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OT - Our Tax System

Discussion in 'Politics, Elections & Legislation' started by dmarbell, Jul 23, 2011.

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  1. dmarbell

    dmarbell Active Member

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    I don't want to debate whether to raise taxes in a recession, or to raise revenue (which could mean decreasing deductions), or to cut spending, or any of the other stuff that's been debated here regarding the debt limit.

    I want to make sure everyone knows what our tax system is all about. It is my opinion, and it's only an opinion, that we have cut taxes more than the marginal amount that will increase revenue, based on stimulating the economy.

    Visualize this case, completely made up, but completely possible.

    A small business owner who operates a pass through entity, like an S-Corp for those who know what that is, has $500k worth of profit before his salary. His salary is $500k, making the corporation income zero (because it deducts his salary), and his W-2 salary is then $500k. He sells stocks for a gain of $143,617 in 2011, which he had held for more than a year, therefore it is all long-term capital gain.

    His total income so far is $643,617.

    He invests in new equipment for his business in the amount of $500k. He does this by borrowing $500k from his bank, and must make monthly payments of $9,436 (5% interest rate for 5 years). This $500k is deductible against his W-2 wages in the amount of $500k.

    He lives in a house, with his wife, with a $1 million mortgage and a $100k equity line, both at 5% interest only, for a mortgage interest deduction of $55k. His property taxes are $11,000 (lives in the southeast). (For those following along in the book, his total itemized deductions are $67,212 because of the deduction for sales tax, assuming no state income tax.)

    His taxable income, married filing jointly with his wife, for 2011 is $69,000. His federal income tax liability is zero. That is because his $69,000 of taxable income is all represented by long-term capital gain.

    So, when someone says that 40-45% of taxpayers in the US pay no income tax, are you including this man, and his wife?

    Danny
     
  2. WS-1

    WS-1 Banned User Banned

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    How many employees does have?

    How many cars do they own?

    How much food do they buy?

    What income tax bracket do they fall in?

    How many homes are they buying?

    How many tradesmen helped build their homes?

    Do they pay their bills on time?

    Do they live within their means?

    etc., ad infinitum
     
  3. dmarbell

    dmarbell Active Member

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    These questions have nothing at all to do with the question of income taxes. However,since I am a fair and square poster, I'll make some assumptions.

    "How many employees does have?" Assume none, or at least no increases over the last few years.

    "How many cars do they own?" Not applicable. Assume none, they live in NYC. (Edit: I said low property taxes because they live in the southeast, no not in NYC. Number of cars is a moot issue anyway.)

    "How much food do they buy?" They are skinny health nuts, so not much.

    "What income tax bracket do they fall in?" Zero. Read the original post.

    "How many homes are they buying?" Assume one.

    "How many tradesmen helped build their homes?" None, lately, they bought an existing house built in 1900, with no recent improvements or updates.

    "Do they pay their bills on time?" Not applicable.

    "Do they live within their means?" Not applicable.

    "etc., ad infinitum." Muddy waters. $500,000 income, financed fixed asset investments, live in a house with $1,100,000 mortgages, have substantial long-term capital gains, but pay zero federal income tax.

    Concentrate on the original post, and the issue of income taxes. This is not an economics lesson, micro- of macro-.

    Danny
     
  4. Chichay

    Chichay TS Supporters TS Supporters

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    I do not know if his $500,000 capital equipment expenditure is deductible against his $500,000 income all in one shot (without even considering its depreciation allowance).

    "His taxable income, married filing jointly with his wife, for 2011 is $69,000. His federal income tax liability is zero. That is because his $69,000 of taxable income is all represented by long-term capital gain."

    His federal income tax liability is 15% of $69,000, assuming he has no carryover losses. Long term capital gain is taxed at a maximum of 15% (minimum 10%).
     
  5. dmarbell

    dmarbell Active Member

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    "I do not know if his $500,000 capital equipment expenditure is deductible against his $500,000 income all in one shot (without even considering its depreciation allowance)." Yes, it is. Section 179 allowance for 2011 is up to $500,000.

    "His taxable income, married filing jointly with his wife, for 2011 is $69,000. His federal income tax liability is zero. That is because his $69,000 of taxable income is all represented by long-term capital gain."

    "His federal income tax liability is 15% of $69,000, assuming he has no carryover losses. Long term capital gain is taxed at a maximum of 15% (minimum 10%)." No. The first $69,000 of long-term capital gains and qualified dividends for 2011 are taxed at a rate of zero form those in the first two tax brackets, including the 15% bracket, which is up to $69,000 for married filing jointly.

    Now we are getting somewhere. Let's understand our tax system. (Some folks just got some free tax planning for 2011.)

    Danny
     
  6. WS-1

    WS-1 Banned User Banned

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    Ok!

    Who built his house? Did he pay the builder?

    How many sub-contractors earned wages while working there.

    How much is his house insured for?

    Who is his pool guy?

    How much does his pool guy make per year?

    Does his wife clean the house?

    If not, how many house staff does he employ?

    How much do they make?

    Where does his wife shop for her clothes?

    Where does he shop for his clothes?

    Do they eat at home every meal?

    Does his wife cook?

    How much did she pay for her Agga stove?

    How much did she pay for her cookware?

    Does he take his wife out in public?

    Does he have a car?

    Does it use gas?

    Is his gas station independently owned?

    And so on, and so on, and so on.
     
  7. Chichay

    Chichay TS Supporters TS Supporters

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    Thanks for the clarification, Danny, although I thought he may be taxed at least 10% of $69,000. Chichay
     
  8. dmarbell

    dmarbell Active Member

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    WS-1 seems incapable of sticking to topic, so I'll ignore his posts, unless some semblance of understanding comes through. This is not an economics lesson. Assume no change in his circumstances, and that he pockets the tax savings for now. We are not talking about all the other taxes he might or might not pay. We are talking about only the federal income taxes. I know about all those other taxes.

    Sheesh.

    Danny
     
  9. Bisi

    Bisi TS Member

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    Our tax system is an outrage. It is so damn convoluted NOBODY (including secretary of treasury) can figure it out. I don't think they make a forklift in this country large enough to pick up the tax code and it's thousands of pages.

    You can have 1000 people in a plant making 50K a year, and not a one of em will pay the same amount in tax. One gets a break because he belongs to the Western Saddle Horse association, the other because he plays table tennis left handed, etc..............

    And every damn year almost everybody in this country has to submit a written report detailing every aspect of their life for the past year on April 15.

    Why do we put up with it??? Why does it have to be so asinine? How many Billions do we spend each year just keeping records and filing paper? Look at the millions of people whom don't do anything productive but their job is filing paper and looking for exemptions.

    And WS1's post seems to be right on topic, because there is probably an exemption for every subject he mentioned.


    The Fair Tax is the answer.
     
  10. WS-1

    WS-1 Banned User Banned

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    Ok, Mr. Laffer, I'll play. You have provided an example to explain how our tax codes work for a certain segment of society. Please provide an example of how our tax codes work for a 28 year old crack cocaine addict in the bowels of New Orleans.
     
  11. Hal1225

    Hal1225 Member

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    For me the tax is not the issue. The issue is usury. The Federal Reserve Bank
    is a privately owned bank the charges our Government interest on the money the Government owns, mints and prints. This private bank sells bonds or T-bills to China and pays interest to them and gives money to Israel. This bank controls America by being allowed to set interest rates and charging interest on a fraud national debt. The Constitution allows only Government to print and coin money and therefor there should be no authority higher than the Government to charge the Government interest on it's own printed and coined money. The bank that is more powerful than the Government controls us. This has to stop now. Who are the owners of this bank today? Who audits them? Why don't schools teach the truth about who collects and controls the money in this country. I would guess that over half the people in this country don't realize that the Federal Reserve Bank is not owned by the Government(even though the name sounds like it is)! There would be no debt ceiling issues if the Federal Reserve Bank was a Government owned bank that issued usury eliminated money.

    Harry Lyga
     
  12. dmarbell

    dmarbell Active Member

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    Nice rant, Harry. There might even be a lot of truth there. However, the thread is about income taxes. I believe we have cut taxes enough to begin seeing revenue increases, if any are to be had. I offer an extreme case as proof. No one would have thought that my imaginary taxpayer was in the 45-50% of taxpayers who pay no federal income taxes.

    Let's try to stay on topic.

    Danny
     
  13. Fast Oil

    Fast Oil TS Member

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    The tax code is all about control. It is used to control every aspect of life. It will never be changed by our government because that is how congress controls what we do and how we do it. They know this!

    One quick example: Home mortgage deduction, suggest that it be eliminated and the howling starts. Home builders lobby. Real estate lobby. Home mortgage lobby. (Fannie /Freddie, there's a great organization!) We have been convinced that buying a home is a great investment and tax deduction. For who? We all have to live somewhere, but can and should everyone own a home?

    The credit card interest deduction was eliminated but we still charge on our cards and many Americans carry (read "live') on CC debt.

    "I believe we have cut taxes enough to begin seeing revenue increases." Danny, does this statement mean that you think that at this point revenue to the governmen should be on the rise or are you calling for tax increases?

    BTW, the imaginary person above would be making quarterly estimated tax deposits?
     
  14. dmarbell

    dmarbell Active Member

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    Cy-Kick,

    I am not calling for tax increases. I just believe we have cut taxes far enough to see revenue increases already, if that is the effect they have. How much lower than zero can tax rates go?

    The imaginary person got a W-2, so had taxes withheld. If his taxes were zero, he would have gotten a refund of all taxes withheld (federal income tax, not social security and medicare).

    Danny
     
  15. slowdp

    slowdp TS Member

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    dmarbell missed an important point. His example business owner borrowed $500k to achieve an earned income deduction in the same amount. Starting next year he will be required to pay back the loan with after tax income dollars. Thus, next year, he will be forced to pay income tax on the amount of the loan payments.

    theoretically the guy could act like the US Government and borrow every year to offset new income. Somewhere though, he is going broke or the bank is going to repo his stuff.

    At some time he must start paying off the house (or sell it). Any payoff will be with after tax dollars.

    You may work the code to your advantage a year or two but somewhere along the way you will pay the piper.
     
  16. hmb

    hmb Well-Known Member

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    We should all be proud to be Americans. All should be treated equally. Everyone should pay 10 percent of their income in taxes, no deductions, no exemptions, just pay your 10 percent and be proud to do it. HMB
     
  17. WS-1

    WS-1 Banned User Banned

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    I'm thinking the premise of this thread is the child of Class Envy and Class Warfare, the unmarried Gods of The Democratic Party.
     
  18. dmarbell

    dmarbell Active Member

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    WS-1, if you can't find anything intelligent to say, stay off my thread. I am a CPA with 32 years experience, a Certified Financial Planner and a Registered Investment Advisor. I am registered unaffiliated. I put myself through school, studied on my own to pass the CPA and CFP exams, and worked for two of the largest accounting firms in the world. I've paid for everything I've ever had. I know more about our tax code, economics, and the US financial system than you could hope to learn in the next 20 years (even listening to Rush for 3 hours a day). You will say anything to divert the conversation from the original intent of the thread.

    slowdp, you are almost correct. Section 179, the write-off all in one year instead of depreciation, is a timing difference. Part of the payments on the loan is principal, which requires after-tax dollars to repay, and part is interest, which is again tax deductible.

    The main point is that a business owner making $500,000 before current depreciaiton, plus $143,000 in long-term capital gains, can leverage himself into zero federal taxes. I want to make sure everyone here has access to this information. This guy could be among the 45-50% of Americans who pay no federal income tax for 2011.

    Can we cut his taxes any more, for that one year, to stimulate the economy?

    Danny
     
  19. Rick Barker

    Rick Barker Well-Known Member

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    dmarbell

    If we had a flat tax rate without deductions, and no need for people to find ways to squirrel away their money to protect it from the Fed, would you still have a job?

    As far as I am concerned, there can never be enough tax rate reduction.
     
  20. WS-1

    WS-1 Banned User Banned

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    Danny,

    I apologize. I have been having a little fun at your expense.

    We now have been exposed to your information. What do you want us to do with it? What's your point?

    What percent of the 40 to 45% of Americans who pay no federal income tax earn $500,000.00 per year?

    What percent of the 40 to 45% of Americans who pay no federal income tax earn
    nothing per year?

    Why don't you tell us which group represents the biggest threat to our future, our society, our economy, our culture, and our nation.

    Respectfully,

    Kit Thomas
     
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