I am the primary breadwinner of a middle class family. We live in a comfortable home in a nice neighborhood, and we paid for that home with a mortgage. We have two vehicles that each have over 100,000 miles on them. My wife works part time to supplement the household income.
Let's say I have a friend who is also the primary breadwinner of what on the surface most would assume is a middle class family. He lives in a nice house in a nice neighborhood, but he does not have a mortgage. The vehicles he and his wife drive are similar to ours. Neither he nor his wife has to work because they have amassed a fortune in the multiple millions of dollars and therefore have more than enough money to live on for several lifetimes.
Just for fun, let's examine how the Romney tax plan would affect each of us.
1. Across the board reduction in tax rates by 20%.
Impact on me: I would save at best a few thousand dollars a year, only because my income is above the median household income in the US. Those closer to the median would see little if any benefit.
Impact on my hypothetical friend: saving a lot more than a few thousand dollars a year.
2. Maintain current tax rates on interest, dividends, and capital gains.
Impact on me: none. I don't exactly make a lot in interest or capital gains.
Impact on my hypothetical friend: none, until you factor in item 3.
3. Eliminate taxes for taxpayers with Adjusted Gross Income below $200,000 a year on interest, dividends, and capital gains.
Impact on me: none, per comment on 2.
Impact on my hypothetical friend: depending on how he manages his portfolio, he could quite easily eliminate all tax liability. Since he has no income from wages and can live on less than $200,000 a year, he could buy and hold securities or sell losers to offset enough of his capital gains such that his AGI never gets above $200,000 a year. Since all his income comes from interest, dividends, and capital gains, despite his significant net worth, he may pay zero dollars in income tax.
4. Eliminate estate tax.
Assuming we were both to die under the Romney plan, Impact on me would be zero, since I'm not worth enough that it matters.
Impact on my hypothetical friend would potentially be significant, though I'm sure he has already reduced the potential for estate taxes through careful planning.
5. Repeal the Alternative Minimum Tax.
Impact on me: none.
Impact on my hypothetical friend: it would keep him from having to pay taxes even though he would have otherwise escaped liability through management of his interest, dividends, and capital gains. The AMT would prevent the situation from arising in #3 where someone of significant means has avoided tax liability. Repealing it would allow a lot of wealthy people to avoid more tax than they do already.
Closing comments: lest anyone think that putting more money in my hypothetical friend's pocket will lead to more jobs, let me disabuse you of that notion right away: it won't. He has made his money but isn't looking to start or grow a new business. He's content to just manage his portfolio. Anything less he pays in taxes will just result in a larger number on the statements that his brokerage firm sends each quarter.
Since there is no such thing as a free lunch, the revenue the government would lose by eliminating my hypothetical friend's tax liability would have to be made up for somewhere else, either by raising my taxes (perhaps eliminating the mortgage interest deduction, which would cost me more than a 20% marginal rate reduction saves me) or by cutting programs, perhaps the programs that helped me get through school and become a contributor to the economy in the first place.
Don't let Romney's naked assertions that he knows how the economy works and that you should trust him to solve the problems fool you. He's solving problems alright, he's solving the problem of having to pay taxes for people who are already wealthy. He does nothing to help the working middle class.
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hmmm... a quite simplistic analysis.
ReplyDelete1. The code as it is to far too complicated. It is insane that a person with a masters in finance (me) can't do their own taxes.
2. Who do you really think understands how economies/businesses work better - Romney or Obama? Hint: one of them has an MBA from Harvard. I can give you at least 2 examples of how the stimulus actually disrupted natural markets and hurt small businesses in the State of WA. I don't think O understands economics/markets or what makes a business tick because he's never had and real experience working in a business.
3. Romney has stated clearly he will not favor a system where the tax contribution from the "wealthy" will decrease.
4. When one "manages his portfolio" he/she invests in companies - some new, some listed on the exchanges. His portfolio only benefits when the companies grow. Therefore, he should be in favor companies growing.
5. What if his 'portfolio' has no losers? It would then be hard to offset gains. True, he could never sell his gainers and not pay tax. But when he sells that will trigger a tax event. Is there another, better way you can suggest? Finally, hasn't he already paid tax on the funds he used to purchase his portfolio? That's the whole idea behind taxing capital gains at a lower rate.
6. It is naive to assume Romney only wants a system that will favor the rich, because he is rich. Romney wants to create an environment where the people with money will be more willing to invest their money in new businesses that will produce revenue, jobs, and hence taxes or revenue for the govt.
7. Finally, let me comment on the estate tax. This is something that doesn't matter to you, unless it impacts you. Let's assume you are very wealthy. You have accumulated your wealth through a lifetime of hard work, careful investing, and the appreciation of a farm inherited from your parents. Why, when you die, should more than half of that go to the govt? Why shouldn't you be able to give that to your children? How is the estate tax fair?
DJ: point by point.
ReplyDelete1. You didn't study hard enough. I have an MBA but an undergrad degree in English. I do my own taxes. I also have or have had rental property, small business income, stock options, etc.
2. I worked for a Chem E major who understood accounting far better than I ever will. Per #1, degrees don't matter all that much. Besides, it's not a question of who understands it better, since their advisers understand it better than either of them. It's a question of which policies they will espouse. Romney's plan is the old trickle down economics. It doesn't work.
3. Rhetoric. Per my admittedly simplistic model, Romney's plan favors a wealthy person who doesn't work more than it helps me. Who it helps depends on how you define wealthy.
4. Not if you invest in derivatives.
5. If your portfolio has no losers (tough to imagine, but possible), then you're Warren Buffet, who, incidentally, agrees with me.
6. It is naive to assume you understand what Romney's motives are. All I can do is look at the impact of his policy insofar as he has provided details, which is the genesis of my comparison above. Seems to me that it favors the wealthy. It most certainly does not help the middle class.
7. The estate tax is largely a non-issue to those who create trusts and plan appropriately. Whether it's fair or not, if it's eliminated, revenue goes down, which will then have to be made up somewhere. Burden shifts further to the working middle class or to the elimination of programs that let the next generation get ahead.
I guess I studied hard enough to work for prestigious companies in London, Tokyo, NY, and Sydney and eventually run one of them. Then retired at age 47 to focus on riding my bike and working with a couple of charities important to me.
DeleteI guess my tax return is more complicated than yours with forms 2555, 1116, income from different countries, tax credits from countries I've lived and and was taxed in, various and complicated AMT calculation, multiple K-1 Statements, various depreciation treatments on apartments and other buildings, depreciation recapture on sales of assets, passive vs. nonpassive issues, etc, etc.
Finally, if you are going to state "trickle down economics doesn't work" you should at least support the statement with some analysis. After all, you have an MBA...
Three things:
ReplyDelete1) The capital gain tax situation is the greatest tax loophole ever! You could quite possible live tax free if you ensure your holdings are over 12 months and if you don't have other income.
2) I'm on neither side of this Obama/Romney thing, but I'm rather intimate with what he did with the Massachusetts tax code and I'm not impressed.
3) I hate, HATE, election year tax returns. Hate 'em. They always end up more complicated.
This was fun. When do you plan to discuss taxes again?
ReplyDeleteJust two comments:
ReplyDeleteFirst, your friend sounds way cool. I bet he is wicked handsome, too.
Second, as someone who likely will inherit some dough, and leave some to his kids, it's hard for me to think of an income source that should be taxed more heavily than inheritance. Yes, my dad worked worked hard throughout my youth, during which time I supported his efforts by living in his house, driving his cars, eating his food and burning his money on tuition. So I should get a tax break? Ditto for my kids now…
The "double taxation" argument against the estate tax is silly. The deceased and the heir are 2 different people. Buying a sandwich is a much better example of double taxation...
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