VT or VTI for Stock Allocation?

[moda0306]

"General Welfare" as well is probably carried well beyond what they had intended.

LW,

I disagree with your assertion that the middle class would have to be heavily taxed.  Right now, the wealthy are paying 15% on their capital gains & dividends with no FICA or Medicare contributions necessary on those amounts, while the middle-class are paying 15-28% federal PLUS 7.65% FICA/Medicare on their wages.  Wealth appreciation also does not show up in "AGI" and therefore doesn't end up as a denominator in the "tax rate" equation. 

I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government.  I am not arguing the morals of "soaking the rich" so much as I think that the idea that we've stumbled into the unfavorable realm of the Laffer Curve is a myth.  We had exhorbitant rates on the top during some of the most prosperous years for our middle class, that gave little preference to income from return on capital.

[Lone Wolf]

I disagree with your assertion that the middle class would have to be heavily taxed.  Right now, the wealthy are paying 15% on their capital gains & dividends with no FICA or Medicare contributions necessary on those amounts, while the middle-class are paying 15-28% federal PLUS 7.65% FICA/Medicare on their wages.  Wealth appreciation also does not show up in "AGI" and therefore doesn't end up as a denominator in the "tax rate" equation.

I hear where you're coming from.  My point was more that there are just a lot fewer wealthy than we might imagine.  I don't dispute that there are many inequities in a structure as complex as the internal revenue code.  Personally, I'd do away with taxing both income and capital gains (for a variety of reasons.)

I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government.

It would be interesting to see this analysis broken down in detail if you happen to stumble across it again.  It could lead to some really enlightening observations.  Do you remember whether it was primarily the lower rates on capital gains that caused the low overall rate or some other factor?

Consider someone who has several billion dollars stashed away but has very little income.  They spend like crazy, living for the moment.  Despite being very wealthy, they'll face an extremely low tax rate under an income tax regime.  Under a consumption tax regime such as FairTax, this person would pay a lot more tax.

On the other hand, someone with billions stashed away who lives frugally would have very little tax burden at all (the miser.)  I'm a fan of the miser because his savings are being lent out for others to use while he consumes virtually nothing for himself.  A wealth tax regime would punish the miser (along with all other savers), which is why this is a tax regime I dislike the most out of all of them.

[moda0306]

LW,

It was probably a combination of capital gains, dividends and Muni Income, the last of which would skew things since the arbitraged interest effect of muni bonds... so maybe that 16% isn't fair... a bit crappy of me to just throw that out there without a source but I've been racking my brain as to where I read it or whether the source seemed to have a liberal bias or some backup sources/statistics.

The market affects of switching to consumption-based tax is something I've pondered on and off for a couple years now.

[dualstow]

I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government. .

See #3, paragraph 2 here: http://www.wweek.com/portland/article-1 ... taxes.html

[moda0306]

Dualstow,

That wasn't my source, but is about 10x better... maybe a little bit left-wing populist, but excellent info.

Thanks!

[TBV]

California provides a good example of what happens when tax rates become excessively progressive.  Though it has 40 million people, half the state's income tax revenue comes from just a few hundred thousand people.  Whenever they have a bad year, the state has a fiscal crisis.  Whenever they alter the pattern of their income, the state has a fiscal crisis.  Unstable swings in revenue are less present in sales taxes, which are not progressive.  So, the lesson should be clear: stable tax revenues require a broader, less progressive tax base.  IMO, the primary purpose of the tax system is to provide stable tax revenue, not income redistribution.  Trying to balance budgets on a tiny sliver of the population produces high volatility, making it just as illusory a benefit as the asset bubbles produced by populist monetary policies.


http://www.ftb.ca.gov/forms/catxrate_exmpt07.shtml

http://www.ftb.ca.gov/forms/2009_Califo ... ions.shtml

[moda0306]

TBV,

I'd imagine that any Laffer-esque arguments are much more applicable at the state level than at the federal level, as moving from state to state is much easier than moving to a lower-tax country than the U.S.

I find, though, that looking at different states as "microcosms" of what should work on a national level is difficult, as there are many liberal and conservative states in completely different states of economic failure & success right now, with no clear trends as to which ideology is a recipe for prosperity.  Nevada, Arizona, the deep south including Florida (not including Texas of course) are in a REALLY tough spot right now.  But my very liberal state of MN is doing quite well with a 7.3% unemployment rate and some of the highest taxes in the country.  Some might think this is a "farmer" affect but in our twin-cities area this rate is more like 6.1%, so it hardly indicates a rural state benefit.  Our metro area is extremely liberal, high tax, but in my opinion a great place to live.

[dualstow]

Dualstow,

That wasn't my source, but is about 10x better... maybe a little bit left-wing populist, but excellent info.

Thanks!

It is left-wing populist. If I see one more image of a pig with a cigar in his mouth... 

[moda0306]

dualstow,

Hahaha... Seems to be pretty accurate, though.

[TBV]

Moda:

Touching on the relationship between prosperity and tax policy is an engaging topic all by itself.  But I was trying to focus solely on the volatility aspect, leaving the how-much-is-too-much tax question alone for the time being.  California is just one state, but the most important one economically.  For it to be perennially experiencing boom-bust fiscal cycles is very dysfunctional.  Just as excessive volatility is anathema to PP adherents, governments with large maturing payment obligations (pensions, entitlements, infrastructure, etc.) need to avoid sudden shortfalls in their revenue stream.  Incrementally exempting one's political base from taxation may be a vote-getter, but it's not sound tax policy. So, for much the same reason that the upper range of income subject to FICA tax should be expanded, so should the lower range of income subject to income taxes.

Of course, if we want maximum revenue regularity, perhaps we should try taxing toilet paper.

http://www.omaha.com/article/20110323/NEWS01/703239866

On second thought, with our luck, that would probably just lead to a sales spike for Japanese water-squirting, air-drying toilets.