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Category archive for: Federal Tax Information


August 16, 2011

1. The Daily News printed in today’s edition a comment column by Warren Buffet. It included several misleading statements.

2. He tried to make the point that the “mega-rich” pay income tax at 15% on most of their earnings, but practically nothing in payroll taxes. He did not indicate any approximate breakdown between dividends, capital gains, and salary that resulted in his 2010 income tax of $6,938,744, which was about 17.4% of his taxable income. Dividend income is taxed at 15% on corporate income that is left after a 35% corporate tax rate. That results in an effective tax rate of 44.75% on those earnings. Some (a relatively few) on Wall Street, if their speculations payoff, get a special “carried-interest” rate of 15% on such gains. For some gains on stock futures (details need to be known) there’s also a 15% tax rate on 60% of the gains.

3. He conveniently lumped his talk about tax rates for the 1980s and 1990s together. That overlooked the substantial reductions authorized in the 1986 Tax Reform Act, which was primarily responsible for the 40 million jobs he mentioned were added during that period.

4. He claims that the “mega-rich” pay practically nothing in payroll taxes. But payroll taxes are based on a limited amount of earned income. For 2011 the limit is $106,800.00. Supposedly recipients of Social Security are paid based on what they, and their employers, pay into the fund. So the “mega-rich” receive no more benefit out of Social Security than anybody else. For a married couple filing jointly, up to $32,000 of Social Security is tax free. The Standard Deduction and Personal Exemption increase the tax exempt amount. Depending on how much income is received from other sources, up to 85% of the Social security income becomes taxable. That’s progressive tax rates in action.

5. He said he knows many “mega-rich” philanthropists who are very decent people, who wouldn’t mind being told to pay more taxes as well. The question is, depending on how much additional tax, what effect would that have on the amount of charitable donations they would make to needy organizations.

What I found to be very conclusive and telling was his comparing the 1992 income tax paid on taxable income for the 400 largest income earners and the 2008 income tax paid by that year’s 400 largest income earners. Mr. Buffett said that the group’s 1992 taxable income of $16.9 billion was taxed at 29.2% while the 2008 group’s taxable income of $90.9 billion was taxed at only 21.5%. But he failed to say that the $90.9 billion at 21.5% generated $19.54 billion in taxes compared to $4.935 billion generated by the $16.9 billion in taxable income. In fact, the 2008 tax rates generated more actual tax revenue than the amount of taxable income generated by the 1992 tax rates. It looks like he made the case for lower tax rates.

Not “Trickle Down”, But a Waterfall.

July 17, 2011

Spending programs have been tried, but failed to achieve the stated goals. The public is apprehensive about their economic future. In general, businesses at all levels have no motivation to invest in more assets or personnel. Loans to people who could not afford them led to the current economic problems. Making loans readily available to businesses without providing motivation, and depriving them of the capital with which to make responsible down payments for the loans will achieve nothing good. Allowing the Bush Tax Cuts (particularly the so called “Tax Cuts for the Rich.”) to expire confiscates capital needed for growth.

Extending, or preferably making the Bush Tax Cuts “for the rich” permanent would be most effective in motivating business, while allowing businesses to have the capital for at least making down payments on plant and equipment (or whatever assets are needed for growth of their businesses). Job creators need confidence to invest in businesses that create employment. The claim that allowing such tax cuts to continue would cost the government more than a trillion dollars over the next ten years is bogus when compared to the history of tax cuts and tax increases. After tax rates on dividends (already double taxed) and capital gains were cut in 2003, total federal tax revenue increased by $743 billion from 2003 to 2007. The combined income tax rate of 15% on the after taxed (at 35%) corporate income results in an effective 44.75% tax rate on dividends. The U. S. Treasury receipts from capital gains climbed to an estimated $117.8 billion in 2006 from $49 billion in 2002. Changes in tax rates have short and long term influence on how people make business decisions. When people know they can personally decide how to handle their earnings, rather than losing them to the government, it benefits the economy. When real estate investments are made (and sold), compensation is generated for Realtors, appraisers, title companies, lenders, and escrow companies, etc. Securities investments and sales similarly generate more compensated work for brokers and others. Spending of their taxable earnings benefits their communities. The so called “trickle down” is more of a waterfall.

While Congressmen and Congresswomen may subsequently say something like “we overestimated the tax revenue from expiration of the tax cuts,” you are being forewarned of reality. But the public would suffer long term from such a mistake. For the benefit of all income levels, in more ways than one, the Bush Tax Cuts on dividends and capital gains need to be made permanent.