What Would Be a Fair Taxation Rate?

Since there is so much talk about the need for a fairer system of taxation here in the US, I wanted to ask my blog’s readers: what percentage of their income do you think it would be fair to ask people who make over a million per year to pay in taxes?

From what I understand, they are now taxed at 30%. In my opinion, this is completely fair and asking such people to pay more makes no sense. What do you think?

Now, there is also the whole issue of hedge fund managers who, reportedly, pay the tax rate of about 15% on their investments. As far as I know, the entire number of hedge funds in this country is between 7,000 and 12,000. Most of them are “boutique” hedge funds that manage less than a dozen million of other folks’ money. This means that what the owners of these hedge funds get isn’t all that huge of a sum (in relative terms, of course). In any case, the idea that hedge fund managers routinely and massively make “billions of dollars”, which many people like to believe, is preposterous. So even if the hedge fund managers get taxed at 30 or even 60%, this will be an absolute drop in the bucket for the federal budget.

Of course, “let’s tax the rich to feed the poor” is a great populist slogan. What does it mean in practical terms, though? What kind of taxation system would make better sense than the one we have right now?

31 thoughts on “What Would Be a Fair Taxation Rate?”

  1. I’ve always been a proponent of the consumption tax, rather than an income tax. I don’t have a choice – I have to work to feed my family. And the more they raise the tax rate, the more I have to work. But how I choose how and when to consume – and I can justify paying taxes for what I buy.

    Simple exemptions for basic necessities – food, rent, heat, books, etc. . . keeps the system progressive, relieving the poor from having to pay tax. We can also differentiate the sales tax to encourage the behaviours we want – lower rates on organic food & green products. High rates on luxury items. Therefore, the rich will pay more in taxes, based on how they spend their money. Take income taxes right off the table.

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    1. I’m sorry for being ignorant, but is the “consumption tax” the same as “sales tax”?

      I think the system you propose sounds very interesting and reasonable. What percentage of sales tax do you see for luxury goods, for example? In Quebec, the sales tax is 15% on everything already. Do you think it is reasonable to have a higher sales tax on some objects?

      It’s good to have an accountant on the blog. 🙂

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  2. In a perfect world, a sales tax would include sales of stocks, bonds, commodity futures, etc. A consumption tax would not. Without the universality of including everything I have mentioned, I am totally opposed to a sales tax. A consumption tax is a ‘soak the poor’ tax, since wealthy people spend a far smaller proportion of their income on consumables.

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    1. “wealthy people spend a far smaller proportion of their income on consumables”

      -I’m not sure I understand how that works.

      Thank you, everybody, for helping me get educated about these issues! I’m sincerely grateful for all explanations.

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      1. The definition of ‘consumable’ would have to be clearly defined – as it stands now, David is correct – stock purchases are not defined as ‘consumption’, but buying laundry detergent is consumption. The ‘rich’ save more (invest) than the poor do – so while the ‘rich’ spend more nominally on consumables, the % of their income that goes toward consumables is lower than the poor – simply as a matter that the poor don’t have money to invest.

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  3. Any millionaire who paid at thirty percent is an idiot and should fire their accountant. In 2010, 7000 millionaires paid NO income tax according to IRS data. One of the favourite tax avoidance schemes for those in the six figure bracket is purchasing municipal bonds whose annual dividend is both state and federal tax exempt. I think that 30% is fair if it was applied to their earnings rather than their more narrowly defined income.

    As for Patrick’s consumption tax we have it in Canada (HST) and it’s a regressive tax which is very complicated in order to make it more progressive. For instance,if you buy five donuts at Tim Horton, a favorite Donut shop, it’s taxed but if you buy six donuts then it’s not taxed because it’s groceries. Also those filing under a certain amount of income get a HST rebate check from the government.

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    1. I’m not in favour of a consumption (sales) tax AND an income tax. I’m in favour of a straight consumption tax. Some of the rules we have in Canada surrounding the GST/HST are astoundingly confusing and impossible to rationalize. I’m talking about an entire revamping of the entire system – much like David’s recommendation. The principle being that you pay tax when you spend your money, not when you earn it.

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    2. “Municipal bonds are securities that are issued for the purpose of financing the infrastructure needs of the issuing municipality. These needs vary greatly but can include schools, streets and highways, bridges, hospitals, public housing, sewer and water systems, power utilities, and various public projects.”

      -It sounds like investing in municipal bonds is investing in schools, roads and bridges, etc., so it’s understandable that people who invest in them get tax exemptions.

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    1. Thanks for the link. I’m not a big fan of the NYT, so I’ll see if I can find another source for that, but it is a good start.

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  4. I think the problem is not just what “a fair taxation rate” is but, as others have pointed out before, all the exemptions and loopholes in the tax code, which benefit those who make the most money.

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    1. I’d like to talk about this more specifically because many people are claiming that there are loopholes benefitting mostly those who make less money.

      How about this oft-repeated claim that 50% of population pays no income tax at all? These are said to be the people on the lowest side of income spectrum.

      To me, this doesn’t sound right. Can anybody explain where this statement comes from and what it is based on?

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      1. Each jurisdiction is different – in most of Canada, for example, if you make <10,000/yr, then your Income Tax Payable is completely offset by your Basic Tax credit. If you have other credits available (dependent children, tuition, medical, etc. . .) than you could make as much as 25,000/yr and have no net tax due. Plus, not all income is taxable – Employment insurance benefits are considered income, while welfare benefits are not, therefore they are exempt from taxes. So those are the people at the low end of the income scale not paying taxes.

        Furthermore, business is allowed to carry forward losses to apply to future years. So, for example, if I sustain a business loss this year of say $20,000, then I'm obviously not paying tax on that loss. Next year, I may make $20,000 – but I can apply last year's loss against it, reducing my taxable income to zero. Then I pay no taxes this year either. Big investors (of the Warren Buffett variety) are able to reduce their tax bills substantially by applying rules such as this; on top of the favourable income tax rates for investment income compared to earned income.

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      2. To be honest, no, I can’t, because American tax code is the most complicated thing I’ve seem in my life. But another thing you have to take into account is that income tax is only one source of funding. Sales taxes, state taxes, city taxes, etc all enter into account.

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        1. You are right, it is extremely complicated a system. This is why I just want to concentrate on the income tax for the moment.The income tax has become very central to this election campaign, so I think a good understanding of it is necessary to understand what the candidates are talking about.

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          1. I honestly don’t know much about the American Income Tax system, which is exponentially more complex than the Canadian system (which is saying something – our tax code is a 5000 page book, with references to thousands of Court Cases and decisions).

            From what I do know, I don’t see the problem being with the income tax rates as much as with the effect of the myriad deductions and exclusions and rebates and carry forwards, etc. . . you get the idea.

            It may be somewhat simplistic, but a straight, “You earn X, you pay Y” would eliminate a great deal of the confusion and animosity. It will never happen, because people can’t even agree on what the term “earn” means.

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            1. “It may be somewhat simplistic, but a straight, “You earn X, you pay Y” would eliminate a great deal of the confusion and animosity. ”

              -Hear, hear! It would also make it harder for politicians to manipulate people emotionally into supporting them based on cheap slogans.

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      3. “How about this oft-repeated claim that 50% of population pays no income tax at all? These are said to be the people on the lowest side of income spectrum.”

        I find it hard to believe, but let’s assume it’s true. It doesn’t mean that 50% of the population pay no taxes at all. Everybody pays sales taxes, and most services a city provides are based on sales taxes, not income tax. Public school funding usually comes from property taxes, hence the great disparity among them. If you have a legal job (not under the table), you will be paying Social Security taxes up to $106,000 of your income (I think it’s that number, but pretty close). So even if the claim is true, the implication (a lot of people are free-loaders) is wrong.

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        1. I don’t think that the sales tax is germane to this specific issue because it isn’t like anybody gets any exemptions from it, right?

          “Public school funding usually comes from property taxes, hence the great disparity among them. ”

          -I find this specific practice to be profoundly ridiculous.

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  5. What I think should be done is to go over and eliminate every tax exemption and lump all income into one category. Tax all that at a flat rate. At the same time, give everyone a guaranteed minimum income. This is what is known as a negative income tax.

    Examples to explain:

    Assume you make $30000 a year. You pay 25 of that in taxes ($7500). At the same time, the government gives you a guaranteed minimum income of 7500. These two numbers cancel out, and you really pay $0 in taxes. If you make $40000 a year, you pay $10000 in taxes. You get the same $7500 back, which means you really pay 2500 in taxes (this is a de facto rate of 6.25%). If you make $20000 a year, you pay $5000. The government gives you a guaranteed minimum income of $7500, which means you actually get $2500 from the government.

    The numbers above are just examples chosen to make the math easy. There is nothing magic about these particular numbers.

    Such as system has the following advantages:

    *As can be seen from the examples, such a system is always progressive.
    *Since it treats all income the same way, it eliminates much of the tax loophole industry, and makes compliance easier. Tax software will be thrown out of work. It also eliminates some evasion, as there are no deductions to “hide” income in.
    *All taxes distort the market somewhat, but this one does it less because it avoids skewing peoples actions based on how they earn their income.
    *It allows the elimination of welfare (like food stamps, which are replaced by the guaranteed minimum income), therefore saving on administration costs.
    *Such a system eliminates any welfare trap. Someone always has an incentive to earn more money. Compare this with current systems, where welfare is clawed back once you start earning some money.

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    1. Ah, but here is the thing: so many bureaucrats and useless paper-pushers are feeding at the trough of ever-expanding bureaucracy that they will not give up on this source of income very easily. It would be great to simplify the tax system but a complicated and impossible to understand system of taxation makes it easier to keep everybody confused and under control.

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  6. The one comment I agree on is “oversimplification of the problem” and also the “Of course, “let’s tax the rich to feed the poor” is a great populist slogan.” The way I see this now is basically people who feel that if you have more than them that they are ENTITLED to dictate to you and also to IMPOSE how you SHOULD HELP them and what you should do for them.

    It all boils down to that government is the answer and should take care of them or rich people are supposed to take care of everybody. And for the record I’m not entirely opposed to some government programs either.

    Where I live and what I see all around me is businesses going bankrupt or belly-up and that means job and employment LOSS. All the big employers are government and universities and that is why most people who work for government are always pro-government. Many business that have been around for decades and even longer are going bankrupt, not only that but they are stifled and burdened by heavy tax and regulations.

    We need to bring business back. WE NEED BUSINESS!

    There were several good segments on 60 minutes about corporate taxes. Here’s a link that discusses it, if you’re interested.

    http://www.cbsnews.com/stories/2011/03/25/60minutes/main20046867.shtml

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    1. “We need to bring business back. WE NEED BUSINESS!”

      -So true!!! The small and the middle-sized businesses are the backbone of every thriving economy. Everybody loves to admire Canada, but in Quebec right now I see such huge efforts on the part of governmental bureaucrats to squeeze the small businesses to death that it scares me.

      “Many business that have been around for decades and even longer are going bankrupt, not only that but they are stifled and burdened by heavy tax and regulations.”

      -Exactly.

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      1. I don’t admire Canada as I know better. I have a friend who owns a business and I’ve heard his views about it concering the heavy tax burdens. The problem here is that Canada as well as western Europe has/is always been held up as as “the system” to aspire too, while all the problems are glossed over. I see as the agenda of the Left here. Most of those people have never owned businesses or even attempted to own a business, but that doesn’t stop them for ranting on like a bunch of feeble-minded noit-alls.

        Business are not only burdened by heavy taxation, but also offering benefits (insurance) imposes heavy financial burdens as well. In addition to a litigious environment by people who see that as a way to make money.

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        1. Yes, the threat of litigation and governmental sanctions! A small business owner in Quebec has to jump through endless, very convoluted hoops before acquiring the right to fire an employee that it’s ridiculous.

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