Taxing the Super Rich

Warren Buffett, no stranger to wealth, told an audience filled with bankers and real-estate developers the system was, in effect, rigged. "This is what Congress in its wisdom did: the 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter." Buffett offered a million dollars to any fellow magnate who could prove he had higher tax rates than his secretary.

Newsweek article

[MonkeyMama]

There is some truth to it but a bit of an exaggeration.

As a CPA I can tell you the cleaning ladies and admin assistants (on a lower level anyway) are not paying that much in tax. Hell I might pull in $70k this year and my tax rate is 15% (Even with an additional $20k in income from a ROTH conversion). It is easy enough to make a decent wage and not top 15% with the Bush cuts (which are insanely low and don't expect them to last).

On the flip side - define the super rich. Out here in Cali the middle class is slammed. Most of my tax clientele make a decent six figure income and most fork over well over 50% of their income to taxes. I know a lot of people who don't make a lot of money and think its unfair and the "rich" get all the tax breaks. But I am sick of seeing people who pay no income taxes complain about the people forking over 1/2 their income.

On the other end - the super rich that you alluded to. They have elaborate tax shelters, live off primarily investment income (which is taxed at favorable rates) and their own personal tax loopholes (bought in congress). Plus they have the cash to pay for elaborate tax strategies. Once you hit the millions and billions you are at this level. We don't have a lot of clients that top $500k in income, but I have a couple that hit $1 million and don't get much of a break at all. The super rich is much bigger than that.

Being in the tax business and working on some million/billion dollar clients and seeing the fancy tax loopholes that are concocted for them, and coming down to a much smaller clientele that is slammed by AMT, you see the inequality. Plus they sneak these tax loopholes in the tax code that affect maybe one big corporation - paid for through and through. That stuff is just disgusting.

I honestly think the middle class has it the worst when it comes to income taxes.

I don't think the lower class as a whole pays a ton in income tax (they just don't realize - don't understand the tax system). They probably have a lot more issue with social security which chomps 7.65% out of their check (of course they feel that more than the middle class). Once you start hitting the 25% tax rate you are squarely middle class (though being a single renter will give you a terrible disadvantage and you will pay way more in taxes than you family/homeowning counterparts, and thus may pay a bigger chunk even on lower class wages).

[Aleta]

I'll tell you something that I definitely don't understand nor do many people that I speak to. How can people get money back from income tax when they never worked. That' s insane. I know of this lady that receives all kinds of benefits from the government and gets even child credits every year and she doesn't work. At least the rich work and produce. They also employ alot of people including domestic help and contribute large sums of money to causes.

But, I agree that the middle class is in the middle of all this. Lou Dobbs has a book out about the Middle Class and how its getting slammed.

As for the AMT, they should do something about that. It's even hitting the middle class. It was only meant for the wealthy so that they couldn't excape paying taxes. Now, we all know that the middle class can't excape anything. We're the guys working craxy hours to support many.

[Exile]

We should respect many of the super rich for earning their money the hard way: They inherited it. And if dividend income, a major source of revenue for the idle rich is taxed at a lower rate than wages, then the working people of America are just making the world safe for plutocracy.

[jIM_Ohio]

I was having lunch with one of my favorite clients last week and the conversation turned to the government's recent round of tax cuts.

'"I'm opposed to those tax cuts," the retired college instructor declared, "because they benefit the rich. The rich get much more money back than ordinary taxpayers like you and me and that's not fair.'"

"But the rich pay more in the first place," I argued, "so it stands to reason that they'd get more money back."

I could tell that my friend was unimpressed by this meager argument. So I said to him, "let's put tax cuts in terms everyone can understand."

"Suppose that every day 10 men go to a restaurant for dinner. The bill for all ten comes to $100. If it was paid the way we pay our taxes, the first four men would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man (the richest) would pay $59."

The 10 men ate dinner in the restaurant every day and seemed quite happy with the arrangement until the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." Now dinner for the 10 only costs $80. The first four are unaffected. They still eat for free. Can you figure out how to divvy up the $20 savings among the remaining six so that everyone gets his fair share? The men realize that $20 divided by 6 is $3.33, but if they subtract that from everybody's share, then the fifth man and the sixth man would end up being paid to eat their meal.

The restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same percentage, being sure to give each a break, and he proceeded to work out the amounts each should pay. And so now the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of $59.

Outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," complained the sixth man, pointing to the tenth, "and he got $7!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!"

"That's true," shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor."

Then, the nine men surrounded the tenth man (the richest one, paying the most) and beat him up. The next night the richest man didn't show up for dinner, so now the nine men sat down and ate without him. But when it came time to pay the bill, they discovered something important. They were $52 short!

"And that, boys, girls and college instructors, is how America's tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table any more. There are lots of good restaurants in Switzerland and the Caribbean."

[Broken Arrow]

That's a great example, Jim. I could've sworn I've seen it somewhere on the internet though. Or is that an actual conversation you've had with a client? If so, what did he say after that?

[jIM_Ohio]

that was pasted from another group I visit without me editing anything. My apologies if that confused anyone.

Yeah, I've seen that story before too. It misses the original point that Warren Buffet is making though. The ultra-rich have a lower tax rate than other people do. If you're for a flat tax that's one thing, but billionaires should not be paying a lower rate than the peons do.

[LivingAlmostLarge]

Um, Jim your restaurant argument is wrong. Why? Because the rich guy, alluded to in MonkeyMama's post is definitely not paying 50%. They are living off of investment income so they are barely paying 15%.

The people paying 50% are DOUBLE INCOME NO KIDS (DINKS) who make $150k+!!! That's me! We have very few breaks and a lot of taxes. We fork over a heck of lot, definitely more than a millionaire. And a millionaire business owner for sure.

People making $200k with kids barely get breaks as well. It's not until you hit the ultra rich level of $1M like MM says that it really gets worth it to start sheltering your money.

But everyone I know making six figures pays a ton in taxes.

[txex86]

I just hope Congress adjusts the AMT threshold when they return to Washington after Labor Day. Paying AMT really hurts.

[rooskers]

"Suppose that every day 10 men go to a restaurant for dinner. The bill for all ten comes to $100. If it was paid the way we pay our taxes, the first four men would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man (the richest) would pay $59."

The restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same percentage, being sure to give each a break, and he proceeded to work out the amounts each should pay. And so now the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of $59.

Outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," complained the sixth man, pointing to the tenth, "and he got $7!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!"

"That's true," shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks!"

Great example except that it leaves out the most important part of middle americas problem. The first 4 men show up and have no money in their pocket so even if they wanted to pay they couldn't. The fifth man has $5 in his pocket and needs the other $4 for bus rides home for the rest of the week because he can't afford a car. The sixth has $15 in his pocket and needs the other $12 to put some gas in his car so he can get home. The seventh guy has $35 but needs the $28 to use for a copay on his childs prescription. The eigth guy has $60 dollars but needs the $48 to pay for his childs membership fee to play soccer. The last guy has $295 in his pocket and will be using the other $236 to go golfing with his buddies.

The savings for the first four guys means nothing obviously, the savings for the fifth guy is a heck of a lot for him since $5 dollars was considered a lot. The sixth guys savings means he doesn't have to worry about his gas running out when prices are higher. The seventh guy is happy cuz the extra savings can be used to pay down the doctors bill. The eighth guys savings will be used as a savings for his boys baseball in the spring. The last guys savings will be used for maybe leaving a higher tip to his club caddy.

[poundwise]

"We've become the absolute biggest whiners of all human history with the absolute smallest justification for whining." ~Charlie Diekatze

"Who is rich? He that is content. Who is that? Nobody." ~Benjamin Franklin

"The nation should have a tax system that looks like someone designed it on purpose." ~William Simon

[jIM_Ohio]

Yeah, I've seen that story before too. It misses the original point that Warren Buffet is making though. The ultra-rich have a lower tax rate than other people do. If you're for a flat tax that's one thing, but billionaires should not be paying a lower rate than the peons do.

If you want to pay by percentage, that is a flat tax, and that would clearly punish the poor.

Because of the graduated income tax system the countyr has the rich will be a lower percentage than the working class, but 35% of 100k (35000) is much less than 15% of 1,000,000 ($150,000).

So even if the really rich pay a lower percentage, their overall tax bill is around 3-5X as much as the working class.

[jIM_Ohio]

"Suppose that every day 10 men go to a restaurant for dinner. The bill for all ten comes to $100. If it was paid the way we pay our taxes, the first four men would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man (the richest) would pay $59."

The restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same percentage, being sure to give each a break, and he proceeded to work out the amounts each should pay. And so now the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of $59.

Outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," complained the sixth man, pointing to the tenth, "and he got $7!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!"

"That's true," shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks!"

Great example except that it leaves out the most important part of middle americas problem. The first 4 men show up and have no money in their pocket so even if they wanted to pay they couldn't. The fifth man has $5 in his pocket and needs the other $4 for bus rides home for the rest of the week because he can't afford a car. The sixth has $15 in his pocket and needs the other $12 to put some gas in his car so he can get home. The seventh guy has $35 but needs the $28 to use for a copay on his childs prescription. The eigth guy has $60 dollars but needs the $48 to pay for his childs membership fee to play soccer. The last guy has $295 in his pocket and will be using the other $236 to go golfing with his buddies.

The savings for the first four guys means nothing obviously, the savings for the fifth guy is a heck of a lot for him since $5 dollars was considered a lot. The sixth guys savings means he doesn't have to worry about his gas running out when prices are higher. The seventh guy is happy cuz the extra savings can be used to pay down the doctors bill. The eighth guys savings will be used as a savings for his boys baseball in the spring. The last guys savings will be used for maybe leaving a higher tip to his club caddy.

This isn't about income or spending... the point is the richest 10% of people pay 52% of the taxes, so any tax cut will appear to benefit the rich more.

How people spend their tax cut depends on many factors. I saved (banked) mine.