Need to Know: January 11, 2013: A tale of four tax returns


As the discussion goes on in Washington about revising the federal tax code, “Need to Know” profiles four New Jersey residents with dramatically different incomes to demonstrate how current tax regulations disproportionately benefit some Americans more than others.

Their returns not only look very different because of their wildly different incomes.  They also offer a glimpse into the enormously complicated U.S. tax code where a set of very particular and personal circumstances – from having kids, to owning a home, to living in a state with high taxes, to the way they earn their money – can change the tax rate paid by multiple percentage points.  Need to Know’s Megan Thompson reports.

>Read the full transcript.

Taking on the tax system:

Five tax terms you need to know

Confused about Earned Income Credits and capital gains? Five terms that dominate the tax debate.

Cleaning up the tax mess

A panel of tax experts who debate how to fix the tax mess. Former New York Governor Eliot Spitzer; Emory University tax law expert Dorothy Brown; Bruce Bartlett, who served presidents Reagan and George H.W. Bush; and Cato Institute economist Dan Mitchell. (March 2012)

FRONTLINE: Tax Me If You Can

In “Tax Me If You Can,” FRONTLINE correspondent Hedrick Smith investigates the rampant abuse of tax shelters since the late 1990s.

Watch more full episodes of Need to Know.

 
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Comments

  • chuckomaha

    I did not see the entire program but did you share that there are capital gains and losses; that for capital gains to be treated at the 15% rate requires that the asset be held for longer than a year; that to get the capital gain the individual must risk money that could be lost; this is very different than my earning a salary showing up at a job. You can make $85K with minimal risk or you can take extraordinary risk and make money on appreciation of capital. Should they be taxed the same?

  • http://www.facebook.com/hawkeye.mash.1 Hawkeye Mash

    I thought this was a one sided look.

    1. The rich guy donated a lot to charity which the poorer people did not. If it is not deductible, who will donate to charities. Whom would you rather give money to: the government which builds a bridge to nowhere or the local boys and girls club or united way?

    2. The rich guy earned less wages than a compare. But he had invested (ie done without) during earlier years to do so. Should he be punished for this? That invested money also goes to provide loans for the poorer folks. Is this bad?

  • ann

    Let’s see, the guy has $68,000 to spare. He could put the money in the bank for later to buy a flashy yacht, But he decides to gives it to those who need it more, meaning he no longer has the money. But you think he should still pay tax on it? On the money he never kept for himself???

    I get it. You’d rather people keep the money to themselves, pay a portion of it as tax to Uncle Sam, just don’t give it to charity and have an “unfair” tax break!

    I would have expected Fox news to use that kind of reasoning, not Need To Know!

    Oh and by the way, wasn’t there a fellow at the end of the program asking us to “donate” to keep the programs going? But it’s such an unfair tax break I’m ashamed of it now. So I won’t donate any more!

  • Carolina

    People who own their own business (self-employed) also get tax benefits such as being able to deduct their car expenses for travel to their office or business location while a W2 employee cannot. Other employee business expenses, such as continuing education, must be in excess of 2% of their income before the W2 employee can deduct them. There are lots of inequities.
    True charity should not need a tax deduction!!.
    All earned income should be subject to social security, and not capped.
    Rental income should be subject to social security and Medicare after expenses are deducted. That income is earned income. The mortgage interest deduction should be able to be taken only on the primary residence .

  • http://www.facebook.com/rncox01 Richard Cox

    Let’s Solve Problems Rather Than Spout Rhetoric – Support these two ways to avoid the Fiscal Dilemma

    That’s why I created a petition to The United States House of Representatives, The United States Senate, and President Barack Obama, which says:

    (1) Let’s Solve Problems Rather Than Spout Rhetoric
     
    As the President proposed in his speech to the United Auto Workers Union and as Warren Buffet and George Soros agree with, the upper echelon of earners pay taxes at a lower rate than the average middle class person, which is an extremely unfair position to be in that needs to be rectified.

    On the other hand, the counter argument has been that increasing taxes on the wealthy will discourage job creation.

    The problem has been that a blanket lowering of taxes on the well-to-do does not in general promote the trickle down economic theorem first proposed by Reagan. Instead, we see the wealth going overseas in the form of outsourcing or being hoarded and not being allowed to “trickle”.

    We suggest that indeed taxes do need to be increased on the upper class to be in align with what the rest of us have to pay, but to alleviate the trickle plug in the form of a dose of tax write-off “Flomax”. Allow corporate elites who increase domestic employment to take write-offs that lower their taxes. Effectively they then offset their own taxes by bringing more domestic tax payers into the fold as domestic employment is increased.

    As we now should have more domestically employed we will have increased revenue going into Social Security thru FICA, thus making it solvent again as well as alleviating Medicare concerns.

    For the nonbusiness owning elite (movie and football stars, second
    generation wealth inheritors, etc.) encourage foundations, mutual funds and LLCs to be developed which in turn invest in companies to increase domestic employment, then pass the write-offs through to their members.

    With the write-off proviso we can encourage the upper class to do what is in their own interest to do, which is to lower their own taxes by increasing the domestic workforce, effectively shifting the extra taxes to those who are hired. This I view as good government influence.
     
    (2) Let’s Solve Problems Rather than Spout Rhetoric.
    We need to remove the incentives for offshoring jobs so tax that advantage away and put it towards the deficit as described below.

    Investing in Our Future PROPOSED: – Economic regulative legislation to ease domestic job issues, reduce the deficit and the Social Security shortfall.
    Implement this as another tool of the Fed, to be administered impartially using row economics, just as interest rates are. That provides a means to regulate money flow to and from the national economy. Remember we are not doing outright protections (as in tarriffs), but setting windows within which free trade flows as normal. But this way we protect domestic businesses from being overwhelmed while still forcing them to be efficient, we remove the advantages of offshoring and maintain good standards of domestic living rather than letting it be “watered down”. And so here is another source of revenue other than direct taxation we need to use which no one seems to want to talk about. In short:

    o Use carefully placed and actively monitored surcharges on foreign products to negate labor cost advantages and bring the labor costs of imports that could be made here near what it would cost to make those products here. This is an economic regulatory mechanism, NOT protectionism, that should be another impartially administered tool of an independent body such as the Fed.

    o Apply the revenue of said surcharges towards the national deficit, then when that is low enough towards the general revenue, thereby lowering taxes for all citizens.

    o Exclude products made here by foreign companies who choose to locate plants here, hire domestic labor and abide by our nation’s labor laws. (We may import products but not labor needs.)

    o Do not exclude domestic companies which export their labor needs outside this country then bring their products made there back here to sell. (We may export products but not labor needs.)

    o Provide tax credits to those companies which increase domestic employment, impose additional tax on those who outsource.
     
    As we now should have more domestically employed we should see more revenue going into Social Security thru FICA, thus making it solvent again :-) . After all, Social Security as originally conceived is the minimal level income safety net for the old and disabled paid by domestic labor thru the good faith contract of the active generation helping take care of the retired and disabled. So if we keep letting our jobs go overseas who will pay YOUR Social Security? Exporting jobs short circuits this mechanism, requiring alternative funding sources like what we’re proposing.

    This will maintain a good standard of living within our country. It might encourage other countries to establish and maintain equally good standards of living for their citizens as well, since the cheap labor and subsidy advantage will be removed. What could be better?

    That’s the answer to our dilemma, keeping existing jobs here by removing the incentive to go outside the country while preserving our nation’s standard of living. This ought to have bilateral support, when it is pointed out that with this mechanism local businesses large and small would not be driven out of business by subsidized or lower cost labor overseas. With that level playing field then it is the quality of their services and products that will dictate whether they survive or fail.

    It is most important when deciding how to implement this mechanism to insure that the so-called “free trade” windows are set as impartially and independently as possible according to market conditions thru an agency not particularly holding to political influence (no “favored nation” or lobbying special treatments, marketing costs independently derived at via market monitoring and reporting), e.g., the FED, using input from another independent accounting agency such as the GAO. Otherwise it would be but one more source of political controversy.

    It also is just as important that revenue from such a surcharge NOT be used for new spending, but 1) to lower the deficit, then 2) to lower the general taxes on everyone by funneling into the general revenue pool, out of which all back owed IOUs to Social Security should be paid as soon as possible.

    One more remark before we go modifying the Social Security retirement age, in addition to a “means” test it needs to take in the type of activities one was engaged in while productive. Generally speaking, while desk or nonphysical intensive careers might be worked at into your 70s (providing dementia does not set in) if you worked at a physically hard job such as a coal miner, mill worker or general laborer you might well be worn out by the time you hit your 60s due to joint deterioration and arthritis. So maybe some justice to this: work at a physically hard job at lower pay but retire early or at a higher paying less physical job but retire later. It keeps the higher wage earners paying longer.

    Will you sign my petition? Click here to add your name: http://signon.org/sign/lets-solve-problems-rather-1?source=c.fwd&r_by=5254576
    Thanks!  

    Subject: Let’s solve problems rather than spout rhetoric. Revive the “Bring Jobs Home” Act

    Where do I stand: higher taxes or more jobs? – The tax break needed for working families (in addition to strengthening Social Security and Medicare) can be effected by removing now obsolete tax breaks for outsourcing jobs. So let’s draw attention to reviving Senate bill S.3364, the Bring Jobs Home Act , as it “Hits the Nail on the Head” with what’s wrong in this country.

    I created a petition to The United States House of Representatives, The United States Senate, and President Barack Obama, which says:

    The tax break needed for working families can be effected by removing now obsolete tax breaks for outsourcing jobs. Current tax law allows for the cost of moving jobs overseas to be deducted as a business expense. S. 3664, sponsored by Senator Debbie Stabenow, D-Mich., would end that tax break while continuing to allow a deduction for jobs returned to this country or moved within the United States. The bill would provide an additional tax credit for 20 percent of the cost of moving jobs back to the United States. On July 19, the Senate rejected, 56-42, a motion to take up the bill, which would encourage companies to bring jobs back to the United States. The motion fell four votes short of the 60 needed to invoke cloture on the motion to proceed made by Majority Leader Harry Reid, D-Nev. Four Republican Senators, Scott P. Brown of Massachusetts, Susan Collins and Olympia J. Snowe of Maine, and Dean Heller of Nevada voted with all participating Democrats to take up the legislation. No further action is scheduled on the bill.
    This really is neither a “Democratic” nor a “Republican” issue, but really a PEOPLE issue, that cuts to the central core of the economic and political problems we are experiencing in this country! A decreasing domestic labor force is at the core of the problems our country is facing today, not only Medicare and Social Security, which of course are paid for by the domestic labor force, and also the deficit in general as that is paid for by general taxed income. See http://rncox.newsvine.com/_news/2012/08/14/13265490-lets-solve-problems-rather-than-spout-rhetoric-the-tax-break-needed-for-working-families-can-be-effected-by-removing-now-obsolete-tax-breaks-for-outsourcing-jobs-so-lets-also-draw-attention-to-reviving-senate-bill-s3364-as-it-hits-the-nail-on-the

    Will you sign this petition? Click here:
    http://signon.org/sign/lets-solve-problems-rather?source=c.fwd.in&r_by=5254576
    Thanks!

  • http://www.facebook.com/realitycheck.santacruz RealityCheck SantaCruz

    Actually Carolina, commute miles are not deductible.

  • http://www.facebook.com/realitycheck.santacruz RealityCheck SantaCruz

    I was a bit disappointed in the trailer in that it showed how much the union worker paid in taxes, and didn’t show how much the millionaire paid – they reverted to percentages. Why not show apples to apples?

  • Morning Star

    That one guy made so much in unearned incme? I would love to know how he did that! Wow.

  • Steve frm Mt Vernon

    It is interesting that you are not counting the fact that capital gains are taxed once as corporate income and then again when passed to the investor. I feel that defining Rates as the standard as fairness is a red herring.

  • Matthew Garrett

    Great program, thanks for showing people real-world examples so they can work out why the tax system is not, in fact, fair at all. I wish more people paid attention to your program and so many others on PBS. The opposite of poverty isn’t wealth, it’s justice.

  • Retired CPA

    Unfortunately, this piece contained numerous inaccuracies that will only add to the general public’s misunderstanding of our complex federal tax system. As one example, let’s examine Stephen Moore’s assertion that half of us pay no tax, and that people making more than $116,000 pay 70% of the US taxes collected. That fact is relatively meaningless. When the current income tax became effective on March 1, 1913, 98% of the population paid no tax. ALL (100%) of the income taxes were paid by the wealthiest 2%. Don’t feel sorry for them. The top tax rate was 7% (yes, seven percent) on income above $500,000 – which would be equal to $11 million today. If 98% of us still paid no income tax today, and all income taxes were paid by people making more than $200,000, would you say these people could afford to pay a little more? If tax rates were still as low as they were in 1913, they definitely could. The percentage of our income taxes that are paid by the wealthy doesn’t tell us whether they are over-taxed or under-taxed. When Mr Moore cites his statistics, I fear that most people will incorrectly infer that wealthy people pay 70% of their income to the IRS.

  • Anonymous

    Steve, you are rather confused. You may be referring to dividends to a shareholder which are paid out of the profits of a corporation. But that is a flawed analysis. It is the new transaction that is taxed, the income, (from which the expenses of gaining that income are deducted) are taxed — as usual. But for now these dividends have a bargain maximum tax rate of 20% (up from 15%).

    Capital gains come when you buy something (stock shares, art, a business) and then later sell at a profit. That profit (less your not previously deducted expenses for achieving it) is what is taxed. That gain has not been taxed before. The capital, what you spent, the amount invested, is not taxed, only the increase which accrues to the investor.

  • Retired CPA

    All of your experts failed to explain the best reason for taxing long-term capital gains at lower rates than ordinary income. I’ll use my aunt as an example, but this happens more often than people realize. My aunt was a fairly low salaried social worker who never made enough to get into a high tax bracket. Around 1970, she invested $2,500 in EQT stock. The value of her stock went up some years, and some years it went down. Capital gains (sale price minus purchase price) are only taxed when the stock is sold. After more than 30 years, she sold the stock and her capital gain was more than $100,000. Her annual income was never even close to that amount. Economically, her stock averaged an annual gain of just $3,000 for over 30 years. But the entire gain (30 years worth) was taxed ENTIRELY in just one year – the year she sold the stock. Were it not for lower rates on long-term capital gains, she would have been taxed (as a single person) at the highest marginal tax rate for no reason other than 30+ years of gain was being taxed in a single year.

    Everyone focuses on whether a lower rate is appropriate on long-term capital gains. It clearly is, because taxing many years of gain in a single year may push the taxpayer into an artificially higher tax bracket.

    Capital gains taxation needs to be reformed, not by raising the rate, but rather by redefining the term “long-term” Currently, a long-term capital gain is gain from an asset held more than one year. That definition should be changed to an asset held more than 5 Years. That retains the justification for lower long-term capital gain rates, while taxing gains on assets held less than 5 years at ordinary rates.

  • Retired CPA

    Your piece made it sound unfair that one of your subjects wasn’t able to deduct his state & local taxes, and he wasn’t able to deduct his charitable contributions. You failed to note that he got an even better break. Every individual can choose whether to itemize deductions or claim a standard deduction. You pick the HIGHER of the two amounts. So when he chose not to itemize, his standard deduction (which he didn’t pay a dime for) was MORE than the sum of his contributions, state taxes, etc.

  • Anonymous

    So are you saying very directly you never give money; you just buy tax breaks? As Carolina rightly said above “True charity should not need a tax deduction!!”

    A lot of people donate a lot of money for charitable reasons that they don’t deduct from their taxes. Either they can’t (66% take the standard deduction) or won’t claim a deduction for gifts. And a lot of so called charitable deductions are for a person to pursue their own interests, furthermore a lot of “charities” are total ripoffs.

    Why should I with my taxes underwrite other people’s choices?

  • Anonymous

    Most investments are not an “extraordinary risk.” But with extraordinary risk you are betting on extraordinary rewards — just like when you buy a lottery ticket. You pay full rates on one; why not on the other? But when I buy Google shares at $300 to $400 then sell them at ~ $650 — well why should I have a special low tax rate? I didn’t create any jobs; Google didn’t see a penny of the money I put in; the money I paid went to some other investor and the money I got came from still another.

    And you are spending your life in your job — which could disappear at a time when there are practically no jobs to be had. That $85k you speak about? Those jobs are very few. The median FAMILY income is about $50K. $85K would put you in the top 15% and even higher if you had a working spouse.

  • Demar Henry

    While I recognize the need for our country to raise tax revenue to help pay for the abusive spending that has occurred for decades, the slant on this program was terrible. There was too much wrong in the show for me to spend the time typing. One person pays $14,000 in taxes, the other pays over $100,000 and the program describes the rich guy as getting more breaks. First of all, getting to keep what you earn is not a break! These two individual get the same police protection, garbage pickup, military protection, and other governmental services. Yet, one has to pay a higher price for the same services. The show twists it around by using percenages. My over simplified analogy is going to McDonalds. Mr Smith who earns $80,000 pays $5,50 for his Big Mac Value Meal. Mr Jones, you make $750,000 a year so your Big Mac meal is going to be $50.

  • http://www.facebook.com/rogerc.hinton Roger C Hinton

    I really think
    the tax code is about as jury rigged and fair as can be. The affluent give the
    mass amount to charity. They pay 70% of the taxes. The ones at the bottom are
    getting assistance. The system is tweaked as much as you can.

  • Tax Guy

    I think your program missed a great opportunity to explore the concept of “tax fairness”. Like everybody else, you focused on whether tax rates for the wealthy and the middle class are “fair”. Fairness is a matter of opinion, not a fact. Mr Schoenberg doesn’t think it’s fair to tax capital gains at lower rates than wages. I disagree because capital gains accrue over many years before being taxed entirely in the year of sale – thus forcing the taxpayer into an artificially higher tax bracket. Everybody has a different idea of fairness.

    Is it fair that our tax code is so complex that almost nobody (including Albert Einstein) can comprehend it? Recently I watched CNBC financial news for a half hour. A person who was financially sophisticated enough to sit in as co-host made three different statements about the alternative minimum tax. All three statements were wrong. I’m not saying it’s his fault. My point is that the laws are so complicated that only an experienced tax accountant or tax lawyer would have caught his errors.

    Is it fair that some people cheat on their taxes? What about making it harder to cheat? (It can be done). Is it fair that the code is so complex that it contains hundreds of tax traps for innocent taxpayers. For example, if a 71 year old person forgets to take a $10,000 required minimum distribution from an IRA, he can be PENALIZED $5,000 (50%) in addition to the tax. Forgot a required minimum what did you call it?

    Is it fair that taxpayers must waste countless hours every year to comply with unnecessarily complicated rules?

    Fairness is in the eyes of the beholder, but we should realize it involves more than one’s notion of how much tax should be paid at various income levels.

  • Teri A

    Interesting, thank you for this program. And I agree with the millionaire, people who work are the ones that are contributing the most. The rich should have higher taxes, it’s because of the work of the ‘people’, the reason the wealthy are able to reap the benefits, so they should give back.

  • Robert Emswiler

    You imply that everyone’s tax should be the same – just like the price of a Big Mac. Half of the taxpayers would not have enough money to pay their share.

  • robert emswiler

    Most capital gains are not taxed twice. Capital assets include far more than stocks (e.g. bonds, real estate, etc). Moreover, most stocks are NOT taxed twice anyway. Most corporations are S corporations. S corporation income is taxed only once at the shareholder level. The shareholder then increases his stock basis to avoid double tax upon disposition of his stock. Even with other corporations, only the gain attributable to the increase in net book value is taxed twice. Stock gain in excess of the increase in net book value is taxed only once.

  • MauDib

    Sorry, poor reporting for the half-truths presented: 1. Rich, compared a single person with a married person, of course the income tax rates are higher at the single rate. 2. Rich have the highest marginal tax rate; of course deductions which come off the top are going to help them more than middle class AND they have to actually part with cash to get those state income tax, home mortgage and charitable deductions.
    The expert Dorothy Brown had an opportunity for open discussion and instead told a series of Buffet-like half-truths. Rich are taxed a low rate for dividends and capital gains but behind most business profits are a great deal of financial risk, owner hard work, and years of payroll many times the profit. Plus most of the businesses involved in taxable dividends and capital gains are too large for passthroug entity status, e.g. S corp, so the business has paid 35% tax at the entity level. Ex, $1 of profit is taxed at 35% at the corp level and 65c dividend to shareholder taxed at 23.8% adds another 15.5% for a total of 50.5% tax rate.

  • MauDib

    Ms. Brown could have provided a real life example like this one: Worker 1, $10 per hour, three kids $23K in takehome pay with OT. Worker 2, professional $72K salary, $54K takehome pay after deductions for income,FICA, med ins., etc. Worker 1 pays less than $500 per year for 35 years = $17,500 for lifetime medical care from 65 on and Worker 1 gets annual Earned Income Credit check of $5300 which more than eliminates his federal pension plan program contribution aka Social Security, for takehome pay of $28K. Fairness can be argued but clear that Worker 2 (and millions like him) is paying for Worker 1.

  • B Wilds

    The American Tax System is a massively complex nightmare that needs reform. One thing that Need To Know should of pointed out in order to be fair is that other subsidizes go to those with low incomes, these include, but are not limited to food stamps and free healthcare.

    More important is that the spending side of government rivals the revenue side as a problem, the spending is riddled with inefficiencies and waste, on top of that government debt and and unsustainable deficit spending is robbing all Americans of a decent future. The spending numbers are very ugly and shocking;

    http://brucewilds.blogspot.com/2013/01/ugly-math-made-simple.htmlties

  • B Wilds

    The claim that even the poor pay various taxes other them income tax was made but it was not pointed out that they also get a slew of benefits that higher income Americans are not eligible to receive.

  • B Wilds

    Much more would have been reveled if a one presenter was not thrown into the mix, this skewed the reality of looking at a representation of average Americans. Also with low incomes are eligible to receive many benefits denied to others.

  • Anonymous

    Good show. It is a good thing to be exploring the concept of tax fairness and getting diverse perspectives.

    However, taxes cannot be evaluated on their own, divorced from other issues. The fact that 47% of the public (up from about 33% before Wall St. crashed the economy) don’t pay income tax is certainly not because the low income lobby is running roughshod over the other lobby groups. It’s because of a number of factors that have reduced employment and greatly tilted the balance of power in favor of Capital (over Labor). These factors include a deliberate war against the labor movement, advancing automation, the destruction of small farming in the developing countries (creating a glut of so-called “unskilled” labor), free trade, financialization of the economy, and more. Basically, the economy has been rigged so that those who are already wealthy will continue to make most of the money. In my view, the working class is paying the costliest tax of all, the “chump change” tax, in that they are not paid adequately for their work. We then compound the insult by resenting any breaks they get in the federal tax code (and resenting any other assistance they get, too).

    Moreover, as a number of interviewees pointed out, it’s misleading to look merely at federal income taxes when determining tax fairness. A number of studies have shown that when all taxes are considered, at the state and local level as well as the federal, we already have approximately a flat tax system. This is because state and local tax codes tend to be regressive, and federal payroll taxes are unquestionably regressive.

    As we look at this issue, we should also bear in mind trends in income and wealth. Certainly it’s hard to say the rich are getting screwed when their share of the nation’s income and wealth keeps rising. The top 1% now hold more wealth than the bottom 90%.

    One negative about the program was the amount of time it gave to Steven Moore, who in my view has never been one of the world’s deeper thinkers. His argument that you need to keep taxes on capital gains low in order to reward those who are creating new industries and jobs is a joke. We had plenty of innovation and capital investment when these taxes were much higher. Also, most of these capital gains are from speculation, not true capital investment. For example, with a public firm, once the IPO is over, when those shares are traded on the exchange, any gains don’t reflect real investment. Dollars are simply moving from one investor’s account to another. If I pay Suzy twice what she paid for 100 shares of Acme Corp., that’s just money flowing into Suzy’s pocket, it’s not going to Acme to finance capital investment.

    Moreover, a number of players on Wall St. are big enough to affect the outcome of their own bets, whether they be in stocks, derivatives or other instruments. Insider trading is also rife. Plus, the big boys can count on special help from the Fed and the Treasury when they get in trouble. So, the playing field is rigged in their favor. Some of these hedge fund speculators are pulling in over $1 billion per year. Do you think they’re earning that bonanza?

    Another topic that should be explored with a more critical eye is corporate taxes (and corporate welfare). They have been slashed and slashed over the years, and to whose benefit? Furthermore, many corporations, while at the same time funding anti-tax and anti-government groups, are making huge profits feeding at the public trough, through no-bid and cost-plus contracts having little oversight. If you want to be thoroughly disgusted, watch the documentary “Iraq for Sale,” highlighting hideous war profiteering during the Iraq War.

    Changes to tax code are needed, but not because it’s too generous to the poor. Let’s simplify it and shift the burden from the upper middle class to corporations and the wealthy. Let’s also address other factors that are causing the few to reap a disproportionate share of society’s income and wealth.

  • B Wilds

    Capital gains is indeed an interesting area, we live in a world where you can lose, and I mean, lose big. If you lose it all will the government take care of you? I just read an article about scams, it dovetails nicely with a post I did on my blog. In our current economic environment the subject can make a person feel rather insecure. The article is named “What is Something Worth?”

    http://brucewilds.blogspot.com/2012/11/what-is-something-worth.html

  • Evelyn J Herron

    The person who made $84,000 would not have enough money to pay $100,000 that was paid by the guy who made $746,000. All of that $84,000 after it was adjusted (AGI) was subject INCOME TAX rates. He was able to cut that down a bit with his personal deduction and the Standard Deduction. He used the SD because it was higher than the accumulated deductions he was entitled to. Meanwhile, a large part of the $746,000 income was Capital Gains and Dividend income; this taxpayer paid no higher than 15% on this income. Because he had more money to spend, he was able to accumulate many deductions–especially through charity giving. So, he deducted all of that from his income. Result was a lower rate, although he still paid a substantial amount in taxes. There really is no relationship between these tax discrepancies and buying a Big Mac at McDonald’s.

  • suzy q

    What everyone seems to forget about capital gains is that the average Joe who has capital gains has already paid taxes when he earned the investment money. Why should I pay a lot on capital gains when I’ve already payed taxes on my salary or other income – money that goes into investments? Does this country want to encourage saving and investing or not???

  • Unfairness doctrine

    This program was an interesting presentation on the concepts of fairness in the tax system. It is unfortunate that the narrator presented the argument with a clear bias that the tax system is not taxing the wealthiest taxpayer enough. Whether or not he feels that he is not being taxed enough is irrelevant. Even if his tax rate was lower, his contribution to the government was significantly higher than all of the rest of those profiled. Starting off with the assumption that a progressive tax rate system is “fair” and that the effect of itemized deductions in changing the effective rate makes it less “fair” forces those watching to focus on the deduction issue at the detriment of questioning whether or not it is appropriate to have a progressive tax rate in the first place. What are the mentioned greater societal benefits the wealthy gentleman receives disproportionately to the poorer tax payers? Does he get to drive in better lanes on the public roads? Does he get to cut to the front of the line at the airport since he pays more of the cost of the TSA? Does he get more protection from the military because he pays more? He probably should, it would only be *fair* since he is contributing so much more than the other tax “payers” profiled.

  • job creator

    I noticed that the show host did not ask the high income guy to put his money where his mouth was when he said that he should pay more taxes. A high income person who keeps his wealth, but advocates for higher taxes is much like a slave-owning abolitionist. I volunteer to collect the money that he says he should pay extra in taxes and deliver it to the treasury.

    Regarding earned income credit, If you pay $1000 in FICA but receive welfare disguised as earned income tax credit then you have not actually “paid” any tax.

    We all have one share of this country regardless of our income so fairness would dictate that we all pay the same amount. Taxes are therefore unfair, but only to the extent that the higher earners are forced to pay more.

    The majority of American are not pulling their weight. They are not DOING their “Fair Share”.

    Perhaps we should copy our Progressive tax code and have a progressive voting code. Should we get different number of votes based on our income?
    Progressive doesn’t sound so good coming back at you huh?

  • Hooper

    Fair Tax. This country was created by white men who didn’t want to pay taxes. It’s still run by the white men who don’t want to pay taxes. Overhaul the entire tax system for one and for all. Make it an equitable system. Everyone but the poor pay a national sales tax. Prebates for the poor. Since the poor are usually on some form of government assistance, it won’t be hard to figure out who gets the prebates.

  • Demar Henry

    You missed my point. I fully understand the way our tax system works. There is no discrepancy. If I don’t make much money a Big Mac costs a higher percentage of my income than it does for the high income earner. With you line of thinking, it is unfair that the rich guy has to pay the same price.

  • Demar Henry

    I did not imply that a all. Warren Buffett’s tax rate was 11% in 2010. Much lower than mine. I’m okay with that because he paid almost $7 million in taxes. My implication is quit focusing on just the percentages and focus on what is a fair share. We cannot tax our way out of this fiscal deficit problem.

  • DarkHumour

    When the program included a ‘representative’ from the WSJ it reminded me of their label of ‘lucky duckies’, people who earn so little they do not pay federal taxes.

    http://en.wikipedia.org/wiki/Lucky_duckies

    Of course they still pay FICA, sales taxes, and so on. Also it seems like people have no idea about prior tax rates in previous decades. There used to be upper brackets of 70 and 90 percent. Of course the effective rate was probably much lower.

    That one example taxpayer seemed deluded about ‘redistribution’. Doesn’t he understand our nation’s wealth is *already* being redistributed? (Upward)

    The whine about increasing taxes on capital gains or higher income will somehow reduce incentives.

    Gosh, I’m not going to buy a 3 million dollar lottery ticket because after taxes it will only be 1.5 million. Why bother ?

    They didn’t mention (or clarify further) in the program that the way FICA is calculated the gentleman earning $80K a year would pay *more* toward that program than the millionaire who earned ~$50K in non investment income. The cap is now $113,700. So a person earning that much pays exactly the same as someone earning 2x, 10x, 100x more.

  • Event_Horizon

    That would create a barter system meant to bypass tax collection.

    Sales taxes are one of the most regressive solutions.

    If there was a national sales tax what would this leave for the states and cities ?

    Would those who live in major cities now being paying 20 percent on their purchases ?

    Giving a break for the poor, sure, but now this plan puts the squeeze on the middle class.

    With things costing more (and incomes always dropping) you consume less.

    What happens to the economy when there is less demand for goods and (taxable) services?

  • r.emswiler

    I agree that Steven Moore is a boob. However, I disagree with two of your other points. The main reason Suzy invested in the IPO was her expectation that she could re-sell her IPO shares at a substantial gain. Without the prospect of capital gain down the road, nobody would invest in IPOs. This future gain is the motivation behind the entire venture capital (start-up, private companies) industry. Venture capitalists want their money back ASAP (from Suzy, and then you) in order to find and fund their next start-up company.

    I also disagree with your comments regarding the corporate income tax. Ronald Reagan once quipped that he did not understand why we have a corporate income tax at all. Most people did not get that. His point was that corporations don’t bear the economic consequences of taxation, because their customers do. In order to survive, a corporation must have more revenue than expenses – otherwise it eventually goes bankrupt. The corporation’s revenue must cover ALL expenses, including cost of goods sold, wages, overhead, and taxes – of every kind, including income taxes. If the government raises the corporate income tax, the corporation must raise it’s prices to remain profitable and stay in business. The problem with that is that we must compete in a global economy – General Motors must compete against Toyota, etc. Why handicap US companies by requiring them to charge higher prices than their foreign competitors?

  • robert

    Economists rationalize progressive taxation on the basis of “marginal utility” – an additional dollar to a wealthy person has less meaning than an additional dollar to someone earning minimum wage. Nevertheless, who said that he robbed banks because that’s where the money is? Fairness aside, we are required to use progressive taxation because there would be no money available for the IRS to collect from the less fortunate among us.

  • Anonymous

    Thanks for the thoughtful reply.

    Regarding your two disagreements:

    1) You have a good point about incentives for investing in the IPO. However, most stock shares are sold dozens of times, and many are sold after someone has borrowed the shares (or fake-borrowed them, as in naked short selling) to realize a quick gain. Manipulation is rife, too, e.g., huge gains are realized when big firms do enough short sales to trigger mass program sales and purposely crash the price of a stock they are betting against. Often we see huge spikes in capital gains when there is a stock bubble. Thus, the vast majority of capital gains aren’t very well anchored to real investment.

    2) Corporate taxes only apply to a certain portion of profits, not revenue. If a corporation has to pay a few more percentage points on the profit they couldn’t protect from taxes, it’s hardly going to make them unprofitable. It’s true that they will have slightly less to divvy out to shareholders, but they won’t necessarily have to raise prices, and they theoretically shouldn’t be able to (at least without negative consequences), because the market sets the price. In fact, most economists say that corporate taxes aren’t shifted to consumers. Moreover, hardly any firms pay the full 35% marginal rate, and the big firms have become experts at weaseling out of their tax burden. A recent study of 280 of the largest American firms found that over the years 2008-2010, they paid an average tax of 18.5%. Almost one fourth of those firms (67) paid an average tax of 0% (30 firms got net refunds). Also, our corporate taxes are pretty much in line with foreign countries’ corporate taxes. The weighted effective tax rate on corporate profits is 27.1% in the U.S., versus 27.7% for the average OECD country.

  • Anonymous

    Another point that should be considered is that many of these large corporations pass enormous costs onto society in the way of polluting our environment, hurting our health, and squandering resources that should belong to all of us. A few more taxes is one way to get something back, although these terrible costs are really beyond any financial accounting. Healthy bodies and ecosystems are truly priceless.

  • r.emswiler

    Economists are wrong as usual. The corporate income tax is an expense. Let’s look at what happens when other kinds of corporate expenses rise. Wages rose significantly in the 1970′s. That resulted in wage-price inflation. Prices rose to make up for rising wage costs. Jet fuel. What happens to airline prices when jet fuel rises? Last summer, everything that was shipped by truck rose in price because diesel fuel went up. It doesn’t matter what the expense is. When expense goes up, prices follow. By definition, your competitors will have the same types of costs you have. When those costs go up, everybody raises prices.

  • robert

    You did not pay tax twice. After paying tax on your salary, the money you invest becomes known as tax “basis” – which means you do not owe more tax until your gain exceeds your basis. Assume there is a 20% tax on all income, and that you can only be taxed once. Thus, if you earn $50,000 of salary, your tax is $10,000, and you have $40,000 after taxes. Let’s also assume that you have no other expenses so you can invest the entire $40,000 that you’ve paid tax on. Let’s say in six months, your investment pays off, and it’s now worth $45,000 so you sell at a $5,000 gain. You owe $1,000 of additional tax on your $5,000 capital gain. Now you have $44,000 after taxes – 80% of your salary plus 80% of your capital gain. Since we are assuming income is taxed only once – at a rate of 20%, your $44,000 must represent 80% of your total income. $44,000 / 80% means your total taxable income must have been $55,000. Your $50,000 salary was taxed only once and your $5,000 gain was taxed once. No double tax. Trust me, I majored in accounting. Passed the entire CPA exam on my first attempt. Had a very successful 40 year career as a tax accountant. I am aware that Paul Ryan once agreed with your comment. That scares me, because it shows his lack of understanding of basic accounting and tax principles.

  • Anonymous

    What you cite are costs, not taxes on profits. Totally different animal.

  • NotARedneck

    What is never stated about capital gains (but always alluded to) is that despite the attempts to frame capital gains as job creating, not all capital gains create positive economic activity and jobs. In fact, is the opposite is true today. Since the election of Ronald Reagan, the economy had completely reversed from the prosperous days of the 1940s through the 60s when there was a large amount of real investment.

    Since the mid 1980s, the wealthy have seldom made any investments that created jobs – unless it was merely to maintain existing holdings. Generally, they either speculate or even worse – use their economic clout to manipulate markets and steal from average Americans. Then they get a tax break for these gains.

    I’m all for tax breaks for real investment but would tax speculation at rates much higher than what the average wage earner pays.

    This would bring us back to the days when our economy was growing and business people looked with contempt on those who speculated – because it paid so poorly.

  • fatcat

    When I began preparing income tax returns in 1974, the top tax rate was 70%. However, earned income (from salaries, wages, and self-employment) was taxed at a maximum rate of 50% – the so-called “maximum tax”. High tax rates gave rise to tax-shelters. “Investors” used terms such as 2 to 1, or 3 to 1, etc. It meant that a $10,000 “investment” created a $20,000 tax deduction (2:1) or a $30,000 deduction (3:1) These were “investments” constructed not for economic investment, but solely for (a) converting high tax rate ordinary income into capital gains taxed at lower rates, and/or (b) deferring tax on income to later years. If you were taxed at 70%, you could buy $14,000 of tax saving by putting $10,000 into a 2:1 shelter that produced a $20,000 tax deduction. Nobody cared if he got any of his investment back. The tax savings alone guaranteed profit. How these deals worked is beyond the scope of this short history. This non-economic investment continued through 1986, when Ronald Reagan signed The Tax Reform Act of 1986 – the last major change to the tax code. Tax shelters were largely eliminated by (1) so called “at risk” rules which disallowed tax losses financed with non-recourse debt; and (2) enactment of passive activity loss (PAL) limitations.

    I thought you may find this tax history interesting. Now for my opinion. Jobs and economic growth are products of human invention, not tax laws. The invention of the automobile may have displaced a few blacksmiths, but it created millions of jobs in auto assembly plants, steel mills, road construction and maintenance, oil exploration, drilling, refining, car dealers, auto mechanics, etc. Since today’s income tax dates back to 1913, tax policy could have had nothing to do with the Wright brothers invention and the millions of jobs it created in the airline industry, and in building aircraft. Our space program created millions of jobs at NASA and it’s contractors.

    Inventions that create new things, create more jobs than inventions that save labor. The car, airplane, and space program were new things. Only blacksmiths and saddle makers lost their jobs. Computers and the internet have certainly created jobs, but they have also cost jobs. I took a plant tour at Harley-Davidson a few years ago. Lots of factory people replaced by computerized (robot) operations. A client once purchased a new printing press. His new press did more than his old press, but required only half as many pressmen to operate. Tax policy did play a part. His decision was influenced in part by the allowance of 50% bonus depreciation.

  • silver eagle

    There’s psychology at work as well. Suppose Congress proposed to reduce all tax rates by half. Everyone would pay half of his current tax. You know that we’d still complain about 47% of the people paying no tax (1/2 of zero is still zero) and people making more than $116,000 would still be paying 70% of the tax burden. Even though the burden of all people who actually pay tax would be cut in half. No one can design a tax system that someone will not perceive as unfair. I challenge you to propose a new tax system that all agree is fair.

  • tax philosopher

    Your program on tax fairness should have noted that tax fairness is a question without an answer. It’s a problem without a solution. I’d like to see Donald Trump (R) and Warren Buffett (D) fund a $50,000 prize to anyone who can design a new tax system that is immune from valid criticism about its fairness. One that everyone agrees is fair. I say their money is safe.

  • fatcat

    Correction: Tax policy (complexity) has created millions of jobs. They’re called accountants, lawyers, tax software programers, IRS agents, etc.

  • fatcat

    and lobbyists.

  • r. emswiler

    As long as the tax code contains even just a few deductions, exemptions, special rates and credits, anyone who isn’t getting those benefits will perceive the system as unfair. Moreover, fairness is not only important to each individual, but fairness is also important to all of us, as a collective group. Are we citizens getting our money’s worth from the government? Who would be willing to pay a little more in taxes in exchange for the world’s best roads, public transportation, health care, tuition-free college education, public safety, etc. which would be available to every one of us? Or would you rather to live in a low tax country with unreliable public transportation, unsafe food and water, wide-spread crime, etc?

  • David Chmura

    Nice job! Thanks for producing this interesting and thoughtful program.

  • Anonymous

    So, if the rich fellow wanted to pay more taxes…why didn’t he? Why didn’t he give MORE to charity which help the poor or was he only giving to ideological “charities”? Just write a check for 100k more to the IRS – they’ll take it. But no, he wants to grandstand and push this for others. Hypocrite!
    As far as the young mother, the apartment was very nice…..is that Section 8? does she get food stamps and how much? Where is that info?
    Insofar as the Hahn, the union rep, itwasn’t clear whether he didn’t itemize because he couldn’t be bothered or just didn’t have the deductions. Didn’t we all at one time before we purchased a home and built up our nesteggs? So what? That doens’t mean he deserves more than anuyone else because he couldn’t take the time to do the return completely!
    I think this was quite one-sided and the interviewer should have done a more fair and appropriate review.
    Where is a rich fellow who risks his money in the market which drives our pension and 401k’s and helps us grow our money and for that risk has a lesser tax on capital gains…there’s a reason for that.