Are Rich People Undertaxed?

Let's say a rich person owns shares of stock in Company A. And let's further suppose that the pretax income that is generated by Company A is $1000. If the aforementioned rich person owns 10 percent of the stock in question, his pretax earnings would be $100. Since Company A is a mature company that is no longer growing, its retention rate is 0 and its payout ratio is 100%. Every dollar of net income will be distributed to the rich person and his fellow shareholders.

But wait. If the corporate tax rate is 35%, the rich person is left with a net income of $65 after taxes, which is then distributed to him as a dividend. And that $65 dividend is taxed again at a rate of 15%. So what started out as $100 has withered away to a paltry $55.25. Our rich investor has been taxed at the unheard of rate of 44.75%.

The above explanation is the standard response to the supporters of the Buffett Rule. It is also the standard response when a rich person who earns a substantial percentage of his or her income in dividends is criticized for "not paying his fair share."

I have nothing against rich people. In fact, I hope to be one someday. But rich people are spared the inconvenience of working in boring, tedious, unfulfilling jobs whereas the less affluent among us may not have a choice. And sometimes the people we work for, who are completely clueless about everything, are the same rich people that many of us have despised all along. No wonder we want them to pay 30 percent of their salaries in taxes. Or 50 percent, or even more! They get away with murder, but if we tax them up the wazoo, they won't get away with this!

Forgive me for getting carried away. What do the rest of you think about raising taxes on the rich and closing loopholes?

 
hdavid57:
L I have nothing against rich people. In fact, I hope to be one someday. But rich people are spared the inconvenience of working in boring, tedious, unfulfilling jobs whereas the less affluent among us may not have a choice. And sometimes the people we work for, who are completely clueless about everything, are the same rich people that many of us have despised all along. No wonder we want them to pay 30 percent of their salaries in taxes. Or 50 percent, or even more! They get away with murder, but if we tax them up the wazoo, they won't get away with this!

Forgive me for getting carried away. What do the rest of you think about raising taxes on the rich and closing loopholes?

I figure MOST of them worked hard to get there and deserve to reap the benefits. Take an IB analyst working 100 hour weeks so that he can get his dream of a PE or HF job that he deserves to be taxed more for working hard and raising his income. And even then hours in PE and HF are far from the 9 to 5 jobs most people work. Im tired of people assuming that id someone is rich, the money fell in his lap from the sky. People work hard for their money and deserve to keep imo. Why should someone working 9 to 5 making 40k be entitled to a wealthier individuals money? Im not saying all rich people work hard for their money, but I think MOST do.

 

Closing loopholes is one thing. But arbitrarily raising taxes for the rich "simply because we can" is, in my opinion, immoral.

For what other reason other than the fact that we can do it, should we be allowed to take more from those who have more? Let's assume all taxes go to the same place, ie public education, healthcare, etc. The rich are already, in absolute terms, contributing more than the average. They aren't consuming said social benefits of government's usages of taxes any more than the average person.

Are they driving over the same bridge that was built on tax money any more times? Probably not.

Are they reaping more benefits from public education than the average person? Probably not -- in fact, they probably don't even send their child to a public institution, yet are paying taxes towards education that supports it anyways.

Sometimes lies are more dependable than the truth.
 
Ultima-RDK:
Closing loopholes is one thing. But arbitrarily raising taxes for the rich "simply because we can" is, in my opinion, immoral.

Agreed. It's the loopholes that need to be addressed. The 'effective tax' most HNWs pay is too low. That said, I also have issues with double-taxing i.e. tax on investments from after-tax income.

Tricky issue. The bigger picture however is the rich-poor gap. As medival Engalnd has showed us, once that gap gets too big, the underclass takes wealth distribution into their own hands.

__________
 
Ultima-RDK:
Closing loopholes is one thing. But arbitrarily raising taxes for the rich "simply because we can" is, in my opinion, immoral.

For what other reason other than the fact that we can do it, should we be allowed to take more from those who have more? Let's assume all taxes go to the same place, ie public education, healthcare, etc. The rich are already, in absolute terms, contributing more than the average. They aren't consuming said social benefits of government's usages of taxes any more than the average person.

Are they driving over the same bridge that was built on tax money any more times? Probably not.

Are they reaping more benefits from public education than the average person? Probably not -- in fact, they probably don't even send their child to a public institution, yet are paying taxes towards education that supports it anyways.

Completely agree with this. I won't go so far as to say that everyone should pay a lump sum, but if you think it about it, taxes should be thought of as essentially a transaction: I give the government money, and in return I get to use roads, defense, SS, etc. On that basis, on average everyone uses the same amount of public resources. I don't understand where the idea of taking a percentage of income even came from in the first place (can anyone explain?). It doesn't seem like someone who made a million dollars (and pays let's say 350k in taxes) versus someone who made 100k (and paid 35k in taxes) received 10x the amount of benefit from the government.

 
whaat:
Ultima-RDK:
Closing loopholes is one thing. But arbitrarily raising taxes for the rich "simply because we can" is, in my opinion, immoral.

For what other reason other than the fact that we can do it, should we be allowed to take more from those who have more? Let's assume all taxes go to the same place, ie public education, healthcare, etc. The rich are already, in absolute terms, contributing more than the average. They aren't consuming said social benefits of government's usages of taxes any more than the average person.

Are they driving over the same bridge that was built on tax money any more times? Probably not.

Are they reaping more benefits from public education than the average person? Probably not -- in fact, they probably don't even send their child to a public institution, yet are paying taxes towards education that supports it anyways.

Completely agree with this. I won't go so far as to say that everyone should pay a lump sum, but if you think it about it, taxes should be thought of as essentially a transaction: I give the government money, and in return I get to use roads, defense, SS, etc. On that basis, on average everyone uses the same amount of public resources. I don't understand where the idea of taking a percentage of income even came from in the first place (can anyone explain?). It doesn't seem like someone who made a million dollars (and pays let's say 350k in taxes) versus someone who made 100k (and paid 35k in taxes) received 10x the amount of benefit from the government.

It came from the Progressive Era.

You're right, taxes should be thought of as a transaction in which I pay for services only the government can provide better than the private sector. Which means ideally, everything would be private except for defense because of the free-riding problem.

 
whaat:
Ultima-RDK:
Closing loopholes is one thing. But arbitrarily raising taxes for the rich "simply because we can" is, in my opinion, immoral.

For what other reason other than the fact that we can do it, should we be allowed to take more from those who have more? Let's assume all taxes go to the same place, ie public education, healthcare, etc. The rich are already, in absolute terms, contributing more than the average. They aren't consuming said social benefits of government's usages of taxes any more than the average person.

Are they driving over the same bridge that was built on tax money any more times? Probably not.

Are they reaping more benefits from public education than the average person? Probably not -- in fact, they probably don't even send their child to a public institution, yet are paying taxes towards education that supports it anyways.

Completely agree with this. I won't go so far as to say that everyone should pay a lump sum, but if you think it about it, taxes should be thought of as essentially a transaction: I give the government money, and in return I get to use roads, defense, SS, etc. On that basis, on average everyone uses the same amount of public resources. I don't understand where the idea of taking a percentage of income even came from in the first place (can anyone explain?). It doesn't seem like someone who made a million dollars (and pays let's say 350k in taxes) versus someone who made 100k (and paid 35k in taxes) received 10x the amount of benefit from the government.

I think a good part of the idea behind progressive taxes would be that rich people are only rich because of the way society works, and that that level of amalgamation of wealth wouldn't be possible without society being structured the way it is. Jury's still out on whether that makes any sense.

 
whaat:
Ultima-RDK:
Closing loopholes is one thing. But arbitrarily raising taxes for the rich "simply because we can" is, in my opinion, immoral.

For what other reason other than the fact that we can do it, should we be allowed to take more from those who have more? Let's assume all taxes go to the same place, ie public education, healthcare, etc. The rich are already, in absolute terms, contributing more than the average. They aren't consuming said social benefits of government's usages of taxes any more than the average person.

Are they driving over the same bridge that was built on tax money any more times? Probably not.

Are they reaping more benefits from public education than the average person? Probably not -- in fact, they probably don't even send their child to a public institution, yet are paying taxes towards education that supports it anyways.

Completely agree with this. I won't go so far as to say that everyone should pay a lump sum, but if you think it about it, taxes should be thought of as essentially a transaction: I give the government money, and in return I get to use roads, defense, SS, etc. On that basis, on average everyone uses the same amount of public resources. I don't understand where the idea of taking a percentage of income even came from in the first place (can anyone explain?). It doesn't seem like someone who made a million dollars (and pays let's say 350k in taxes) versus someone who made 100k (and paid 35k in taxes) received 10x the amount of benefit from the government.

This is a simple and great way to refer to increasing taxes on the rich. It creates a picture of how "fair" it would actually be. This increase in taxes is too contractive anyway. The increase could significantly reduce private investment in our economy, which has had a dismal recovery at best. It is much too early to have any tax increase, especially in the social class that drives GDP growth the most. Growth means job creation for the middle and lower classes. The so called "Warren Buffet" rule is really a slap in the face to Warren and what he contributes the economy. I do believe it was Buffet that bailed out Goldman with his $5 billion contribution. So be it he is likely to make around 70 percent on his investment. His contribution was critical in providing liquidity and Goldman very well may have failed without him. The government has to come up with a way to reduce deficit and I think an increase is a lazy and easy way to do it, especially during an election year. From a Macro view, it just doesn't seem make sense to me.

 
hdavid57:

I have nothing against rich people. In fact, I hope to be one someday. But rich people are spared the inconvenience of working in boring, tedious, unfulfilling jobs whereas the less affluent among us may not have a choice. And sometimes the people we work for, who are completely clueless about everything, are the same rich people that many of us have despised all along. No wonder we want them to pay 30 percent of their salaries in taxes. Or 50 percent, or even more! They get away with murder, but if we tax them up the wazoo, they won't get away with this!

Forgive me for getting carried away. What do the rest of you think about raising taxes on the rich and closing loopholes?

This might truly be one of the dumbest things ever posted on WSO.

 
Boreed:
QuantKing45:
As part of the 99%, I have no problem with this. Once I get closer to the much sought-after 1%, the hypocrite in me will come out and I will tell the loophole-closers to go fuck themselves

I like your honesty.

I say tax the shit out of rich actors, sports people and pop stars. They should not be earning that much money.

Well, if the market wants to pay them all of that money...
 
Boreed:
QuantKing45:
As part of the 99%, I have no problem with this. Once I get closer to the much sought-after 1%, the hypocrite in me will come out and I will tell the loophole-closers to go fuck themselves

I like your honesty.

I say tax the shit out of rich actors, sports people and pop stars. They should not be earning that much money.

Why? They work their arses off and train hard to earn their pay. They have as much right as any other person to earn what they do, and they currently pay maximum taxes. It's the loopholes that need to go.

But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely. And Rhaegar died.
 
Boreed:
QuantKing45:
As part of the 99%, I have no problem with this. Once I get closer to the much sought-after 1%, the hypocrite in me will come out and I will tell the loophole-closers to go fuck themselves

I like your honesty.

I say tax the shit out of rich actors, sports people and pop stars. They should not be earning that much money.

The same could be said about any well paid profession. Clipping an aneurysm just isn't that difficult.

 

I go to a school with tons of kids who come from privileged backgrounds. They will collect their trust funds and their 6-figure salaries right after graduation despite obtaining C- averages and doing little to signal their value to the workforce. They also complain about the high taxes they will have to pay and they have convinced themselves they work harder than anyone else so their wealth is simply the product of excellence. Something tells me it wouldn't be so wrong to tax them...

 

Aside to Robin Banks, who thinks my post was perhaps "one of the dumbest things ever posted on WSO": Please don't take my fourth paragraph too literally. I was being ironic, putting myself in the mindset of people who may be resentful of the affluence of others, even if that affluence was earned through hard work.

Howard Schwartz See my WSO blog
 

Aside to Robin Banks, who thinks my post was perhaps "one of the dumbest things ever posted on WSO": Please don't take my fourth paragraph too literally. I was being ironic, putting myself in the mindset of people who may be resentful of the affluence of others, even if that affluence was earned through hard work.

Howard Schwartz See my WSO blog
 

The sheeple in this country just beg for the government to enslave them.

Fact-the lower half of this county pay about zero in fed taxes

Fact-the wealthy provide the vast majority of tax revenue for the government

Fact-increasing taxes on the rich will simply lead to more TSA employees and other government bloat.

Government is about power and getting bigger. If you think either party cares about the poor you are clueless. They are simply easy to manipulate. This "rich aren't paying their fair share" rhetoric is about jealousy and revenge. The politicians know it and manipulate people with it.

What we need is a drive towards efficiency, end pensions for federal workers unless it is a dangerous role, end the wars and reduce defense spending, shrink the federal government, reduce entitlements and tax credits, and cut corporate taxes.

 
TNA:
This "rich aren't paying their fair share" rhetoric is about jealousy and revenge.

I must disagree. If a rich person pays 10% of his income in taxes while a poorer person pays +30% (ie regressive tax system) then surely we have a problem. And yet that's what's happening (in certain cases) thanks to loopholes & tax avoidance. Jealousy & revenge?! A bit rich. Surely it's common sense. Waren Buffet tends to agree.

EDIT: don't get me wrong. I think a lot of the tax argument hase been sensasionalized by the OWS-friendly media. But I don't think we can get away with the argument that rich people are fine paying lower tax rates on income they generate.

__________
 
SaucyBacon85:
TNA:
This "rich aren't paying their fair share" rhetoric is about jealousy and revenge.

I must disagree. If a rich person pays 10% of his income in taxes while a poorer person pays +30% (ie regressive tax system) then surely we have a problem. And yet that's what's happening (in certain cases) thanks to loopholes & tax avoidance. Jealousy & revenge?! A bit rich. Surely it's common sense. Waren Buffet tends to agree.

They pay a lower rate because they incur risk on their income. They are compensated for this risk by paying a lower rate. A poorer person paying 30% will never have a "loss" from his source of income regardless of whether or not the economy is doing well, while a rich person whose income is largely from investments could from year to year incur huge losses or make no money at all.

Sometimes lies are more dependable than the truth.
 
SaucyBacon85:
TNA:
This "rich aren't paying their fair share" rhetoric is about jealousy and revenge.

I must disagree. If a rich person pays 10% of his income in taxes while a poorer person pays +30% (ie regressive tax system) then surely we have a problem. And yet that's what's happening (in certain cases) thanks to loopholes & tax avoidance. Jealousy & revenge?! A bit rich. Surely it's common sense. Waren Buffet tends to agree.

EDIT: don't get me wrong. I think a lot of the tax argument hase been sensasionalized by the OWS-friendly media. But I don't think we can get away with the argument that rich people are fine paying lower tax rates on income they generate.

I don't know ANYONE who is defined as "poorer" being taxed at a 30% effective rate. NO ONE.

Array
 
TNA:
The sheeple in this country just beg for the government to enslave them.

Fact-the lower half of this county pay about zero in fed taxes

Fact-the wealthy provide the vast majority of tax revenue for the government

Fact-increasing taxes on the rich will simply lead to more TSA employees and other government bloat.

Government is about power and getting bigger. If you think either party cares about the poor you are clueless. They are simply easy to manipulate. This "rich aren't paying their fair share" rhetoric is about jealousy and revenge. The politicians know it and manipulate people with it.

What we need is a drive towards efficiency, end pensions for federal workers unless it is a dangerous role, end the wars and reduce defense spending, shrink the federal government, reduce entitlements and tax credits, and cut corporate taxes.

+1. Along those same lines, consider this: 'Fair share' would imply that the rich are getting MORE utility out of the system, which is why so many people want them to pay more taxes. BUT, a rich person is much less likely to do things like a) take public transit, b) send children to public school, c) collect things like welfare or foodstamps. So logically, wouldn't the people who benefit the most from these things (bottom 50%) be expected to at least pay SOMETHING into them? Doesn't make any sense: become successful so you don't need the system as much as the little guy, but pay more into it to support it? Something just isn't right there.

"Who am I? I'm the guy that does his job. You must be the other guy."
 
MonkeyWrench:
<span class=keyword_link><a href=/company/trilantic-north-america>TNA</a></span>:
The sheeple in this country just beg for the government to enslave them.

Fact-the lower half of this county pay about zero in fed taxes

Fact-the wealthy provide the vast majority of tax revenue for the government

Fact-increasing taxes on the rich will simply lead to more TSA employees and other government bloat.

Government is about power and getting bigger. If you think either party cares about the poor you are clueless. They are simply easy to manipulate. This "rich aren't paying their fair share" rhetoric is about jealousy and revenge. The politicians know it and manipulate people with it.

What we need is a drive towards efficiency, end pensions for federal workers unless it is a dangerous role, end the wars and reduce defense spending, shrink the federal government, reduce entitlements and tax credits, and cut corporate taxes.

+1. Along those same lines, consider this: 'Fair share' would imply that the rich are getting MORE utility out of the system, which is why so many people want them to pay more taxes. BUT, a rich person is much less likely to do things like a) take public transit, b) send children to public school, c) collect things like welfare or foodstamps. So logically, wouldn't the people who benefit the most from these things (bottom 50%) be expected to at least pay SOMETHING into them? Doesn't make any sense: become successful so you don't need the system as much as the little guy, but pay more into it to support it? Something just isn't right there.

The point is that without the system providing stability to the general public, you might not have been able to get that rich in the first place. A business owner benefits from having a stable economy to sell to. A hedge fund manager benefits from a well-developed financial system. And a rich person benefits more from, say... The police, or the fire service.

 

Rich people aren't undertaxed, but the problem is that looking at GINIs, the US's economic structure has gotten too stratified and that's causing social unrest. I get the sense that about 5% of the country is obsessed with accumulating money, and the rest isn't. The worst part is that we tend to feed each others' obsessions. As my neighbors get wealthier, I need to keep up.

The government is a terribly inefficient redistributor of wealth, and capitalist countries aren't about the government helping people. They're about people helping people. What if, instead of raising taxes, we cut the GOVERNMENT'S social spending and required rich people to give a percentage of their income to a charity of their choice. That's a much more effective way of lowering GINIs while also making the US a better place to live for EVERYONE.

 
IlliniProgrammer:
Rich people aren't undertaxed, but the problem is that looking at GINIs, the US's economic structure has gotten too stratified and that's causing social unrest. I get the sense that about 5% of the country is obsessed with accumulating money, and the rest isn't. The worst part is that we tend to feed each others' obsessions. As my neighbors get wealthier, I need to keep up.

The government is a terribly inefficient redistributor of wealth, and capitalist countries aren't about the government helping people. They're about people helping people. What if, instead of raising taxes, we cut the GOVERNMENT'S social spending and required rich people to give a percentage of their income to a charity of their choice. That's a much more effective way of lowering GINIs while also making the US a better place to live for EVERYONE.

GINIs?

Sometimes lies are more dependable than the truth.
 
IlliniProgrammer:
The government is a terribly inefficient redistributor of wealth, and capitalist countries aren't about the government helping people. They're about people helping people. What if, instead of raising taxes, we cut the GOVERNMENT'S social spending and required rich people to give a percentage of their income to a charity of their choice. That's a much more effective way of lowering GINIs while also making the US a better place to live for EVERYONE.

That's a very good idea. Badly it will never happen.

 
TheSquale:
IlliniProgrammer:
The government is a terribly inefficient redistributor of wealth, and capitalist countries aren't about the government helping people. They're about people helping people. What if, instead of raising taxes, we cut the GOVERNMENT'S social spending and required rich people to give a percentage of their income to a charity of their choice. That's a much more effective way of lowering GINIs while also making the US a better place to live for EVERYONE.

That's a very good idea. Badly it will never happen.

How about we just increase the tax destructibility on charitable donations. Problem is politicians cannot control which group receives the money and that is the real point of redistribution. It isn't to help, only to gain favor.

 

Company A should relocate its HQ to the Grand Cayman or Antigua- 35% is unacceptable. And the 44.75% figure is accurate and sometimes is higher if you have to pay income/corporate taxes twice if you are not given a deduction. Capital and investment should not be disincetivized/punished via tax. Invested capital is a plus and a net gain for society.

By the way, the assumptions upon which you framed the issue (the rich are spared working hard/drudgery) is nonsense. "They get away with murder" - either you are a troll or you are completely unfamiliar with the capitalist system or any morally defensible system of property. No prosperous person owes anyone a dime ipso facto that they are successful.

Bene qui latuit, bene vixit- Ovid
 

Why not tax everyone at the same rate (my suggestion, let's go to 0% for everyone on income)? That is the essence of fairness. Progressive taxes have poor incentive response systems (there will always be more people with less who will have a greater expected value because the tax burden is disproportionately carried by higher earner who generally don't need additional government services. The problem with arguing for a progressive tax (a perverted term) is that it always has a voyeuristic preoccupation with the pocketbook of the higher earner and never has anything to do with treating the richer taxpayer fairly. Assuming we must have an income tax, how can it possibly be construed that a flat tax is unfair? Just look at the numbers of a hypothetical regressive tax. If I pay a 30% effective income tax for the rest of my life and Mr. Buffet pays 15% effective income tax for ONE YEAR, statistically speaking, it is likely that I will never contribute as much to government coffers as he has. Why should he or anyone bear a higher burden for services that I get to utilize equally?

Bene qui latuit, bene vixit- Ovid
 
rls:
Assuming we must have an income tax, how can it possibly be construed that a flat tax is unfair?
It is unfair because poorer people will in effect be paying a higher proportion of income in tax. Unjustifiable by any criteria.
rls:
Why should he or anyone bear a higher burden for services that I get to utilize equally?
You are defining burden in absolute terms (the amount of tax paid) as opposed to relative terms(% of one's income). Most people use the latter.

Flat tax (regressive tax) is grossly unfair. I repeat; Grossly. I would support proportional tax. i.e. everyone pays a fixed percentage of income.

__________
 
SaucyBacon85:
rls:
Assuming we must have an income tax, how can it possibly be construed that a flat tax is unfair?
It is unfair because poorer people will in effect be paying a higher proportion of income in tax. Unjustifiable by any criteria.
rls:
Why should he or anyone bear a higher burden for services that I get to utilize equally?
You are defining burden in absolute terms (the amount of tax paid) as opposed to relative terms(% of one's income). Most people use the latter.

Flat tax (regressive tax) is grossly unfair. I repeat; Grossly. I would support proportional tax. i.e. everyone pays a fixed percentage of income.

First, you are patently wrong on two counts. 1) A flat tax is flat- it represents an equal portion of everyone's wages (assuming it is an income tax); and 2), it is not regressive and it is not progressive. It is equal (hence the "flat" moniker), there is no slope based on income scale. There is no slope, period.

Second, in your error, you have demonstrated we are in agreement (I think). What you desire "a proportional fixed percentage tax" is a flat tax. There is only one marginal rate that you pay whether you make $30,000 or $30M. For example, a 10% flat tax would be $3,000 and $3M, respectively, for those income earners. I believe you are confusing a flat tax with a per capita tax (such as $10,000 per person per year regardless of income) which would qualify as a "regressive" tax and would constitute a higher percentage of tax on lower income earners.

Bene qui latuit, bene vixit- Ovid
 

I'm not sure rich people are undertaxed - but I certainly think some forms of income are undertaxed.

I think inheritance income is undertaxed relative to wage income. I also think dividend income is undertaxed relative to wage income.

 
PetEng:
I also think dividend income is undertaxed relative to wage income.

Even after considering dividends are paid out from earnings which have already been taxed?

"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
 
cplpayne:
PetEng:
I also think dividend income is undertaxed relative to wage income.

Even after considering dividends are paid out from earnings which have already been taxed?

Corporations don't pay taxes in the US. I think the proportion of corporate tax paid to reported US-sourced profits in 2011 was around 10%. So the effective tax rate really works out to 25%.

How about we have a flat 15% tax on C-corps, charge ordinary income tax on dividends, and offer a 5% discount on long-term capital gains along with inflation indexing?

 
cplpayne:
PetEng:
I also think dividend income is undertaxed relative to wage income.

Even after considering dividends are paid out from earnings which have already been taxed?

Yes. I have no problem saying that non-wage income should be taxed at a higher percentage than wage income.

I'd agree with eliminating corporate income taxes and then racheting up taxes big time on dividends (~60%?).

 
TNA:
The rich do not pay a lower income tax rate. They might pay a slightly lower overal tax rate because the wealthy have money invested earning capital gains. This is different.

You are absolutely correct. I for one should've said effective tax and not income tax.

__________
 

So let's follow the logic. Let's increase capital gains tax to 30% so they are at the top tax bracket. This is going to hurt dividend paying stocks, many of which are held by retirees. It will diminish the incentive to invest because of higher taxes.

See, the real issue is tax deductions and spending through the tax code. Problem is everyone loves their tax deductions. Eliminate deductions and you will increase revenue and make things more fair. But that isnt the goal and we know it. Taking 100% of the wealth of the richest 100 Americans won't even bridge this one years budget miss. You need to increase the amount of people paying into the pool and increase efficiency in the government.

 
TNA:
So let's follow the logic. Let's increase capital gains tax to 30% so they are at the top tax bracket. This is going to hurt dividend paying stocks, many of which are held by retirees. It will diminish the incentive to invest because of higher taxes.
Technically, it will diminish the incentive for rich people to invest. Meanwhile, for folks in lower tax brackets, lower asset prices are a very good thing over the long-term. We want cheaper dividend stocks, not more expensive ones. The higher the dividend yield, the better the return.
See, the real issue is tax deductions and spending through the tax code. Problem is everyone loves their tax deductions. Eliminate deductions and you will increase revenue and make things more fair. But that isnt the goal and we know it. Taking 100% of the wealth of the richest 100 Americans won't even bridge this one years budget miss. You need to increase the amount of people paying into the pool and increase efficiency in the government.
You need to cut entitlements.
 

Everyone should be taxed the same way. You can argue about the subjective semantics of who the rich are and why they should pay more, however there will always be the extremes. Some athletes, bankers, etc are where they are for no apparent reason (God given skills, destiny, luck, whatever), but many are also where they are out of sheer determination, choices and sacrifices. You cannot bundle the group of rich people into the stereotypical rich asshole who doesn't work for their money just as you can't bundle all poor people on unemployment benefits into a bunch of lazy slumming stupid people.

Fair is fair, flat tax is proportional to all.

"History doesn't repeat itself, but it does rhyme."
 

Yes, I am defining the burden of government based on the amount paid rather than percentage of income because that is how prices work. I am claiming that people ('most people', as you observe) who focus on percentage of income are concerned with distributing the burden of government in an unfair manner and are wrong.

If I am looking to buy an item, the price of the item is based on the real input and its value is determined by that plus the utility I could get from it. Taxes are a price of government. If Person A is successful and Person B is not, why should Person A have to pay more for the same benefits Person B equally enjoys for less? Imagine if you walked into a restaurant and they wanted to charge you based on your net worth or income. Imagine if you had to pay $3 for a sandwich and the guy behind you paid $0.16- does that sound fair?

This is why I dislike the 'progressive' and 'regressive' tax classification methods. Whenever you are comparing two unequal values (i.e. a rich person and poor person) and apply an equal variable, they will turn out differently. So, in my view, a flat tax is better than what we have now- but is not ideal.

Bene qui latuit, bene vixit- Ovid
 
Ultima-RDK:
SB to anyone who can make a solid argument as to why carried interest is taxed the way it is
I'll take a run at it. Obviously these arguments aren't flawless, but I think they are compelling enough to say that there is no clear cut answer to how carried interest should be taxed.

1) The biggest knock that I've heard against Carried Interest is that the General Partners don't have their OWN capital at risk. The reality is that at every PE firm I've encountered, the General Partners are required to have a meaningful equity investment in the fund in order to receive carry. In fact, that equity interest is typically split up pro-ratably amongst the individuals participating in the carry. In effect, the more carry you have, the more you need to invest into the fund. So the above argument is false. You'd be correct to instead argue that the carried interest received by the General Partners is disproportionate to the amount of capital they have at risk.

2) The other knock I hear is that the amount that the General Partners need to invest is not significant. For successful General Partners, this is often the case towards the end of their careers. That said, it isn't the case for many people starting out. When I was presented with my portion of the carry (and my corresponding capital obligation), my firm offered me the option of taking out loans in order to fund my capital calls due to the large capital requirement. In order to secure these loans, the bank was asking that I pledge 100% of my personal assets (things such as my house, furniture, cash in the bank, and any other assets I own). For new fund managers with significant capital requirements, they have a tremendous amount of their personal wealth on the line.

3) Finally, you can look at carried interest as a similar compensation scheme as restricted stock. Management often receives restricted stock as a means of compensation to ensure that their interests are aligned with those of investors. If the stock value appreciates, the manager earns money (which is treated as capital gain if held for at least 12 months). If it depreciates, the manager loses nothing. The exact same dynamics are true of carried interest. Value is built through capital appreciation which is then shared by the General Partners. If there is no capital appreciation, the General Partners get nothing.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 
CompBanker:
Ultima-RDK:
SB to anyone who can make a solid argument as to why carried interest is taxed the way it is
I'll take a run at it. Obviously these arguments aren't flawless, but I think they are compelling enough to say that there is no clear cut answer to how carried interest should be taxed.

1) The biggest knock that I've heard against Carried Interest is that the General Partners don't have their OWN capital at risk. The reality is that at every PE firm I've encountered, the General Partners are required to have a meaningful equity investment in the fund in order to receive carry. In fact, that equity interest is typically split up pro-ratably amongst the individuals participating in the carry. In effect, the more carry you have, the more you need to invest into the fund. So the above argument is false. You'd be correct to instead argue that the carried interest received by the General Partners is disproportionate to the amount of capital they have at risk.

2) The other knock I hear is that the amount that the General Partners need to invest is not significant. For successful General Partners, this is often the case towards the end of their careers. That said, it isn't the case for many people starting out. When I was presented with my portion of the carry (and my corresponding capital obligation), my firm offered me the option of taking out loans in order to fund my capital calls due to the large capital requirement. In order to secure these loans, the bank was asking that I pledge 100% of my personal assets (things such as my house, furniture, cash in the bank, and any other assets I own). For new fund managers with significant capital requirements, they have a tremendous amount of their personal wealth on the line.

3) Finally, you can look at carried interest as a similar compensation scheme as restricted stock. Management often receives restricted stock as a means of compensation to ensure that their interests are aligned with those of investors. If the stock value appreciates, the manager earns money (which is treated as capital gain if held for at least 12 months). If it depreciates, the manager loses nothing. The exact same dynamics are true of carried interest. Value is built through capital appreciation which is then shared by the General Partners. If there is no capital appreciation, the General Partners get nothing.

I have no problem with income derived from invested capital being taxed at capital gains. I suspect that the vast majority of the population views the same.

Cap gains rates on income from non-invested capital is the issue.

 

I am all for busting your ass to make money, and do not believe that those whom are successful in doing so should have to pay higher taxes. Unfortunately, wehn you look at it from an economic perspective, a higher tax seems to make more sense. The lower class will exhaust 90% of their income in one year, while the richer upper class will exhaust a small percentage. It just seems to work out that richer people can afford to pay higher taxes and this may help the economy, but it raises other concerns; fairness. With the United States economy in its current state taxing richer people at a higher rate may not be the worst thing in the world. However, for those richer people who are paying higher taxes, there should be policies put into effect which will make paying higher taxes an incentive, not a disincentive.

 

Flat out, if I was a "rich" small business owner, as most of them are, my income would not budget if taxes went up. I would cut costs and normalize my earnings. If that means laying off employees then so be it.

THIS is exactly what would happen.

 
TNA:
Flat out, if I was a "rich" small business owner, as most of them are, my income would not budget if taxes went up. I would cut costs and normalize my earnings. If that means laying off employees then so be it.

THIS is exactly what would happen.

Actually, ANT, if you laid off workers because marginal income tax rates went up, you're running your business inefficiently. You're going to be taking in a certain amount of revenues, you're going to have a certain set of expenses, and the difference is going to be your profit, which gets taxed. If cutting expenses means you lose less revenues than the expenses you get rid of, you you should have done that before tax rates went up.

So no, ANT, you already cut expenses years ago. But hey, if you hire more, your taxes go down faster now.

Here's the real reason we don't want to raise taxes on business:

It discourages new investment, which creates jobs. We also want to be seen as a stable capitalist country to invest in, and a massive tax hike would tarnish our reputation on that front for years.

 
IlliniProgrammer:
TNA:
Flat out, if I was a "rich" small business owner, as most of them are, my income would not budget if taxes went up. I would cut costs and normalize my earnings. If that means laying off employees then so be it.

THIS is exactly what would happen.

Actually, ANT, if you laid off workers because marginal income tax rates went up, you're running your business inefficiently. You're going to be taking in a certain amount of revenues, you're going to have a certain set of expenses, and the difference is going to be your profit, which gets taxed. If cutting expenses means you lose less revenues than the expenses you get rid of, you you should have done that before tax rates went up.

So no, ANT, you already cut expenses years ago. But hey, if you hire more, your taxes go down faster now.

Here's the real reason we don't want to raise taxes on business:

It discourages new investment, which creates jobs. We also want to be seen as a stable capitalist country to invest in, and a massive tax hike would tarnish our reputation on that front for years.

You can always squeeze a little more juice from the orange, given the proper motivation IP.

 

Tracer,

You have several incorrect assumptions. First, there is no precondition in a flat tax proposal that requires the same level of revenues be collected. Second, even if the same level of revenues needed to be collected, the flat tax rate would be adjusted higher (say 25%), but it would still be flat. The lower income earners would bare an equal burden proportionally as the rich, even though the rich would be paying vastly more in actual dollars- nothing regressive about that.

Your use of "regressive" to described the flat tax is incorrect. The progressive/regressive terminology strictly examines the relationship of the percentage of income assessed as tax and the its relationship to the income scale. If the tax rate and income level are positively correlated (higher income, higher tax rates), the tax is called progressive. If the tax rate and income level are negatively correlated (lower income, higher tax rates), the tax is called regressive. The flat tax is uncorrelated with income scale and does not meet the criterion. It is the 'third way'.

So, ceterus paribus, no matter what you do, lower income earners have less money after taxes- but that will always be the case. Lower income earners by definition have less money and thus your observation is a tautology and not relevant, and in no way demonstrates regressivity or progressivity.

Bene qui latuit, bene vixit- Ovid
 
rls:
Tracer,

You have several incorrect assumptions. First, there is no precondition in a flat tax proposal that requires the same level of revenues be collected. Second, even if the same level of revenues needed to be collected, the flat tax rate would be adjusted higher (say 25%), but it would still be flat. The lower income earners would bare an equal burden proportionally as the rich, even though the rich would be paying vastly more in actual dollars- nothing regressive about that.

Your use of "regressive" to described the flat tax is incorrect. The progressive/regressive terminology strictly examines the relationship of the percentage of income assessed as tax and the its relationship to the income scale. If the tax rate and income level are positively correlated (higher income, higher tax rates), the tax is called progressive. If the tax rate and income level are negatively correlated (lower income, higher tax rates), the tax is called regressive. The flat tax is uncorrelated with income scale and does not meet the criterion. It is the 'third way'.

So, ceterus paribus, no matter what you do, lower income earners have less money after taxes- but that will always be the case. Lower income earners by definition have less money and thus your observation is a tautology and not relevant, and in no way demonstrates regressivity or progressivity.

You're shifting goalposts and getting pointlessly caught up in semantics. Sure, there's no inherent requirement to maintain the level of revenues when shifting, but that's missing the point. If you decrease revenues without cutting spending, then you're not really solving anything. And if you're cutting spending, you don't need to change the tax system to cut taxes.

The fact of the matter is that the most financially stressed citizens, low-income earners, will see their tax rates rise dramatically. By bringing the 35% brackets down to 25%, you are also bringing the 10 and 15% brackets up to 25%, effectively doubling the tax burden of low-income earners. It's simply not feasible. Raising taxes on the poor to cut taxes for the rich is an absurd proposition.

 

Ultima-RDK,

Carried interest is defined as the share of profit of the appreciation of assets owned by a partnership (LLP) to the assigned partner in the partnership agreement.

Notice that I didn't say "hedge fund" or "private equity". It is because these agreements, and its surrounding tax laws, were designed to facilitate the use of 'sweat equity' in partnerships. It just so happens that hedge funds and private equity firms are established as partnerships. So, to dispel the sinister suggestion that you often hear- the law came first and lawyers decided this was the most tax-efficient way to set up investment funds. (Interestingly enough, nearly all law firms are partnerships, so consider that....)

If two parties want to form a partnership, but only Party A has capital (i.e. traditional equity), Party B can contribute skills, knowledge, etc (i.e. sweat equity). This is the arrangement of most funds. The fund manager partners with investors- the investors bring the capital and the manager brings the expertise.

For the sake of time, I’ll assume you want to understand this all from a hedge fund manager’s perspective. What is being taxed? The fund manager’s share of ownership in the invested assets. Why is it ‘carried interest’? This is best illustrated by an example. Let’s assume that Fund A (20% performance fee) is fully invested at the beginning of the year with $100M AUM; and further assume that the fund had a phenomenal 100% return and thus the AUM of the fund is now $200M. At the end of the year, Fund A is still fully invested, but according to the partnership agreement, a performance fee of 20% of the accrued money is given to the manager. So now the manager owns $20M of the $200M (20% of the $100M earned). But, the manager doesn’t sell his stake and cash out. He leaves his money in the fund. The tax code assumes that this will be a longer term investment (unless it was interest, short-term gains, or non-corporate profits) so it is taxed at the long-term capital gains rate, which is 15%. His ‘interest’ is still ‘carried’ in Fund A. He has not received income. A common misconception is that he can cash out the money as income and be assessed 15%- not true. If taken as income, it would be taxed at the ordinary income tax rate.

Demagoguery surrounds the issue because people think this was a loophole set up for investment managers. Nonsense- the law was in place before hedge funds and private equity became all the rage.

Bene qui latuit, bene vixit- Ovid
 
rls:
Ultima-RDK,

Carried interest is defined as the share of profit of the appreciation of assets owned by a partnership (LLP) to the assigned partner in the partnership agreement.

Notice that I didn't say "hedge fund" or "private equity". It is because these agreements, and its surrounding tax laws, were designed to facilitate the use of 'sweat equity' in partnerships. It just so happens that hedge funds and private equity firms are established as partnerships. So, to dispel the sinister suggestion that you often hear- the law came first and lawyers decided this was the most tax-efficient way to set up investment funds. (Interestingly enough, nearly all law firms are partnerships, so consider that....)

If two parties want to form a partnership, but only Party A has capital (i.e. traditional equity), Party B can contribute skills, knowledge, etc (i.e. sweat equity). This is the arrangement of most funds. The fund manager partners with investors- the investors bring the capital and the manager brings the expertise.

For the sake of time, I’ll assume you want to understand this all from a hedge fund manager’s perspective. What is being taxed? The fund manager’s share of ownership in the invested assets. Why is it ‘carried interest’? This is best illustrated by an example. Let’s assume that Fund A (20% performance fee) is fully invested at the beginning of the year with $100M AUM; and further assume that the fund had a phenomenal 100% return and thus the AUM of the fund is now $200M. At the end of the year, Fund A is still fully invested, but according to the partnership agreement, a performance fee of 20% of the accrued money is given to the manager. So now the manager owns $20M of the $200M (20% of the $100M earned). But, the manager doesn’t sell his stake and cash out. He leaves his money in the fund. The tax code assumes that this will be a longer term investment (unless it was interest, short-term gains, or non-corporate profits) so it is taxed at the long-term capital gains rate, which is 15%. His ‘interest’ is still ‘carried’ in Fund A. He has not received income. A common misconception is that he can cash out the money as income and be assessed 15%- not true. If taken as income, it would be taxed at the ordinary income tax rate.

Demagoguery surrounds the issue because people think this was a loophole set up for investment managers. Nonsense- the law was in place before hedge funds and private equity became all the rage.

Appreciate it. Still, sounds like a performance bonus to me. Under your illustration, there was no traditional equity invested by party B (I recognize in reality, there is some mandatory side-by-side investments in most, if not all funds, to encourage best interests). If there is no original invested capital, it's just not compelling to me to tax it along the capital gains rate.

Sometimes lies are more dependable than the truth.
 
Ultima-RDK:
rls:
Ultima-RDK,

Carried interest is defined as the share of profit of the appreciation of assets owned by a partnership (LLP) to the assigned partner in the partnership agreement.

Notice that I didn't say "hedge fund" or "private equity". It is because these agreements, and its surrounding tax laws, were designed to facilitate the use of 'sweat equity' in partnerships. It just so happens that hedge funds and private equity firms are established as partnerships. So, to dispel the sinister suggestion that you often hear- the law came first and lawyers decided this was the most tax-efficient way to set up investment funds. (Interestingly enough, nearly all law firms are partnerships, so consider that....)

If two parties want to form a partnership, but only Party A has capital (i.e. traditional equity), Party B can contribute skills, knowledge, etc (i.e. sweat equity). This is the arrangement of most funds. The fund manager partners with investors- the investors bring the capital and the manager brings the expertise.

For the sake of time, I’ll assume you want to understand this all from a hedge fund manager’s perspective. What is being taxed? The fund manager’s share of ownership in the invested assets. Why is it ‘carried interest’? This is best illustrated by an example. Let’s assume that Fund A (20% performance fee) is fully invested at the beginning of the year with $100M AUM; and further assume that the fund had a phenomenal 100% return and thus the AUM of the fund is now $200M. At the end of the year, Fund A is still fully invested, but according to the partnership agreement, a performance fee of 20% of the accrued money is given to the manager. So now the manager owns $20M of the $200M (20% of the $100M earned). But, the manager doesn’t sell his stake and cash out. He leaves his money in the fund. The tax code assumes that this will be a longer term investment (unless it was interest, short-term gains, or non-corporate profits) so it is taxed at the long-term capital gains rate, which is 15%. His ‘interest’ is still ‘carried’ in Fund A. He has not received income. A common misconception is that he can cash out the money as income and be assessed 15%- not true. If taken as income, it would be taxed at the ordinary income tax rate.

Demagoguery surrounds the issue because people think this was a loophole set up for investment managers. Nonsense- the law was in place before hedge funds and private equity became all the rage.

Appreciate it. Still, sounds like a performance bonus to me. Under your illustration, there was no traditional equity invested by party B (I recognize in reality, there is some mandatory side-by-side investments in most, if not all funds, to encourage best interests). If there is no original invested capital, it's just not compelling to me to tax it along the capital gains rate.

Agreed. Only the invested capital gets cap gains rate. Nothing else.
 
Ultima-RDK:
rls:
Ultima-RDK,

Carried interest is defined as the share of profit of the appreciation of assets owned by a partnership (LLP) to the assigned partner in the partnership agreement.

Notice that I didn't say "hedge fund" or "private equity". It is because these agreements, and its surrounding tax laws, were designed to facilitate the use of 'sweat equity' in partnerships. It just so happens that hedge funds and private equity firms are established as partnerships. So, to dispel the sinister suggestion that you often hear- the law came first and lawyers decided this was the most tax-efficient way to set up investment funds. (Interestingly enough, nearly all law firms are partnerships, so consider that....)

If two parties want to form a partnership, but only Party A has capital (i.e. traditional equity), Party B can contribute skills, knowledge, etc (i.e. sweat equity). This is the arrangement of most funds. The fund manager partners with investors- the investors bring the capital and the manager brings the expertise.

For the sake of time, I’ll assume you want to understand this all from a hedge fund manager’s perspective. What is being taxed? The fund manager’s share of ownership in the invested assets. Why is it ‘carried interest’? This is best illustrated by an example. Let’s assume that Fund A (20% performance fee) is fully invested at the beginning of the year with $100M AUM; and further assume that the fund had a phenomenal 100% return and thus the AUM of the fund is now $200M. At the end of the year, Fund A is still fully invested, but according to the partnership agreement, a performance fee of 20% of the accrued money is given to the manager. So now the manager owns $20M of the $200M (20% of the $100M earned). But, the manager doesn’t sell his stake and cash out. He leaves his money in the fund. The tax code assumes that this will be a longer term investment (unless it was interest, short-term gains, or non-corporate profits) so it is taxed at the long-term capital gains rate, which is 15%. His ‘interest’ is still ‘carried’ in Fund A. He has not received income. A common misconception is that he can cash out the money as income and be assessed 15%- not true. If taken as income, it would be taxed at the ordinary income tax rate.

Demagoguery surrounds the issue because people think this was a loophole set up for investment managers. Nonsense- the law was in place before hedge funds and private equity became all the rage.

Appreciate it. Still, sounds like a performance bonus to me. Under your illustration, there was no traditional equity invested by party B (I recognize in reality, there is some mandatory side-by-side investments in most, if not all funds, to encourage best interests). If there is no original invested capital, it's just not compelling to me to tax it along the capital gains rate.

The tax is applied after the manager gets traditional equity- and if he holds it as a long-term investment. Imagine you have a grandfather who bequeathed some dividend yielding stock to you. You didn't sell the stock, you get keep the dividend stream. Should you pay ordinary income or dividend tax rate (excluding estate, gift, and all other taxes for this example)? This is what, in effect, is happening in the hedge. The manager is receiving, in my example, long-term assets that transformed his or her sweat equity into traditional equity. In a way it is performance-based- the quality of his or her 'sweat equity' determines how much traditional equity. However, this is not a straight-up income-based compensation. His compensation is equity. In the case of the fully invested fund, he get shares in companies. It doesn't make sense to me to treat that the same as dollars and cents in a bank account if he doesn't sell it. The newly created equity is his or hers and can now be treated as you would long-term capital gains. The nuances of the tax law permit, nay, encourage this type of partnership arrangement.

Bene qui latuit, bene vixit- Ovid
 

ANT, you're going to be less inclined to focus on expenses if tax rates go up because workers just became a lot cheaper, after-tax. The upshot is that you're also going to be less inclined to focus on revenue.

One of the fallacies of the "we need to keep cutting tax rates" crowd is that higher taxes mean layoffs. They don't. We may lay people off out of spite, but higher taxes don't shift the economic decision at all. Higher taxes just mean less investment and slower job creation.

My view is that if you factor out our entitlement obligations, taxes as a percentage of GDP are fairly low historically. We need to talk about tax reform to broaden revenues and keep the same rates that we have. Maybe we should even talk about a return to the Clinton tax schedule for everyone.

 

Illini,

You are assuming people like ANT are going to sit around and let margins be squeezed. If he needs to fire five people to keep his same lifestyle, I fear for those people's jobs. It is a mathematical fact that if you tax a business more, ceteris parabus, there will be less money available for expenses (i.e. employees), growth (new job creation/equipment), and profits. It is up to the owner to decide which one has to be cut first- ANT has told you what he will do. It may be the case that after cutting employees, profits could drop as well, but it makes some sense to see if he could try to squeeze rather than capitulate to a lower profit margin.

Bene qui latuit, bene vixit- Ovid
 
Best Response
rls:
Illini,

You are assuming people like ANT are going to sit around and let margins be squeezed. If he needs to fire five people to keep his same lifestyle, I fear for those people's jobs.

Ok, then where was ANT for the past five years when his margins were sub-optimal, when Chinese labor was cheaper, and he had MORE incentive to optimize everything? He's optimized the business all he can; the next employee he lays off cuts his revenues by more than his costs.
It is a mathematical fact that if you tax a business more, ceteris parabus, there will be less money available for expenses (i.e. employees), growth (new job creation/equipment), and profits.
Taxes are always $0 if expenses equal revenues. Profits after tax drive growth; I agree with you there.
It is up to the owner to decide which one has to be cut first- ANT has told you what he will do. It may be the case that after cutting employees, profits could drop as well, but it makes some sense to see if he could try to squeeze rather than capitulate to a lower profit margin.
Maybe, but in the meantime, the government has more than enough tax revenues to increase infrastructure spending to replace those jobs until ANT and other business owners come to their senses. Obviously lower profits hurt long-term growth, but in the short run, Keynesianism works.
 

^^^ One can also use the flat tax on utility argument. Everyone needs to make the same relative sacrifice for the government. Taking the subway to Manhattan for $3 might provide a poor person with 10 utils. A $30 cab ride might provide a middle-class person with 15 utils. A $300 helicopter ride might give a rich person 18 utils.

As you can see, because of declining marginal utility, rich and middle class people pay more to gain less utility than poor people.

If we tell everyone they have to give up 10% of their utility to pay for the government, we tax the rich guy $200 (67%) to take him most of the way back to a cab ride, we tax the middle class guy $15 (50%) to take him halfway back to the subway, and we tax the poor guy $0.30 for 10% of his train fare.

One of the justifications for a progressive tax is that it's a much bigger relative sacrifice for a poor person to give up 10% of his peanut butter sandwich money than it is for a rich person to spend 10% less on his porsche. I'm not a gung-ho supporter of making the tax system more progressive, but I think it's a good justification for leaving the tax system at least somewhat progressive.

 
IlliniProgrammer:
^^^ One can also use the flat tax on utility argument. Everyone needs to make the same relative sacrifice for the government. Taking the subway to Manhattan for $3 might provide a poor person with 10 utils. A $30 cab ride might provide a middle-class person with 15 utils. A $300 helicopter ride might give a rich person 18 utils.

As you can see, because of declining marginal utility, rich and middle class people pay more to gain less utility than poor people.

If we tell everyone they have to give up 10% of their utility to pay for the government, we tax the rich guy $200 (67%) to take him most of the way back to a cab ride, we tax the middle class guy $15 (50%) to take him halfway back to the subway, and we tax the poor guy $0.30 for 10% of his train fare.

One of the justifications for a progressive tax is that it's a much bigger relative sacrifice for a poor person to give up 10% of his peanut butter sandwich money than it is for a rich person to spend 10% less on his porsche. I'm not a gung-ho supporter of making the tax system more progressive, but I think it's a good justification for leaving the tax system at least somewhat progressive.

Another suggestion could be to simply eliminate income taxes and increase consumption (or sales) tax.

Sometimes lies are more dependable than the truth.
 
Also, I'm just not completely sold yet on implementing a luxury tax on certain goods. It would bring about negative consequences to the companies producing those goods, unfairly hurting a lot of middle/lower class employees. Is it not enough that those rich people purchasing luxury goods are already paying higher consumption taxes as it is, based on the price of the good?
Aren't most of those companies European anyways? Since Duesenberg went bankrupt in the '30s, just about all of the luxury and exotic carmakers have been foreign.
 

I think the fundamental difference of opinion on the income tax argument is that everyone has a very different opinion of what "fair" represents. Unless the concept of "fair" can be determined, there will never be any resolution on the issue.

I think the biggest problem we have is that people have grown too attached/used to the existing system. People hate change and change in any capacity is often very hard to implement. It is easy to sit back and argue that the existing system works and shouldn't be modified -- especially if you're the one on the receiving end. Breaking through this mentality seems to be nearly impossible at this point.

Personally, I'd be happy to define "fair" as a flat percentage rate for everyone with absolutely no deductions or exceptions. This seems like a good equilibrium to me. Everybody pays something and as your income increases, so do your taxes on a direct proportional basis. Undoubtedly this would decrease taxes on the rich and increase taxes on the poor. However, this "decrease/increase" is only relative to the current system.

The main argument I've heard against the flat tax is that the rich should pay a higher rate than the poor. However, what I've never understood was WHY? The normal response is that the rich should pay a higher rate because they have more money to spare. To me, this is not a valid argument -- just because someone has more money doesn't mean they ought to pay a higher RATE. And this is where most of America diverges...

Finally, there is the problem that tax preparation is not only a profession, but an INDUSTRY. If we simplify the tax system to a flat tax, a LOT of people instantly become obsolete. H&R block, all of the major financial firms' tax departments, and likely a large portion of the IRS. While I view this as an eventual necessity, the rationalization of the tax industry would hurt a lot of families.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 
CompBanker:
I think the fundamental difference of opinion on the income tax argument is that everyone has a very different opinion of what "fair" represents. Unless the concept of "fair" can be determined, there will never be any resolution on the issue.

I think the biggest problem we have is that people have grown too attached/used to the existing system. People hate change and change in any capacity is often very hard to implement. It is easy to sit back and argue that the existing system works and shouldn't be modified -- especially if you're the one on the receiving end. Breaking through this mentality seems to be nearly impossible at this point.

Personally, I'd be happy to define "fair" as a flat percentage rate for everyone with absolutely no deductions or exceptions. This seems like a good equilibrium to me. Everybody pays something and as your income increases, so do your taxes on a direct proportional basis. Undoubtedly this would decrease taxes on the rich and increase taxes on the poor. However, this "decrease/increase" is only relative to the current system.

The main argument I've heard against the flat tax is that the rich should pay a higher rate than the poor. However, what I've never understood was WHY? The normal response is that the rich should pay a higher rate because they have more money to spare. To me, this is not a valid argument -- just because someone has more money doesn't mean they ought to pay a higher RATE. And this is where most of America diverges...

Finally, there is the problem that tax preparation is not only a profession, but an INDUSTRY. If we simplify the tax system to a flat tax, a LOT of people instantly become obsolete. H&R block, all of the major financial firms' tax departments, and likely a large portion of the IRS. While I view this as an eventual necessity, the rationalization of the tax industry would hurt a lot of families.

Thanks CompBanker.

A couple things- first, I agree with the common criticisms that the public raises against the way that carried interest is taxed. As I mentioned in a previous post, I recognize the fact that a lot of PE funds require "side-by-side" investments, which act to align the interests of the managers with those of the investors. However, there is still clearly a discrepancy between the amount invested and the amount potentially earned by these managers. At my PE shop, I know that there is a separate "bank" as I'll refer to it, which gives employees extremely favorable rates. Sure, they'll have to borrow from this bank, but nobody else besides employees VP and higher even have access to it. I doubt I'm revealing any sensitive information here because I'm sure this is how most top brand PE firms operate (have friends at competing funds).

Second, I'm not quite sure how you are defining "fair flat tax", because if we are to say for example, everyone is taxed at x% of their income, then as your income increases, your taxes do NOT, on a direct proportional basis. It is still proportional, ie, the same x% regardless of your income. I agree, it will increase in absolute terms, but not proportionally in terms of income. As I mentioned in my first post here, I agree with you that just because people simply have more money doesn't mean they should be taxed more. They aren't receiving more benefits from the system, and taxes should be viewed as a transaction of payments for social benefits. If they aren't receiving these social benefits at a higher rate -- why tax them higher?

I've definitely heard the argument that implementing a simpler tax code will damage the tax industry, but is it just an efficiency that needed to be addressed at some point anyways?

Anyway, I would say that our system doesn't function perfectly. People with wealth have a higher economic status simply achieve more wealth. Is it a result of higher intelligence, drive amongst those with higher wealth? Or is it due to the fact that some people simply have access to more opportunities. If so, a progressive tax rate might seek to balance this imbalance of opportunities.

Sometimes lies are more dependable than the truth.
 
Ultima-RDK:
I would say that our system doesn't function perfectly. People with wealth have a higher economic status simply achieve more wealth. Is it a result of higher intelligence, drive amongst those with higher wealth? Or is it due to the fact that some people simply have access to more opportunities. If so, a progressive tax rate might seek to balance this imbalance of opportunities.
Ultima, the way I read your argument is as follows:

Fact: People with wealth have a higher economic status and therefore achieve more wealth than those with low economic status. Fact (/ Question): Is this due to the wealthy being more driven and/or intelligent, or is it due to them having more access to opportunities as a result of their wealth? Conclusion: The system doesn't function perfectly.

Implied Premise 1: A properly functioning system is one where wealth is accumulated based on intelligence and drive (and not based on existing wealth).

My disagreement with your conclusion is based on your implied premise. I pose the following question: Why should intelligence and drive be the only two factors that dictate the amount of wealth accumulated?

What about the parents who worked hard their entire lives to give their kids access to better education? Or perhaps the parents worked to give their kids money to start their own businesses? Under your concept of a properly functioning system, access to a better education and start-up funds should be a function of drive and intelligence and NOT existing wealth. I disagree with this position.

In my mind (and feel free to disagree), a properly functioning system is one that provides the infrastructure in which almost** everyone can generate meaningful wealth. Personally, I think this is something that we have already achieved. I believe access to knowledge is the only thing somebody needs to achieve wealth generation in America. With free K-12 education, physical libraries spanning the country, and internet access dirt cheap (and in some places absolutely free), I believe the tools are out there for almost** everybody. I also believe that it is the responsibility of individuals to access these tools and invest the time and effort ("drive") to achieve economic mobility.

**There are obviously people out there, such as the mentally handicapped, that won't be able to use the existing infrastructure to generate meaningful wealth.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 

I don't think we should tax the wealthy at exorbitant rates. But a progressive tax rate is justified, for reasons of political stability and to our system more rewarding of merit than privilege.

And the preferential tax treatment of long term capital gains is not good economic policy, so the 15% rate should be raised.

 

All income should be the same. No deductions no nothing. A dollar is a dollar and it shouldn't matter if I got it from working at GS, McDonalds or a dividend payment from my MCD stock.

If that raises tax on the rich, so be it.

 

Consequuntur est corrupti reiciendis eaque dolores ea nulla. Ab vel omnis magni eius voluptas debitis. Tenetur aspernatur sit tenetur cumque.

Iste quaerat et sint cupiditate totam. Eveniet voluptatem aut illum fugiat dolor ex omnis. Molestias dolorem aliquid suscipit eos et sed laudantium. Sint quo repudiandae ea quia sequi. Consequatur ut aperiam laboriosam et sed incidunt.

Enim et vel dolorem voluptatem aspernatur voluptatem et. Excepturi dolorem voluptas qui magnam iste quam. Accusamus at id praesentium aut alias. Temporibus assumenda saepe qui impedit corrupti ut harum. Est nobis voluptatem fugit quos sit quisquam.

Eaque quidem et vero ea et. Ab eos veniam nobis quod odit perferendis. Numquam nemo quia libero est aut excepturi. Qui quia quisquam unde asperiores ea.

 

Ullam perferendis eligendi rerum aut voluptatem. Provident aut omnis nulla voluptatem et consequatur. Incidunt saepe consequatur consequuntur est reiciendis. Suscipit magnam asperiores harum dignissimos quis sed qui. Porro alias porro maiores voluptate fugit.

Deleniti nisi sed corrupti ratione voluptatem libero placeat iure. Nesciunt nisi qui eaque. Aut autem debitis sit doloribus. Quo eaque facilis quisquam asperiores numquam nobis corporis velit.

Eveniet at harum fugiat qui dolor a et illum. Et iste aut dolor hic dolorum sit modi. Provident eos eum praesentium in maiores. Minima consequatur quae aut vero mollitia maxime. Et odio aperiam facere autem eos et. Facere et qui doloremque nesciunt aut dolores aut quos. Atque et eaque dolores incidunt ut.

Dolor veritatis temporibus ex sunt. Molestiae voluptatem praesentium modi qui cum ut. Et delectus facilis laborum iusto consectetur numquam quas. Voluptatem eum provident non nam dolor. Facere qui et et id modi. Ipsam quo eum sint sit.

 

Sunt magni qui velit et quia minus. Esse sit ipsa aut facere molestiae sint dolor. Expedita itaque et quaerat nisi explicabo magnam accusantium. Harum quos ratione sequi veritatis architecto itaque quibusdam. Perferendis corrupti neque dicta ea totam. Impedit earum et quia in ab velit.

Architecto officiis temporibus omnis laborum voluptatibus autem consequuntur. Deserunt aliquam provident eos sint. Laborum cumque fugit sit harum illum a explicabo. Et error quam est omnis sint. Velit eum vero minima quis laborum nihil.

Commodi quia et consequuntur expedita explicabo voluptas omnis. Atque fugiat aut et molestias quibusdam nulla voluptates. Eaque exercitationem omnis eum incidunt omnis a.

Saepe deleniti est eum explicabo at sed at voluptatem. Saepe sunt accusamus nihil consectetur. Consectetur laboriosam delectus eaque ut eius adipisci nisi. Et fuga et accusantium optio id.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
kanon's picture
kanon
98.9
6
dosk17's picture
dosk17
98.9
7
GameTheory's picture
GameTheory
98.9
8
CompBanker's picture
CompBanker
98.9
9
DrApeman's picture
DrApeman
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”