13 Tax Increases in 2013

From 13 Tax Increases in 2013:

(Click on the link above for explanations for each of these)

1. Payroll tax

2. Top marginal tax rate

3. Phase out of personal exemptions for adjusted gross income (AGI) over $300,000 ($250,000 for single filers)

4. Phase down of itemized deductions for AGI over $300,000 ($250,000 for single filers)

5. Tax rates on investment

6. Death tax

7. Taxes on business investment

Obamacare tax increases that took effect:

8. Another investment tax increase

9. Another payroll tax hike

10. Medical device tax

11. Reducing the income tax deduction for individuals’ medical expenses.

12. Elimination of the corporate income tax deduction for expenses related to the Medicare Part D subsidy.

13. Limitation of the corporate income tax deduction

Isn’t it fun?

I wish we could move beyond this silliness and just set up a flat tax. Consider this:

“I made $75,000 this year. I contributed 10% to my 401(k). I owe $6,750 in federal income tax.”


“I made $1,500,000 this year. I put 10% away for retirement. I owe $135,000 in federal income tax.”

Should the Capital Gains Tax Rate Remain Low?

Interesting piece from IBD: Six Reasons to Keep Capital Gains Tax Rates Low

Two interesting points that I hadn’t really thought about:

Inflation. If an individual buys a stock for $10 and sells it years later for $12, much of the $2 in capital gain may be inflation, not a real return. Inflation — and expected inflation — reduce real returns and increase uncertainty, which suppresses investment, particularly in growth companies.

One solution is to index capital gains for inflation, but most countries instead roughly compensate for inflation by reducing the statutory rate on gains or providing an exclusion to reduce the effective rate.

Double Taxation. Corporate share values generally equal the present value of expected future earnings. If expected earnings rise, shares will increase in value, creating a capital gain to the individual. But those future earnings will be taxed at the corporate level when they occur; thus hitting individuals now with a capital gains tax is double taxation.

Dividends are also double-taxed, with the result that the U.S. tax system is biased against corporate equity and in favor of debt. This destabilizes companies and the overall economy.

Ernst & Young calculates the current U.S. combined corporate and individual tax rate on capital gains at 50.8% — compared to an OECD average of 42.0%.

Our tax burden on dividends is equally out of line. The U.S. disadvantage will get much worse next year with the scheduled tax hikes on capital gains and dividends.

I know I’ve said this many times before but I’m 100% for a low flat tax rate (say 10% to 15%) on capital gains, dividends (not taxed at corporate level), and earned income. Then, we could move on from these discussions. Our government should be able to operate on a 10% to 15% tax.

One Commenter’s Argument Against the Flat Tax

The posts of this week have led to some very interesting discussions. This is what I love about blogging. Yes, even some of the commenters that I didn’t agree with made some points that made me reconsider my positions.

I wanted to highlight one comment left on the What’s the Definition of “Fair” and “Rich?” post from earlier this week:

“Fair” as a flat percentage is not fair in my opinion for one reason:

Money has a real purpose.

If you make $10,000 a year, and pay, say 15%, you are left with $8,500. $50,000? $42,500. $5,000,000? $4,250,000.

If you make $10,000 a year and you buy a gallon of milk, how much does it cost, $4.00? If you make $50,000? $4.00. If you make $5,000,000? $4.00. Is that a fair percentage?

Money is not an abstract concept. It has a value only in its trade for goods and services. And goods and services do not work as a percentage. You don’t go to a dealership and buy a car for %10 of your yearly income. Why should taxes magically act that way?

The concept of a flat tax, as I understand it, treats money as if it’s fair to take the same percentage from all people, while still allowing money to have an absolute value of its own. This is why I can’t support a flat tax, personally.

I suppose this is the argument for progressive taxation. However, I think we have to be careful with this line of thinking. If I make $50,000 per year and I buy a $25,000 car, that’s 50% of my income. However, if I make $500,000 per year and I buy a $25,000 car, it’s only 5% of my income. Should I pay more for the SAME CAR just because I make more money? No. However, because I do make $500,000 per year, I have the ability to buy a more expensive car if I choose. Afterall, wealth does have its privileges.

When it comes to the everyday items we must purchase, if we want the prices of those items to have less of an impact on our budgets then we have to MAKE MORE MONEY! It’s really that simple.

I look at the flat tax this way: when our boys were younger, we paid them an allowance based on their age. When my oldest son was 8, he got $8 while my youngest son got $7. We required our boys to put back 25% of their money for long-term savings. That meant the oldest had to save $2.00 and our youngest had to save $1.75. We also required them to tithe, which again meant the oldest paid more tithe than the youngest. It was FAIR!

This is the way our society should be taxed! Same percentage for all people. No deductions, no incentives. You make $100,000, you pay $10,000 in taxes (or whatever the percentage would be). You make $10,000, you pay $1,000 in taxes. If the $1,000 tax burden is too much for you, then make more money.

Finally, the thing I would like most about a flat tax is that no one could say that the rich weren’t paying their fair share. Politicians wouldn’t be able to use taxes as a way to pander for votes.

Anyway, I have really enjoyed this week’s discussions (even if I drove a few people away). Those who stayed around really made some interesting comments. I enjoyed them all even if I didn’t agree with them all.

Thanks for reading.

WSJ Editorial: Fair Tax, Flawed Tax

I read an interesting editorial in this weekend’s Wall Street Journal titled Fair Tax, Flawed Tax. I have not read Neal Boortz’s The FairTax Book (affiliate link), which is a book about abolishing the IRS and the income tax and moving to a consumption tax. Boortz calls this a fair tax. In my opinion, it doesn’t seem fair. Why? Because the less money you make, the higher percentage of your income will be spent on consumption. In other words, it seems like a regressive tax, not a fair tax (for the record I’m not a fan of progressive taxation since it too is not fair).

Personally, I like the idea of a flat tax. I think it’s fair for everyone since everyone pays the same percentage regardless of income. I know, I know, I’m too simplistic!

UPDATE: For those who are interested, here’s Neal Boortz’s Response.

How About a 4.3% Surtax on the “Rich” to Fix the AMT?

Homework assignment: Read Democrats Seek Formula to Blunt AMT

From to the article:

House Democrats looking to spare millions of middle-class families from the expensive bite of the alternative minimum tax are considering adding a surcharge of 4 percent or more to the tax bills of the nation’s wealthiest households.

Under one version of the proposal, about 1 million families would be hit with a 4.3 percent surtax on income over $500,000, which would raise enough money to permit Congress to abolish the alternative minimum tax for millions of households earning less than $250,000 a year, according to Democratic aides and others familiar with the plan.

I wasn’t exactly sure what a “surtax” was so I looked it up. According to dictionary.com, a surtax is:

1. an additional or extra tax on something already taxed.

2. one of a graded series of additional taxes levied on incomes exceeding a certain amount.
–verb (used with object)

3. to put an additional or extra tax on; charge with a surtax.

One thing isn’t clear to me: Is the $500,000 figure “income” or “taxable income?” Based on the 2007 Federal Income Tax Brackets, someone who had taxable income of $500,000 or more would be in 35% tax bracket. Add a 4.3% surtax to that and it brings their total tax to 39.3%.

So, what do you guys think? Is this fair? I’m not sure what I think about this. I’m not a fan of progressive taxation but I don’t have a better answer other than a flat tax.

Anyone Read “The Fair Tax?”

All the sudden one of my posts from over a year ago is getting a lot of attention!

Over the weekend I noticed that a post I did on the Forbes Flat Tax Plan was receiving some new comments. Most of the comments are from people suggesting something called The Fair Tax Book by Neal Boortz.

I have not yet read the book. Have any of you? (If somebody from the Boortz Camp is reading this, if you send me a book I’ll read it and post about it.)

From what I can tell, it is a consumption tax rather than an income tax. I’m not sure what consumption is taxed, but it seems to me that those with lower incomes, who spend most of what they make, would be paying a bigger percentage of their income in taxes than someone who has greater income but doesn’t have to spend it all on consumption. If this is true, it doesn’t seem “fair” to me. I think that’s why I’m a fan of a modified flat tax.

I don’t like Steve Forbes’ Flat Tax plan because he doesn’t tax dividends or capital gains, which heavily favors the wealthy. I say make it a flat tax but tax ALL income.

Question of the Day

It’s been a while since I actually posted a Question of the Day. I would like to get back into the routine because I like the interaction with you, my readers. So, here’s today’s Question of the Day:

Do you like the idea of a flat tax? Why or why not?

Personally, I like the idea of a flat tax but I would want all income taxed, not just earned income. Steve Forbes believes that dividends should not be taxed, which I think is crazy. His argument is that they are already taxed at the corporate level, which is true. However, if you want to do away with a tax on them, then why not do away with it at the corporate level? I’m sure a nice portion of Mr. Forbes income comes in the way of dividends.

Now I would like you to weigh in.