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Very cool, it seems the researchers took into account all sorts of things like state sales tax, state income tax, corporate tax, welfare / handout type programs
by leelin 16y ago
Very cool, it seems the researchers took into account all sorts of things like state sales tax, state income tax, corporate tax, welfare / handout type programs, and spending + savings habits.
From what I can tell the key inflection points in the graph come from four issues.
1.) How much can one contribute to retirement accounts to avoid paying income tax that year?
2.) Where are the key discontinuous cutoff points in the tax system? (social security maxes out, certain payments to the needy disappear, etc)
3.) What is the typical marginal propensity to consume?
4.) How much wealth has one accumulated by a certain age in life, which can be invested, which is only taxed at lower capital gains / dividend rates?
My thoughts on the first are mixed. Yes, we don't pay taxes this year on money we stash into a non-roth 401k, but I hope they aren't doing the bad accounting of treating that as 0% tax... we will eventually pay SOME tax when we withdraw on it, just not this year.
The second point is very valid... there is a magic range around $110-$160K income right now where your marginal tax rate from paying social security is almost 12% lower than the guys making $80K-$110K. In the US, you and your employer each pay 6.2% of your earned income to social security, but it caps at $110K (the rationale being you won't get credit for more than that at retirement, so they won't take more).
The final points are a bit bogus in terms of providing us guidance, but they are more of the author's observations from the data they studied. Poor people consume more as a percentage of their income and hence pay more sales tax each year. Wealthier people buy more, but less as a percentage of their income, so they pay less sales tax, and save more over time which can be turned into investment income.
http://people.bu.edu/kotlikoff/Does%20It%20Pay%20to%20Work%20and%20Save,%20December%209,2006.pdf http://people.bu.edu/kotlikoff/Does%20It%20Pay%20to%20Work%2...
- JoeAltmaier 16y agoReally rich people have little or no income. The dodge comes in taking your jet, car, residence, living expenses etc as work expenses. While you OWN billions, your income may be thousands.
- byrneseyeview 16y agoIf you own "billions," you presumably own equity or debt (maybe some commodities, but it's not likely). If you own debt, you're paying taxes on the interest. If you own equity, the value of that equity is the net present value of future cash flows--meaning it's 'taxed' at the rate at which corporations are taxed. In addition, spending a lot of money and then making it a 'work expense' still requires lots of income. You can't effectively write off your limo charges unless your income at least equals them. And I don't know how common it is to treat a residence as a work expense. There's a home office tax deduction, but that is a common audit flag.
- smeatish 16y agoAs a side note, one interesting difference between owning equities from a company that you started versus that you purchased from savings is that your work invested into the company is NOT taxed. If you can create $100k of value a year in your own company or earn a salary of $100k (which after taxes nets you only $60k that you can contribute to purchasing assets), it will take you a lot longer to build up the value of your assets. Of course, capital gains distributions from either asset are taxed the same.
- byrneseyeview 16y agoYour work is not normally taxed; your income is. If your company is worth something, it's based on some kind of future earnings. And those future earnings are taxed.
- Retric 16y agoConsider two developers that make 100k per year before taxes and live off of 40k / year. Now assuming they work for each other they pay 100k and get 65k after taxes, spend 40k and get to invest 15k which they spend on advertizing for their company. Now assume the work for themselves They pay they only need to live off of 40k so they pay themselves 70k and get to invest 30k on advertizing without paying taxes on that value. Note: numbers are not accurate but they do give context. The idea, is companies can invest in future earns though things like advertizing or R&D without paying taxes on the income uses to pay for that advertizing. Now you are supposed to pay yourselves market rate, but if you generate 300k in value each year you don't need to pay yourself that money.
- ww520 16y agoWhat rich people do to avoid paying income tax is to structure the payment as long term capital gain. Capital gain is taxed at a lower rate than income tax. Of course if you stuff the jet/car/residence/gold-cards as corporate expenses, the capital gain would be lower, too.