Raubant wrote:
Quite frankly I am neither democrat or republican. Either way the people in charge of this contry are just plain stupid. As far as what I think the taxes should be for people yes I think richer people should pay in more money than an average middle class person. The same % of their income. Also no matter what, everyone earning an income should pay the same %, what I mean by this is that rich people who do everything they can to pay less taxes should not be allowed to get away with it.
This is a typical statement from someone who knows very little about economics.
First thing: You are aware that we have a progressive tax system in the US, right? The higher your "income", the higher the percentage you pay in taxes. So yeah. The "rich" pay a higher percentage of their income then the middle class, who pay more then the poor.
Second thing: You're confusing "income" with "earnings". Income is specifically money you are paid in return for goods and services. Typically, that's a salary of some sort. Those are taxed in the progressive manner I spoke of.
However, earnings includes all methods by which one's wealth may increase. That includes things like capital gains (which is what usually makes up the bulk of the "rich" people's earnings). Capital gains are *not* taxed progressively. They are taxed at a flat rate based on the duration the investor held the investment. The longer you hold an investment before selling it (and taking either a gain or loss), the lower the tax rate. The *highest* capital gain rate is equal to the income tax rate you'd incur for the same quantity of money (typically capping at 50%). The lowest rate varies over time (I think it's like 18% atm, but I could be wrong).
There is an absolutely critical reason why capital gains rates must *always* be lower then income tax rates. Because if you don't do so, then there is no incentive for those who are already wealthy to invest their money. They would simply own businesses and venture directly (since they're taking the same risks and paying the same tax rates). This would have the effect of cutting anyone who wasn't already wealthy out of the investment market. Right now, a working class person (anyone in fact) can save up some money and invest it in the market). Raise capital gains taxes, and there wont be an investment market (not a real one anyway, since the bulk of the capital wouldn't be there). The rich would still be rich, but everyone else's opportunities would be cut.
Even if you don't raise capital gains to be the same as income, even just raising in in general has a big effect. But not in the way most people think.
Imagind you've got an "ultra wealthy" person. He's got 5 Billion dollars of investment wealth. It's diversivied and gains an average of 3% after inflation (a pretty modest increase honestly). That means that his wealth increases by 150 million dollars each year. Let's say he likes to live large and allows himself 15 million dollars a year for living expenses. He's going to pay capital gains on the amount he has to sell off to have 15 million left over. If capital gains is set at say 25%, that means that he sells 20 million each year, 25% is paid in taxes (5 million), and he lives on the remaining 15 million. If you raise capital gains taxes to 50%, he sells 30 million, pays 50% of that (15 million) in taxes and lives off the remaining 15 million.
Who paid the taxes in this case? Not him. He still lived comfortably on his 15 million dollar a year allowance. The taxes came out of the remainder of his wealth growth. At 25% rate, he reinvested 130 million dollars each year. At 50% rate, he reinvested 120 million dollars. That extra 10 million dollars came out of the money he normally would just keep in his investment portfolio. That's people's jobs. That's R&D for new products and technology. That's a chunk of funding into a new medical proceedure or device. It could be anything, but now we've got 10 million less dollars doing it. Presumably, it was generating a positive result (else his money would be shrinking, not growing).
You didn't tax "the rich" by increasing capital gains at all. However, you most definately hurt the middle classs. Let's say you are a middle class employee. You make a good salary and can afford to put aside an average of 20 thousand dollars a year into your own investment portfolio over your lifetime. You have a goal to be able to retire once you have enough money to ensure your own modest allowance of 40 thousand a year (after taxes). In order to do this (we'll use the same rules as for the rich guy), you must have enough that 3% of your investment wealth minus taxes is equal to 40k. This will allow you to live the rest of your life on that amount of money (adjusted too, since the 3% is an ajusted value). At 25% rate, you'd need to have a yearly growth of 53.3k. In order to get that, you'd need to save up 1.78 million dollars. At your investment rate of 20k a year, allowing for that same 3% adjusted increase rate, it'll take about 40 years for you to reach your goal and retire with a yearly alllowance of 40k a year (adjusted for inflation).
This is difficult, but doable for many middle class people. Especially if they start investing early, keep at it, and increase their investment as they increase their salary throughout their life. Note also that this is the amount to effectively become "independantly wealthy". You need not work and the money will sustain you at that level essentially indefinately. You can retire on less, but you will either have to take less money per year, or slowly eat your investment away through your retirement years (which is what most people end up doing).
If you raise that capital gains rate to 50%, now you need to have an income growth of 80k a year. This requires an investment size of 2.66 million dollars. That's almost a million dollars extra. You'd need to make the same investment for around 55 years. Most people don't work for 55 years...
What this does is raise the bar at which a middle class person can become "wealthy" (wealthy being defined as having sufficient wealth to support a person without having to spend the wealth itself, just living off the returns of the investment without any depreciation of value in the investment itself). This is a hard minimum, and you run into some problems if you can't reach it. Everyone retires at some point. What they have accumulated at that point is all they have. If you have enough to meet the criteria for "wealthy", you're golden. You can live for as long as you live and you can hand your wealth on to your children and granchildren. You never lose it. If you have less then that amount, you *will* lose it through the course of your retirement (most of it anyway). Since you don't have enough wealth to sustain you, you must consume your wealth each year, gradually shrinking it over time. Of course, then we'll apply death taxes to the remainder, effectively ensuring yet another "bar" where if you are below a set point, you're stuck.
Raising capital gains does not hurt the rich. In fact, it protects them. It makes it harder for anyone else to become rich, effectively keeping those who are already rich in a separate "class" from everyone else. It discourages anyone who might try to save and invest money, since the simple facts of time and working lifespan begin working against them. Raise capital gains high enough, and you dramatically reduce the percentage of the workforce that can even possibly succeed at obtaining wealth during their lifetimes. It's a pretty horrible thing, and often misunderstood.
And that's not even going into the effects that capital gains have on things like banking and business loans. They end up being direct determinants of interest rates on loans. Once again, this affects the middle class the most since their salary ranges are the most sensitive to increases on those things. The poor don't make investments and don't take out loans as often. The rich can afford and absorb whatever increases there are. But for the middle class, the difference of even a few percent can make the difference between being able to do something with their money and not.
Most people don't understand how capitalism works so they assume that the bits they don't understand are "bad". And there's a whole lot of misinformation out there as well. The facts are not nearly as "easy" as some make them out to be. And in most cases the effects of taking particular actions are the exact opposite of what you might think they'd be.
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As a matter of fact this is a true statement most of our soldiers are less educated because they don't have the money to go to college which is why they become soldiers. Sad truth but oh well. Amyway, I would say that a decent percentage of people who have been in the military though are well educated because of the military.
We are currently fielding the most educated military force in US history. I'm curious what criteria you are using to determine this...
Edited, Feb 21st 2007 3:44am by Raubant[/quote]