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If rich aren’t paying their “fair share,” then what’s fair? By: Philip Klein 04/19/11 11:58 AM
Filed under Taxes
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polination.blog 
Dang, a consumption/Fair/Flat/Whatever tax sounds better and better all the time.
http://www.fairtax.org/site/PageServer?pagename=about_faq_answers
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Oh, yes, indeed! I think the time is right, too. I sort of think it would unleash a lot of cash sitting on the sidelines to back some new businesses, and so help our job situation. I think there is a very good chance it would jump start the economy.
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I like it since you only pay tax on what you spend, not what you earn.
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This is such a great graphic! You said in a couple of graphics what I was trying to say but never got around to it in my tax myths series (it was never going to happen!)
Got a graphic up your sleeve for disproving the myth that the rich only give to charities for the tax breaks? This is a myth I’ve heard my relatives repeat and the math only adds up if they are on the border of a tax bracket (if I’m looking at it correctly!).
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I have no trouble believing ANYONE near a bracket break would donate to bump themselves down. I know someone who made a very generous donation to our Birthright one year for exactly that purpose. But they were not rich by any means, just smart money managers.
I would LOVE to highlight this issue if someone can find me the data. I’m not a number cruncher … awful at my checkbook! For some reason, I can do polls. But the minute it’s about money, my brain goes mushy. No doubt a sign of a neuroses or two, but there it is. If you can send me the figures, I’ll graphic them!
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I have to admit that some of my donations are based on tax considerations. Not all of them, of course, but I do consider it. For example, to my church I give stock. They are set up to receive the stock, and it is simply a matter of writing a letter to make it happen. As soon as the church gets the stock, they sell it and I get “credit” for the amount they receive from the sale. But the stock that I give them is stock that I bought in my first year of marriage, 36 years ago. If I were to have sold the stock myself, almost all of the proceeds would be a capital gain and I would have to pay the tax on the gain before the church got a dime. It saves more than 20% in federal and state taxes to give them the stock directly.
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Good stewardship, Ting!
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Ting: But you aren’t giving just to avoid those taxes, right? You’d have given anyways, you are just lessening your tax burden with the way you do it. What I mean is, if you were greedy, you wouldn’t give at all!! Like Chrissy said, what you are doing is good stewardship.
This is more about multi-millionares and people like my dear mom who think the rich are only greedy and heartless – that the giving they do is only because of the tax breaks.
Say you have someone with a gross of 10 million dollars a year, and they give away to charities 500,000 of their income. They take the deduction (as they should) and their taxable income is is decreased to 9.5 million dollars.
In my mom’s line of thinking – that giving was not out of charity, but out of greed! They got a tax deduction for it!!!
However, the deduction is not a credit – it only decreases their taxable income and and instead of paying 35% on 10 million (3.5mil) they pay 35% on 9.5 million (3,325,000) which, using my mom’s logic, means they gave away $500,000 to save themselves $175,000 in taxes. If they were truly greedy, they’d just keep the money and pay the extra taxes, in effect saving themselves $325,000!
Now granted, a multi-millionaires tax sheet will not be that simple, there would be many, many deductions to add to that list. However, you can usually safely say that they are not just giving to get the tax break. Those rich people actually do have hearts!
And of course, there could be exceptions. If I was on the edge of a tax bracket I could conceive of giving a little more to bump me down a bracket – I already give though and it would just be on top of that.
However, in order to even consider it, you’d have to have your adjusted income around 373K, and even then you’d only decrease your percentage by 2% (33%) until you hit around 209K where it would decrease again by 5% (28%).
Now there might be specific cases where they do give to do this, but they are not the uber rich, although they would be rich to my standards!!
Now they people where it really could pay to give? The lower and middle classes.
If we were in the 25% bracket (we aren’t!) but just barely, and gave a small amount to jump down to the 15% bracket, that could really work in our favor. And I’d do it in a heartbeat! I’d much rather have Harvesters (our local food bank) get our money than Uncle Sam and save some money for our household expenses!! Call me greedy!
Now, my math could be off here, so consider yourself my peer reviewers and skewer me (nicely) if I’m wrong! 😀
P.S. This math also works for mortgage interest – if you are keeping that mortgage around just for the deduction you might be paying more money to save a little money.
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No, I don’t think you are wrong. The thing about a deduction is that you have to first have actually paid for the deduction. I don’t think the rich are able to easily play the game of donating to drop their bracket. The bracket spread, as you noted, is too wide at the upper levels and most wealthy people have very complicated tax returns and all the information needed for them to plan is not always available until after the year is over and it is too late. There are usually partnerships and investments with tax shelters and they usually don’t get the information until sometime in March of the next year. About the only deduction for which you do not have to pay the amount you are deducting is depreciation, say for equipment that a small business has bought, or rental property held in some kind of partnership or business. You are correct about the mortgage interest deduction. You have to first pay the interest, so you are not really saving all that much. Pay the mortgage off as soon as you can! A lot of investment experts disagree with me on that, but there is a lot of piece of mind to owning your home free and clear. It sure helps you weather bad times a bit easier.
Also, the wealthy, and even the not so wealthy, get stuck with the Alternative Minimum Tax which limits the amount of deductions that they can take anyway, so that pretty much blows your mother’s theory. The wealthy know all about the AMT and there isn’t much they can do about it. The AMT kicks in BEFORE the deductions. And it kicks in near the $150,000 range of gross income, I think – sorry, I’m not in that category so I am not as familiar with it.
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I’m with you on paying the mortgage off as soon as possible! We have 14 years left on ours, we’ll be in our mid-forties when it’s paid off – we are big Dave Ramsey fans and to not pay it off and instead invest is just too risky for our tastes. I’d much rather be in a recession with a paid for house than with a mortgage and a bunch of low value stock. Of course, we are saving for retirement at the same time. Once the house is paid for we’ll increase retirement contributions quite a bit.
I always forget about the AMT – so that would effect the numbers, too.
I doubt it’s my mom’s theory as I’m fairly certain she’s heard it stated on programs. It’s just one of those things that gets repeated often enough and people assume it’s true. The funny thing is, even if I explain it to her, she still thinks she’s correct!
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I agree about paying off the mortgage as quickly as possible, too. It makes it a lot less nerve-wracking when we have to go through bad economic times. People who recommend against paying it off tend to be starry-eyed optimists who think the economy is just going to chug along happily without any major problems. People call me a pessimist because I like to be prepared for the worst (even as I hope and pray for the best), but I’m just not a risk taker.
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