Punishing success?

[Sisyphus]

One of the persistent claims of fiscal conservatives is that so-called "progressive" policies like graduated income tax, welfare, or social security are unfair and harmful to the economy by punishing economic success and rewarding failure. Like most broad, provocative generalizations in politics, this claim is (by my statistical analysis) about 80% bullshit. If it were actually true, nobody would try to become rich, because it would be more advantageous to be poor. Obviously we don't have that problem, nor would we even if we managed to cut off "corporate welfare" or close all the various loopholes those with a lot of money can take advantage of to pay far less than you might expect. The profit motive is very much alive and well and not going anywhere.

 

Still, there is that 20%. As a general rule, it's always better to make more money, but there are exceptions, as anyone who just barely qualified for a higher tax bracket can testify. Another example: in New York State, there is a program offering relatively cheap (~$250/mo) health insurance to any full-time (at least 40hrs/week) employee earning less than $25 thousand per year. If you make $25,001 per year, you get nothing.

 

Most of us have had experience with similar scenarios (with income taxes if nothing else), because they are everywhere in government. It's these cut-offs that, in specific cases, offer strong and clear incentives to deliberately earn less money. I don't see how that sort of thing could fail to hurt the economy, albeit in a probably impossible to quantify way.

 

So what can be done about it? The most obvious answer would be to do away with all these programs entirely, but that's a drastic solution which would almost certainly do more harm than good, and I'm not terribly interested in pursuing it. We can argue back and forth all day the "fairness" of graduated income tax, but at the end of that day the fact that we need that revenue won't have changed.

 

What I'll throw out there is actually much simpler: smooth out the cutoffs. Instead of discontinuous income brackets, use a continuous function. The percentage you pay could still be dependent on income, but there would never be a point at which making more money would result in keeping less money. Yes, it might make figuring things out a bit more complicated, but the again, maybe not. We live in the digital age, no? Would plugging in one variable really be harder than a fixed percentage flat tax, which is among the more drastic proposed "simplification" measures?

[Realitycheck]

I see this disparity between what people claim and what is actually true. For instance, I always seem to hear about how the wealthy get all of these tax breaks, this, that, and the other, and it's just not fair. However, people seem to need to be reminded that the $15,000 earner only gets taxed 15%, while the $100,000 earner gets taxed 39% on the top tier of his earnings, in addition to all of the other tiers within his/her bracket. I agree, it does seem a bit tedious, but I've always had a computer to figure it all out, so what does it really matter. Surely, they do it that way for some reason, but I wouldn't know how significant rocking the boat would be. Why not just abolish the entire IRS code? As one CPA once told me,"If they passed a flat tax, we wouldn't all be out of a job, because people would still need to know exactly how much money they actually did make."

 

As far as welfare and ss are involved, there comes this natural law into play which dictates who wins and who doesn't. There is just no way that everybody can win. Survival of the fittest, smartest, luckiest, it's wrapped into the fabric of society, even today. So we have cushions set up for those who don't make the cut, for whatever reason - deadbeat fathers, disabilities, or Hurricane Katrina (but we all know whose fault N.O. was). Otherwise, they would all be dead or contributing to the crime rate.

 

Do people really deliberately earn less money to make more incentives? The gutter can be a real rut to get yourself out of. Plenty of lower-class earners simply don't have the resources or skills to move up.

[iNow]

Do people really deliberately earn less money to make more incentives?

 

My experience has been that people generally earn MORE money, but find better ways of hiding and redistributing it to skate around the tax codes. In essence, they make it LOOK like they earn less money. It's the WAY the income gets earned and the WAY it's paid that allows such circumvention of the taxes... Hence the calls for new and updated policies.

 

 

 

The gutter can be a real rut to get yourself out of. Plenty of lower-class earners simply don't have the resources or skills to move up.

Unfortunately, in the current market, even those in the middle are struggling to move up or even just keep their head's above water. The disparity between the rich and poor is growing, and the spectrum of earned income is stretching at both extremes. Only time will tell, but hopefully things improve soon.

[Realitycheck]

My experience has been that people generally earn MORE money, but find better ways of hiding and redistributing it to skate around the tax codes. In essence, they make it LOOK like they earn less money. It's the WAY the income gets earned and the WAY it's paid that allows such circumvention of the taxes... Hence the calls for new and updated policies.

 

 

 

 

Unfortunately, in the current market, even those in the middle are struggling to move up or even just keep their head's above water. The disparity between the rich and poor is growing, and the spectrum of earned income is stretching at both extremes. Only time will tell, but hopefully things improve soon.

Yes, I was going to say something about that, the difference between high-income earners and the truly wealthy. People who have saved up a big nest egg or inherited a bunch of money have one distinct advantage over high-income earners, these big nest eggs have already been taxed. So they come up with sometimes elaborate money-making schemes to make more money with the money that they already have. Here is where methodologies run far and wide.

 

Some people are really conservative and put it all into interest bearing accounts. On the opposite side of the spectrum, we have gunslingers riding the options market either till it crashes or they go bust. And then, yes, we have those pesky little varmints that try to ease their way through the woodwork, loopholing in and around the law to save a nickel or dime, just because it's a "challenge" to the accountant, until he finds himself in tax court to get ruled on. Everybody wants to be their own judge if the question has not already been answered. Then, there are the true crooks, of course.

 

I really believe that this element, in general, is fading to an extent, since the era of Enron, Tyco, and Worldcom. Accounting has always been a conservative bunch and they really took a shot to the eye with all of these scandals involving gunslinger accounting. Bush really seemed to make it a priority to step up audits, making people, in general, think twice about fudging their numbers. And I really believe that the accounting industry will be even more conservative in the future and less tolerant of outlying gunslinger accountants tarnishing their titles.

 

Excuse me for taking this so off track. So the topic is, why should we have graduated tax brackets that favor the poor, along with welfare that favors the poor, not to mention ss that benefits everybody?

 

Because if we didn't, only the Mexicans would do the work here?

[Severian]

I think the biggest problem with progressive taxes is that they don't tax the rich the most. They tax the middle classes the most. The rich can pay for tax lawyers to find tax loopholes.

[Sisyphus]

 

Excuse me for taking this so off track. So the topic is, why should we have graduated tax brackets that favor the poor, along with welfare that favors the poor, not to mention ss that benefits everybody?

 

 

What the hell. No, that's not the topic at all. Did anyone read more than the title and first sentence of the OP?

[iNow]

I really don't know how a continous function applied to our existing definition of "tax bracket" would work. The concept of a bracket itself implies enclosure, so perhaps you can help me better understand the idea being presented.

 

I also apologize, as I believe much of the tangent is a result of my response to post #2 instead of post #1 at post #3.

[Sisyphus]

The idea is doing away with the brackets in favor of a function. For example, instead of paying 20% at X dollars and 30% at X+1, there is a single function of X that determines percentage. So a graph of income vs. percentage income tax would look like a continuous slope instead of a series of plateaus.

[Pangloss]

Interesting OP, Sisyphus. Thought provoking as always.

 

In terms of "smoothing out the cutoffs", I guess the question that occurs to me is: mathematically speaking, isn't "a percentage of your income" as smooth as the curve can get? Why not just do it that way?

 

I get that that means that some people would be harmed by this, but isn't that really a temporary problem simply in need of adjustment based on obvious market pressures? If you can't pay your bills, you can't work that job. Isn't that a self-correcting problem?

 

I'm kinda playing the devil's advocate here for the sake of discussion, but it's a logical question, or so it seems to me.

[Realitycheck]

Interesting OP, Sisyphus. Thought provoking as always.

 

In terms of "smoothing out the cutoffs", I guess the question that occurs to me is: mathematically speaking, isn't "a percentage of your income" as smooth as the curve can get? Why not just do it that way?

 

All I can see that has kept it from being changed is that the original law that signed graduated tax into legislation was an actual Constitutional Amendment.

When the income tax legislation was introduced in the Senate in 1894, Sen. Aldrich had come out against it, saying it was "communistic and socialistic," but in 1909, he proposed the 16th Amendment to the Constitution, with the support of President Taft, which called for the creation of a progressive graduated income tax. It was ratified in February, 1913, and levied a 1% tax on all incomes over $3,000, and a progressive surtax on incomes over $20,000. Although praised by reformers, conservatives said it was "a first step toward complete confiscation of private property."

http://www.the7thfire.com/new_world_order/final_warning/federal_income_tax.htm

 

 

View the extent to which it affected public opinion.

 

THE INCOME TAX

In 1913, almost 300 years after the landing of the Pilgrims and 137 years after the founding of the Republic, America submitted to the curse of the Marxist income tax, an income tax that was as alien to the faith of our forefathers and the nation that they founded and as radical a departure from historic Christian civilization as it was unscriptural. A people who had robbed God and denied him his tax and had failed to tithe to support the Christian social order which their forefathers had bequeathed to them, were now being robbed by Caesar through the income tax to finance a new social order, that of Karl Marx. It was Marx, that prophet of the overthrow of Christian civilization, that called for a heavy, progressive income tax in the Communist Manifesto back in 1848, in order to replace and repeal the tithe, the pillar of Christian society, and to finance his statist program of anti-Christianity. As Samuel warned the Israelites when they sought a king other than Jehovah, an ungodly state will appropriate the tithe to itself as an earmark of its tyranny (1 Samuel 8:15-17).

 

The tithe is not particularly Jewish or merely an Old Testament institution, as some Christians mistakenly and disastrously contend. Abraham paid tithes to Melchisedek long before the founding of the Hebrew State and the promulgation of the law from Sinai's heights. The tithe is an inherent part of God's creation order and affects all men. The question is not, is there a tithe, but rather, to whom will it be paid? Men will pay a tithe, and they will be taxed to support some social order. The increase of God's creation will be taxed, but will it be given to God by just and faithful stewards or will it be exacted from an apostate people to finance the tyranny of a socialist totalitarian welfare state? Marxism is Anti-Christ, and the Marxist income tax is designed to rob God of his portion of the increase of his creation and offer it to the Anti-Christ.

 

God's income tax is equitable. He that receives more pays more. As scripture saith, "For unto whomsoever much is given, of him shall be much required", which is confirmed by the parable of the talents. It is clearly just that he who receives, by the gracious providence of God, a greater share of the bounty of God's creation is under greater obligation to God and is under greater obligation to maintain a productive, godly social order. All men pay an equal share and all men are left an equal and generous share. The Marxist income tax, by contrast, is neither just, equitable nor reasonable. It is designed not to maintain but rather to be destructive of God's social order. Marx called for a heavy graduated income tax. It was designed to overthrow a productive order, to have a socially chaotic leveling effect and to rob the workman of his hire. Like a destructive two-edged sword it undermines free enterprise and private property and penalizes productive effort, while it finances every form of tyranny and depravity. It taxes God's creation to destroy God's social order with an avenging greed that consumes and extorts as much as 90% of the fruit of one's labor.

http://amprpress.com/income_tax.htm

[Pangloss]

(shrug) That was then, this is now.

[ecoli]

I think the biggest problem with progressive taxes is that they don't tax the rich the most. They tax the middle classes the most. The rich can pay for tax lawyers to find tax loopholes.

 

The middle class thus winds up paying for both entitlements to the poor and corporate subsidies to the rich... grrr.

[ParanoiA]

So what can be done about it? The most obvious answer would be to do away with all these programs entirely' date=' but that's a drastic solution which would almost certainly do more harm than good, and I'm not terribly interested in pursuing it. We can argue back and forth all day the "fairness" of graduated income tax, but at the end of that day the fact that we need that revenue won't have changed.

 

What I'll throw out there is actually much simpler: smooth out the cutoffs. Instead of discontinuous income brackets, use a continuous function. The percentage you pay could still be dependent on income, but there would never be a point at which making more money would result in keeping less money. Yes, it might make figuring things out a bit more complicated, but the again, maybe not. We live in the digital age, no? Would plugging in one variable really be harder than a fixed percentage flat tax, which is among the more drastic proposed "simplification" measures?[/quote']

 

Well of course it would be better than what we have now, but in the previous paragraph you boxed in the debate.

 

The government never asks "how's the public going to pay for this?". They just assume they must need all of the revenue. When we propose to cut taxes, the first thing we hear is "how are we going to pay for these programs"? Answer: we're not. We're going to do without, on a government level, just like the rest of us do individually. I can only go into debt so much, then I'm cut off and I have to sacrifice to make ends meet, and get back on track. This is responsible, market driven, survival driven common sense. I see no problem with this at all.

 

So, yeah, a graduated "function" is way better, no doubt. I like it. But it assumes that taxes are graduated purely by economic success - as if the american government should only be appreciated for its economic advantage.

 

I like a flat percentage, because everyone is impacted more - so everyone CARES what the money is spent on.

 

If rich people are paying for the bulk of everything in revenue - with a graduated function or otherwise - then we agree to all kinds of silly programs and entitlements and inflate the function of government, like healthcare for people making 3 times the poverty rate or invading small countries to secure oil or whatnot.

 

Everyone should pay for the benefits of the american government. Not just the economicly successful. And the more who have a monetary stake in its performance, then the more who are paying attention.

[Mr Skeptic]

An evil thought has just occurred to me. If the government get higher tax rates from the extremely rich than from others, the government could increase its revenue by increasing the number of extremely rich at the expense of others. > Perhaps the government isn't as worried about the disappearance of the middle class as they would have us believe

[john5746]

One of the persistent claims of fiscal conservatives is that so-called "progressive" policies like graduated income tax, welfare, or social security are unfair and harmful to the economy by punishing economic success and rewarding failure. Like most broad, provocative generalizations in politics, this claim is (by my statistical analysis) about 80% bullshit. If it were actually true, nobody would try to become rich, because it would be more advantageous to be poor. Obviously we don't have that problem, nor would we even if we managed to cut off "corporate welfare" or close all the various loopholes those with a lot of money can take advantage of to pay far less than you might expect. The profit motive is very much alive and well and not going anywhere.

 

Lowering taxes tends to increase consumption and short term investment vs longer term capital investment for tax shelter purposes.

 

Still, there is that 20%. As a general rule, it's always better to make more money, but there are exceptions, as anyone who just barely qualified for a higher tax bracket can testify.

 

If you barely qualify for a higher tax bracket, you barely pay the higher tax rate on just the amount over the limit. I do not see how this will result in less net income.

 

 

But it assumes that taxes are graduated purely by economic success - as if the american government should only be appreciated for its economic advantage.

 

 

The government should be appreciated for more than economic success, but revenue is paid in $, not blood and sweat. The latter two are hidden in every greenback and I would argue that the poor and middle class have provided the majority of that blood and sweat equity that goes unseen in every dollar. All of us are in debt to one another for this equity that has required sacrifice so that we have an opportunity to succeed. The more we acquire, the more in debt we are to soldiers, firemen, policemen, etc.

 

 

If rich people are paying for the bulk of everything in revenue - with a graduated function or otherwise - then we agree to all kinds of silly programs and entitlements and inflate the function of government, like healthcare for people making 3 times the poverty rate or invading small countries to secure oil or whatnot.

 

Everyone should pay for the benefits of the american government. Not just the economicly successful. And the more who have a monetary stake in its performance, then the more who are paying attention.

 

Good point on the people caring more, but the federal government will run a debt, so it doesn't seem to worry about being low on the revenue side. Most important is to never appear to raise taxes.

[ecoli]

If you barely qualify for a higher tax bracket, you barely pay the higher tax rate on just the amount over the limit. I do not see how this will result in less net income.

He probably meant the other way, narrowly missing the lower tax bracket by making too much money.

 

The government should be appreciated for more than economic success, but revenue is paid in $, not blood and sweat. The latter two are hidden in every greenback and I would argue that the poor and middle class have provided the majority of that blood and sweat equity that goes unseen in every dollar. All of us are in debt to one another for this equity that has required sacrifice so that we have an opportunity to succeed. The more we acquire, the more in debt we are to soldiers, firemen, policemen, etc.

Doesn't that mean there would be less incentive to gain more money... why try harder to make more money when the gov't. is going to take more money. Wouldn't it be better to not work hard and receive your entitlement check every month?

I mean, I'm sure that there aren't a lot of people who enjoy being poor, but I bet there are people who would rather stay poor and receive a reliable source of income than to work really hard and only potentially rise on the socioeconomic scale.

 

 

Good point on the people caring more, but the federal government will run a debt, so it doesn't seem to worry about being low on the revenue side. Most important is to never appear to raise taxes.

 

Yeah, politicians will say the darnedest things to avoid saying they'll raise taxes, at least on their likely voter base...

 

But do people really think they won't an economic backlash when politicians (democrats) claim they'll only raise taxes on the rich?

[john5746]

He probably meant the other way, narrowly missing the lower tax bracket by making too much money.

 

Still don't understand:

 

If I make 100,000 at 20% tax, then I take home 80,000

 

If I make 110,000 and the extra 10,000 is at 30% tax rate,

 

then I take home 80,000 + 7,000 = 87000.

 

 

 

Doesn't that mean there would be less incentive to gain more money... why try harder to make more money when the gov't. is going to take more money. Wouldn't it be better to not work hard and receive your entitlement check every month?

I mean, I'm sure that there aren't a lot of people who enjoy being poor, but I bet there are people who would rather stay poor and receive a reliable source of income than to work really hard and only potentially rise on the socioeconomic scale. .

 

Very true on the low wage scale, which I am not talking about. Now if the tax rate on millions is at 40%, I still want that 60%. If too high, it does provide less incentive, but mostly it just encourages investment in long term capital or tax free structures(muni-bonds, etc.)

 

 

But do people really think they won't an economic backlash when politicians (democrats) claim they'll only raise taxes on the rich?

 

The perception is that democrats just increase spending and increase taxes. Actually, there is some truth to that, but closer to the truth is that the democrats tend to spend in different sectors than the Republicans. Both spend.

[iNow]

Still don't understand:

 

If I make 100,000 at 20% tax, then I take home 80,000

 

If I make 110,000 and the extra 10,000 is at 30% tax rate,

 

then I take home 80,000 + 7,000 = 87000.

If you make 100,000 at 20% tax, then you take home 80,000.

 

If you make 100,001 at 30% tax, then you take home 70,000.

 

 

What is being discussed is (I think) finding the best way to ensure that those who make more money before taxes will never take home LESS money than those who actually do make less money before taxes... as in the example above.

[Realitycheck]

Actually, john5746 is right. Given the specified parameters, the higher earner will take home a lesser percentage than the lesser earner because he is rightfully taxed higher. And the tax brackets are graduated.

 

I think that maybe the IRS handles our money like the bank. Everybody's first $15,000 goes into one account, then anything between $15,000 and $35,000 goes into another account, and so on and so on, you know, like when they add up your withdrawal by the different values of currency at the bank? This way, they can keep their apples with their apples, maybe. Accountants tend to be like that, for some strange reason.

[Pangloss]

This thread has become almost as confusing as my last 1040.

 

Are you guys sure you're talking about the same thing? I was under the impression that John was talking about a proposed taxation approach, but then iNow and AgentChange seem to be responding with how things work currently.

[Severian]

If you make 100,000 at 20% tax, then you take home 80,000.

 

If you make 100,001 at 30% tax, then you take home 70,000.

 

Really? Is this how it works in the US? I am very surprised. In the UK, you only pay the higher rate on the amount you are over the threshold. So in this case you would only pay the 30% on $1.

[iNow]

Really? Is this how it works in the US? I am very surprised. In the UK, you only pay the higher rate on the amount you are over the threshold. So in this case you would only pay the 30% on $1.

 

I need to clarify that I wasn't posting as Pangloss stated I was. I was not posting based on current tax structure, just explaining what I saw as a problem in understanding.

 

Putting it the way you did above (only pay the 30% on the $1), I think that works well. The first 100K @ 20%, then what's on top of that @30%.

[Realitycheck]

This thread has become almost as confusing as my last 1040.

 

Are you guys sure you're talking about the same thing? I was under the impression that John was talking about a proposed taxation approach, but then iNow and AgentChange seem to be responding with how things work currently.

 

Actually, since 1913, tax computation has been tallied similar to what follows. These tax rates are about ten years old, so they have no bearing on the current tax structure, but you should get the general picture.

 

On your first $15,000, you are taxed at 15%.

On money made from $15,000 to $25,000, you are taxed at 20%.

On money made from $25,000 to $40,000, you are taxed at 25%.

On money made from $40,000 to $75,000, you are taxed at 30%.

On money made from $75,000 to $100,000, you are taxed at 35%.

[Pangloss]

Right, and I think that's a "yes" to Severian's question above (Post#21). I think where I got confused is when you (agentchange) replied to iNow thinking that he was talking about the current situation. I think he (iNow) was talking about this new, proposed system, that Sisyphus brought up earlier in the thread.

 

(Does that sound right to everyone?) (lol)

[Realitycheck]

OK, I see where you are coming from.