Two Americas, Two Tax Codes

[dtotire]

Two Americas, Two Tax Codes

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By DOROTHY BROWN
Published: March 8, 2009

Atlanta
WARREN BUFFETT knows there’s something very unfair about the American tax system. He’s often complained that while his 2006 tax rate (for federal income taxes and Social Security withholding) on $46 million of income was 17.7 percent, his secretary’s combined tax rate was 30 percent.

There are effectively two tax systems in America: one for the very rich and one for the rest of us. Income from stock dividends and capital gains, which makes up a disproportionate amount of the earnings of the very rich, is taxed at 15 percent. But the bulk of what the rest of us earn — wages and interest from savings accounts — is taxed at up to 35 percent. Though President Obama’s recent tax proposals are progressive and comprehensive, his reforms don’t do nearly enough to address this significant disparity.

Yes, President Obama’s plan would eliminate the loophole that has allowed hedge fund titans, whose income comes in no small part from management fees, to be taxed at just 15 percent instead of the ordinary income tax rate.

Families earning more than $250,000 and singles earning more than $200,000 would likewise see taxes on their wages and interest increased to a top rate of 39.6 percent from 35 percent. And the rate on both capital gains and dividends on the sale of stock would increase, but only to 20 percent from 15 percent. These changes lessen the unfairness in our tax system; they don’t eliminate it.

The gap between the tax rates for the rich and the rest of us is relatively recent. Until 1921, capital gains were taxed at the same rate as ordinary income. Then Congress enacted a law that taxed capital gains at 12.5 percent while ordinary income was taxed at as much as 58 percent.

In the decades since, the tax rate on capital gains varied — sometimes it increased, sometimes it decreased. But with the exception of a brief period in the late 1980s, it was always lower than the tax on ordinary income. That was not the case for stock dividends, which were taxed like wage income and savings account interest — that is, until President George W. Bush and Congress in 2003 gave dividends the same preferential treatment as capital gains. The Bush tax cuts moved our tax system too far in the wrong direction.

There is a flip side to raising the tax rates for dividends and capital gains. In this market, there won’t be too much capital gain to worry about. So how should we treat capital losses?

Under current law, capital losses that exceed capital gains can be deducted up to $3,000 (losses above that limit can be carried forward indefinitely into future tax years). If we increase the tax rate on capital gains, then a more generous limit on capital losses should almost certainly be allowed. During the presidential campaign, Senator John McCain proposed increasing the $3,000 offset against ordinary income to $15,000. It’s an idea worth dusting off.

The question of how to tax capital gains and dividends is one of fundamental fairness. Why should tax law treat income from savings accounts differently from income from a diversified stock portfolio? Either we push up the rates on corporate dividends and capital gains or we lower the rates on wages and interest: it’s all income and it should all be taxed at the same rate.

Dorothy Brown is a professor of tax law at Emory University.



http://www.nytimes.com/2009/03/09/opinion/09brown.html

[FormerDittoHead]

1. Two points. 1) 401k's and 2) Wealth taxes

First off, I think it's sadly perverse that those who have taken a beating in the market but who are soon retiring will be expected to pay taxes on what they take out of their 401k's upon retirement, even though they've lost half of what they put in.

Next, no one dares mention this, but a WEALTH tax LIKE THEY HAVE IN OTHER COUNTRIES LIKE FRANCE (oh, it's POSSIBLE) would be the solution to many of these problems, AND IT WOULD BE FAIR.

It would be fair because, as most people here know, the vast majority of tax dollars go into the military whose job it is to... PROTECT WEALTH. So it's only fair that those WITH wealth should pay SOMETHING PROPORTIONAL toward its protection.

Instead, because of various practical matters, income is used as a means to tax.

A form of wealth tax is ALREADY used in this country. It has been since before the Revolutionary war and is in every single state and every single town - it's called property taxes. The more your property is worth, the more tax you pay.

While I have no expectation of enabling a wealth tax in our country in our lifetimes, I think that planting such a seed will help orient some who don't realize some of the injustices of taxing wages.

[Tuesday Afternoon]

2. ~

:kick:

[Tex-Slim]

3. THE SIMPLE ANSWER

A consumption based scheme solves all the problems, if you think about it. The more a rich person buys, the more ostentatiously they choose to live, the more tax they pay. Certain items, basics, you know, especially basic foodstuffs, but not highly processed foods, soft drinks, snack foods, would be exempt. No more lawyers dedicating their lives to finding new and ever more clever ways to cheat. Automatic collection at point of sale. A vastly reduced IRS that is more efficient and doesn't bother regular people who just made a mistake on their way too complex taxes, or the old lady who is too senile to be able to figure out hers, or to realize she needs an expert, that she may not be able to afford anyway!

[zalinda]

5. You've forgotten the main problem

It's not the poor, or even the majority of the middle class who don't pay taxes, it's the rich. And, I'm sorry, but they can buy anything they want, from any part of the world, and avoid consumption taxes. They have most of the money, they "earn" most of the money, but we spend most of the money, because the vast majority of us can't afford to save or invest. The consumption tax is a rich persons wet dream, they would pay less tax than they do now.

zalinda

[Igel]

4. Risk. n/t