Perhaps the perspective of a tax professional and academic can add some insight into this....
Yep- there it is, the usual dance of the anti-tax zealot...
In 2007, the top 1% paid an average federal tax rate of 22.5% on 22.8% of all taxable income. In 1980, prior to Reaganomics, they paid 34.5% on 8.5% of all taxable income.
Which is more, 22.5% of 22.8%, or 34.5 of 8.5%?
Statistics are great, except when they're not understood or used to mislead....
Yes, Reagan era tax law cut top rates, but also eliminated almost all deductions/write-offs available that top earners (or anybody really) took advantage of.
What was the result?
HIGHER taxable income and lower rates. Which results in a higher tax bill, high rates on a smaller taxable income or lower rates on a higher taxable income?
Reagan didn't cut taxes nearly as much as left claims. I know, I was doing tax returns for wealthy before, during, and after his term as President.
Because of the elimination of a slew of deductions, the % of taxable income of the wealthy increased dramatically just by virture of the deductions disappearing. It's simple mathematics (when one can remove the partisan "beam from thine eye").
As Zebo points out, top filers have myriad deductions and exclusions on their incomes, and they don't pay SS taxes on the vast majority of it, either- that's ~6.5% for ordinary wage earners. It's even more profound for the very top filers, who paid 17% on incomes averaging $263M in 2007.
He refers to incentive stock Options (ISO's). Yes,
if the holding period is met, the LT cap gain will be taxed at 15%. People complaining about this fail to take into account a number of important things:
1. The employee/CEO is NOT given the stock, they must PAY for it. The price is equal to the FMV of the stock at the time of grant. If/when stock is just given (or even a grant) for less than the FMV it is immediately taxable as wages and goes on a W-2 - it is treated the same as receiving cash.
2. The top corporate rate is 35% (except for a little bubble that is higher so as to make the corp rate a flat 35% - i.e., they are recapturing the lower brackets), the top individual rate is 35%. So, if a CEO is paid $1 million how much does the government make?
The answer is zero. The corp gets to reduce it's taxes by $350k ($1M x 35%). The CEO pays in $350K. This nets the gov zero.
However, for ISO's the corp gets NO deduction. The CEO pays 15%. So, ISO's are a good deal for the gov, they net out $150K.
3. The exec must hold onto the stock he bought for at least a year. This means they are assuming some risk, if the stock price doesn't rise, or falls, they lose money.
The hedge fund manager 'loophole' he mentions can be blaimed on Sen Chuck Schumer (D) of NY. He has thwarted all efforts to have that closed, including those made under the Bush admin. IMO, this needs to be fixed, even Buffet, who benefits from it, agrees.
Many claim residence in states where there is no income tax. They own a ranch in Texas, for example, where they spend a few weeks a year.
It doesn't work like that. States have their own rules on how (tax) residency is defined. Merely owning a home in TX or FL, or some other state with no personal income tax, is insufficient. If you do have a home in one of those states, you better be there for most of the year, or lie about it etc.
Meanwhile, they've offshored production of manufactured goods and many services, depriving the American economy and workers of income while increasing their own income. They also own the debt, and receive income from funds that would have been paid as taxes in a sane system. They created the need for more govt services and employment when they started paying foreigners rather than Americans, then flimflammed the electorate into borrowing the money to do it from them.
The US, unlike most all other countries, taxes it's citizens on world-wide income. Moving your company to a foreign country will not get you out of US taxation, we have massively complicated rules most people aren't even remotely aware of. Yes, it can be moved and hidden, but if caught you get a free trip to a federal penal institute.
You cannot stop off-shoring, IMO, unless and until you repeal big chunks of the Bill of Rights. We have, naturally, the freedom to pursue commerce abroad.
Lefties throw a fit about not respecting the civil rights of some non-US citizen accused of terrorism, but then turn around and demand evil rich Americans have theirs stripped.
They also throw a fit about building walls to keep out illegal immigrants, but then want those same walls to keep the evil rich locked in.
This has been an ongoing process for 30 years. The effects of compound interest over that period of time are profound on both sides of the debt equation.
Raising taxes at the top isn't the whole answer, obviously, but it's part of the answer, and is a necessity if we're to maintain any sort of social cohesion at all.
But, rave on, fools. We live in a world where work is a necessity for the vast majority, given that the vast majority have no capital, in a country rich in capital and increasingly scarce in work. That capital/work partnership was the basis of our greatness, the bedrock agreement implicit in the New Deal. If that deal is truly broken, and I think it is, then we need to find other ways to create the kind of cashflow in the domestic economy that allows us all to thrive, not just a very, very few to live at a stratospheric level of opulence.
As a conservative, even I can agree that tax increase at the top may be necessary. However, we must be careful not to raise them too much or it becomes a disincentive, no economists deny this. Add the top US rate of 35%, plus Medicare at 1.45% and state & local income taxes, we're already close to the magic number of 50% in many areas of the country.
Government spending must be decreased. It has steadily risen since 1900 (from about 7% of GDP) to almost 50% of GDP now. Given the recession and increased spending by this Congress, I wouldn't be surprised if we have passed the 50% mark. That is unsustainable.
http://www.usgovernmentspending.com/us_20th_century_chart.html
Maybe what we really can't afford are the world's lowest tax rates on huge incomes
We do not have the "world's lowest tax rates on huge incomes", not by a long shot.
First, one should be aware that, IIRC, other than Switzerland we are the only country to have 'state & local taxes', therefor looking at our federal rate is incomplete.
Our corporate rates are, IIRC, the second highest in the world.
Nor is our personal rate that low. Yes, countries like France have a higher rate (50%), but takes 30% right off the top. What's 50% (tax rate) of 70% (income), yep an effective rate of 35%, same as our top rate. BTW: they also have other tax breaks we don't. Comparing tax rates among countries is not 'apples to apples' as many pretend.
Hope that helps,
Edit:
Cliffs Jhhnn is wrong or misguided.
Fern