

This is the double taxation element that is referred to.

Capital gains on the other hand is simply the increased value the market as a whole deems the company to be worth.  If you buy a stock for $1 and it subsequently rises to $2 you have made $1 in capital gains.  The company has not paid any taxes on this increase in your wealth.  Taxes on capital gains are not paid unless the share is sold.

Therefore, the companies Buffet invests in do not pay any taxes on the money that "becomes his capital gains".

This is not correct, well at least not totally.  Here is what you are missing.  Lets say a company makes $3/share, it then pays a third, or $1/share in taxes - it is left with after-tax earnings of $2/share.  From that the company pays a dividend of $1/share (which is taxed and hence double taxation all for the luxury of the owner getting their money - it wouldn't be any different than you making a withdrawal from your bank account and then getting taxed on it).  Regardless, the company retains $1/share which increases the book value of the company by $1/share and theoretically the share price by the same amount - this gain has already been taxed but if you sold your share you would be taxed on this gain.   

Another component of the share price is some present value of the earning capacity of that retained dollar (i.e. the multiple or P/E), which we have concluded above has already been taxed - but guess what, that $1/sh is invested and its earnings are also taxed a third and cycle goes on and on - ideally there should be no tax on capital gains as it is already taxed but we know that won't happen and is why we have a lower long term capital gains rate and a short term rate that is based on your personal income tax rate - it basically normalizes for luck/timing/whatever.

The only part of the capital gains that may not be fully taxed is the multiple effect, which ebbs and flows.

[KGZotU]

I was thinking specifically about reinvested corporate income, not dividends. If a company reinvests $1B of profits then the value of the company will increase (all other things held equal) by ~$1B. This value is realized by the shareholder upon sale of shares, and taxed as capital gains.

[PKFFW]

This is the double taxation element that is referred to.

Hence why I said an argument could be made for no taxation on dividends.

This is not correct, well at least not totally.  Here is what you are missing.  Lets say a company makes $3/share, it then pays a third, or $1/share in taxes - it is left with after-tax earnings of $2/share.  From that the company pays a dividend of $1/share (which is taxed and hence double taxation all for the luxury of the owner getting their money - it wouldn't be any different than you making a withdrawal from your bank account and then getting taxed on it).  Regardless, the company retains $1/share which increases the book value of the company by $1/share and theoretically the share price by the same amount - this gain has already been taxed but if you sold your share you would be taxed on this gain.   

Another component of the share price is some present value of the earning capacity of that retained dollar (i.e. the multiple or P/E), which we have concluded above has already been taxed - but guess what, that $1/sh is invested and its earnings are also taxed a third and cycle goes on and on - ideally there should be no tax on capital gains as it is already taxed but we know that won't happen and is why we have a lower long term capital gains rate and a short term rate that is based on your personal income tax rate - it basically normalizes for luck/timing/whatever.

The only part of the capital gains that may not be fully taxed is the multiple effect, which ebbs and flows.

None of that really means squadoosh.

I'm sure you know of many examples of companies that have increased earnings and all that jazz and yet the market sees fit to send the stock price lower.

All that matters is what the market is willing to pay.  If the market is willing to pay more than you paid for the share you have capital gains.  If the market is willing to pay less you have capital losses.

[PKFFW]

I was thinking specifically about reinvested corporate income, not dividends. If a company reinvests $1B of profits then the value of the company will increase (all other things held equal) by ~$1B. This value is realized by the shareholder upon sale of shares, and taxed as capital gains.

Not necessarily.

Many companies have increased their profits, reinvested those profits and then investors have subsequently seen the price of the company stock fall.  If investors sell at that point no tax is paid because they made a loss on the investment.

[KGZotU]

Yes: not necessarily. Hence my caveat on all other things being held equal. But that's an example of capital gains derived from post-tax corporate income.

[PKFFW]

Yes: not necessarily. Hence my caveat on all other things being held equal. But that's an example of capital gains derived from post-tax corporate income.

Tbh I thought the caveat was just a sort of saying and not meant to be taken seriously in this instance since nothing is ever "all else being equal".

Yes, theoretically and in a perfectly predictable investing world in which all companies and all members of the market work in the way you describe your example would be true.  The real world isn't like that.

[NYD3030]

One way I think about it is I kind of liken it to inflation, only for productivity.  Since the late 70s there has been a hell of a lot of productivity growth without corresponding growth in salaries.  That's a lot of effort you're putting into your job that you aren't getting compensated for...

If you used to trade 100 units of productivity for 50,000 a year, and now you trade 170 units of productivity for 50,000 a year, the buying power of your productivity has eroded badly!

Of course the thing here is that the 170 units of productivity produce more total wealth than the 100 did... you're just a smaller percentage of it.