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Alan45
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PostPosted: Sat Sep 29, 2012 10:01 pm Reply with quote
A lot do, and of course the politicians play on that. Some people think that any taxes they have to pay are too much. Others just see how much is taken out of their pay and think of what they could do with it. The tax system is very complicated and there are some areas where it is unfair. Of course it reflects a very complicated economy and is hard to explain.

I gather from what I have read that we are not very highly taxed for a first world country.
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nbahn
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PostPosted: Sat Sep 29, 2012 10:31 pm Reply with quote
manicli wrote:
[...] I always thought the US had a similar policy of the more you make, the more in taxes you pay.

I see that Alan45 has beaten me to the punch; but here is my take:

That does not apply to the unearned income from the sale of securities. Any monies earned from that are subject to far lower taxes. That is why the best minds in the U.S. want to work for wall street -- the U.S. tax system is systematically skewed toward stock brokers on wall street and against barbers/stylists on main street.
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Surrender Artist
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PostPosted: Sat Sep 29, 2012 10:32 pm Reply with quote
manicli wrote:
Vata Raven wrote:
manicli wrote:
@Alan45

Just out of curiosity here, do Americans really think they're overtaxed?

More like unfairly taxed. Like I said, middle class people seem to get taxed more. While people that can afford a trip to France without worrying about cost, they don't pay much in tax.

People will forever complain about why the rich don't get taxed more. Middle class is always what supported US, and there are a lot of stories were the rich won't pay taxes. I think there is someone with so much buildup on tax that they can pay off most of the US debt.


Well that I can certainly understand. Here in Canada, most people pay an income tax rate of 30%. But once your annual income before taxes goes upwards of $150K a year, the tax rate becomes 51%. I always thought the US had a similar policy of the more you make, the more in taxes you pay.


I'll try to explain, as best as a wretch like me can, why this seeming oddity exists.

Firstly, let's distinguish between marginal and effective tax rates. The marginal rate is the rate that certain segments of income are taxed at. For example, according to the IRS 2012 tax schedule, income for a single individual up to $8,700 is taxed at 10%, but income between $8,701 and $35,350 is taxed at 15%, which is to say you pay 10 of tax on each of the first 8,700 dollars, but 15 on each of the next 26,650. One's effective tax rate is the actual percentage of your total income. So if you earned $35,350 last year, you'd pay $870+$3,997.50=$4,867.50 in taxes, so your effective tax rate is approximately 13.8%.

Bear in mind that the above seeks only to explain how marginal and effect tax rates work. The reality of taxes in the United States, or anywhere, is much more complicated.

Firstly, there are deductions and credits, i.e. you can deduct mortgage interest payments from your taxable income and if your income is below a certain level, you can reduce your total liability with the earned income tax credit (Things like this are called, not without controversy, "tax expenditures") Interestingly, some of these policies constitute a sort of stealth welfare state. (if I recall rightly, Theda Skocpol argued that the US welfare system is significantly larger than it looks because we do so much with tax reductions as opposed to direct benefits) Many of these, especially the mortgage interest deduction, tend to be more advantageous higher up the income scale. (The next time you visit somebody with a big house, ask them if they have a mortgage and if they say yes, then ask them how they enjoy being on welfare. Should be lots of laughs) There are also payroll taxes for Social Security, which applies only to the first $110,000 of income, and for Medicare. These are levied as flat percentages and no deductions or credits apply. (Many people pay no income tax, but nobody who gets a paycheck can elude payroll taxes)

The United States does, as indicated by the example, have a graduate income tax rate, although the top rate is 35% for income over $388,350, which is lower than the 51% rate cited above for Canada. However, this ignores capital gains tax. Income from investments is taxed differently from earned income. Earnings from assets hold for less than a year are taxed at the normal income tax rates, but earnings held for more than that are taxed at 15%. At the end of this long and winding road, we come to the reason why Warren Buffett might pay a lower rate than his secretary: Warren Buffett pays mostly capital gains tax on long-term capital gains, whereas his secretary pays mostly income tax. So most of Warren Buffett's earnings are taxed at 15%, while most of what his secretary earns are taxed at, I presume, up to a top marginal rate of 25%. Warren Buffett is presumably able to exploit more deductions and credits than his secretary.

There are also state taxes. Besides Federal income and payroll taxes, I also pay Pennsylvania's 3.07% income tax and 6% sales tax.

I'm not a tax expert and I've not really read much about it for a while, so I must plea for mercy in regards to any errors that I might have made, but I believe that I am substantially correct on the important points. I also hope that it was comprehensible.

P.S. Alan45 and Nbahn posted shorter explanation of much the same thing while I was hocking up this monster; I hope that I included enough additional content for this to have been worthwhile.
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manicli



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PostPosted: Sat Sep 29, 2012 11:01 pm Reply with quote
@Surrender Artist

Firstly, I'd like to thank you for that comprehensive answer as I was always ignorant of how the tax system actually works. So I'm very grateful for that explanation.

Don't worry, anyone who's moderately literate would be able to understand that with ease such as myself Smile

Thanks for explaining it to me, I've only done one year of taxes and it was really confusing so I didn't really think about it but what you say does make a lot of sense.

When you think about it though, investments have to be liquidated before they can be used as cash so I guess the 15% makes sense. Mortage, not so much unless you're talking about middle class people.

So I guess it isn't that rich people pay less taxes, it's that they pay a smaller % depending on what type of income they have. Or atleast that's what I got from your post.
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Blood-
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PostPosted: Sun Sep 30, 2012 5:43 am Reply with quote
manicli - your 51% as the top tax rate for incomes over $150,000 isn't quite right. The top federal rate is 29% of taxable income over $132,406 and the top provincial rate varies from province to province. Not only does the rate vary but the amount at which that rate kicks in varies. The highest provincial top rate is Nova Scotia's with 21% on the amount over $150,000 and the lowest top rate is Alberta's 10% - although theirs is a flat rate that applies to ANY amount. Laughing

Canadian Tax Rates for 2012
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Surrender Artist
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PostPosted: Sun Sep 30, 2012 8:09 am Reply with quote
manicli wrote:
@Surrender Artist

Firstly, I'd like to thank you for that comprehensive answer as I was always ignorant of how the tax system actually works. So I'm very grateful for that explanation.


I'm glad if I was able to help. I just hope that I didn't get anything important wrong.

manicli wrote:
Thanks for explaining it to me, I've only done one year of taxes and it was really confusing so I didn't really think about it but what you say does make a lot of sense.


I understand. When I was younger and starting to pay any attention to taxes at all, I was confused as all Hell by how it worked. Until later in life than I care to admit, I thought that you just multiplied your income by a certain percentage and that was it. The reality is far more baroque. (I know nothing of corporate income taxes, which I understand to be terribly complicated, probably in part so companies that can afford a lot of tax lawyers can slither out of a lot of them)

manicli wrote:
When you think about it though, investments have to be liquidated before they can be used as cash so I guess the 15% makes sense. Mortgage, not so much unless you're talking about middle class people.


I'm not up on all of it, but there are many who hold lower rates on capital gains to be economically ideal. I suppose that's conceivable, but I suspect that the policy is more a matter of the affected constituency being very powerful than the economics of it. The mortgage interest deduction is a relic from the early days of the modern tax code when all interest was deductible and there wasn't really much consumer interest to speak of. Credit card interest and some other categories used to be deductible too, but those deductions have been abolished. From what I recall, few people think that the mortgage interest deduction is a good idea, a tax commission convened by President Bush part 2: Electric Boogaloo proposed its abolition, but that was a non-starter. (I recall reading that Margaret Thatcher abolished the United Kingdom's equivalent) It's distortionary and biases the system toward owners over renters (which I am, so maybe I'm just bitter), but it's part of the mythology of the American dream, which makes it nigh untouchable.

manicli wrote:
So I guess it isn't that rich people pay less taxes, it's that they pay a smaller % depending on what type of income they have. Or at least that's what I got from your post.


That's more or less it. Many very wealthy people like Warren Buffet or Mitt Romney get most of their money from long-term investments and are more able to take advantage of ways to lower their tax liability. I'm far from a frothing-at-the-mouth socialist, but I think that there are things economically and ethically wrong with much of it. (If I had my druthers, we'd get rid of every last doggone tax expenditure; essentially a militant version of the Bowles-Simpson 'Zero Plan')

Here in Pennsylvania there's a tax exemption for helicopter manufacturing, because rich people in the Philadelphia collar counties wanted it. (The tax expenditure section of the budget is a a little shady because it includes no total, summary estimate or even assessment of their effects)
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manicli



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PostPosted: Sun Sep 30, 2012 9:10 am Reply with quote
@Surrender Artist

Now I understand now why taxes are so complicated and a big issue in politics, nor am I looking forward to doing my tax returns next year.

@Blood-

"Damn you blood-, always making my posts seem like half thoughts." I can't exactly remember where that quote came from but I remember it well Razz haha I kid I jk I guess I really am stupid when it comes to taxes.

@both of you, it's just too bad more people don't import stuff, otherwise if enough complaints go in or a protest they might lower the charge.
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Alan45
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PostPosted: Sun Sep 30, 2012 10:29 am Reply with quote
@ Surrender Artist
Your information appears correct based on my limited knowledge. I remember when you could deduct all intrest payments on any account. The rational was that intrest was a cost of having the money, much the way a business can deduct the cost of doing business.

Don't be bitter about the mortgage intrest deduction. It is grossly overrated. If you buy a home and must have a mortgage to own it, it is a good deal. However, you only get a tax reduction based on the marginal rate you are paying. The balance of the interest comes out of your pocket with no reimbursment. In the past it was assumed that an increase in the value of the property would cover that. But as the news reminds us frequently that is no longer a given. In addition, as far as I know, all jurisdictions have real estate taxes which in some areas can be a problem. Of course a homeowner pays for all maintaince and has to worry about the neighborhood. The idea that home ownership is "good" is a simplification of a complex decision.
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