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Thursday, February 2, 2012

Who Pays What In Taxes?

The question came into sharp focus when Mitt Romney’s tax forms revealed he paid just under 14 percent on $42 million in income over two years.

Billionaire Warren Buffet says he pays around 17 percent – and he compares that to some of his employees who pay a greater percentage. We set out to find out who pays what in taxes, why, and ask, what’s fair? It turns out to be a complex question with lot of opinions — and heavily debated facts, check out the links below.

Guest:

  • David Cay Johnston, Reuters columnist, professor of tax law at Syracuse University

Please follow our community rules when engaging in comment discussion on this site.
  • BEEZ

    The bigger issue is that low and middle income wages have been stagnate for years…while the upper incomes continue to climb. That disparity is the bigger issue

  • http://www.facebook.com/dhrosier Dreighton Rosier

    Calling FICA contributions a tax is at best disingenuous.  Taxes go to general revenue and are expended for purposes that have no relation to individual taxpayer.  FICA contributions secure income security in Old Age and event of Disability that related directly to the employment history of the individual taxpayer.  FICA contributions are a flat % of Covered Compensation but progressiveness is achieved by the fact the lowest band of Covered Compensation earns 93% annuity type benefits where the very broad top band earns only 15%.

  • PHILIP BRETT

    To elaborate on the payroll taxes.  The payroll tax for Social Security–6.2% if you are employed, 12.4% if you are self employed–is capped at $106,000.  For the benefit of “fairness”, let’s look at Social Security and Medicare together.  For an employed person, the percentage is 7.645% for the first $106,000 and then the Social Security drops off leaving only the Medicare tax of 1.45% for income over $106,000.  Double both rates for the self-employed.  Therefore, the “independent contractor” who delivers your paper and makes $20,000 pays 15.3% on that $20,000.  Meanwhile, for the very rich, the marginal payroll tax rate approaches between 2.9% and 3% after a few million dollars of income.  So the paper delivery contractor pays more the Mitt Romney in payroll taxes alone.   The 15.3% comes off an independent contractor’s income tax before any other taxes are considered. 

    • http://profiles.google.com/caleb.b.king X X

      Superb contribution and clarification.
      If this isn’t modern feudalism – where the poor pay all the taxes for those who own entitlements to the wealth the poor produces – I don’t know what is.

  • Mark Dawson

    I thought the point of having lower tax rates on capital gains was to encourage investment, not necessarily (only) to reward rich people. I don’t hear any discussion about changing our long-term savings and investing mentality – I almost feel like if even us poor people had a healthier financial management ethos we too would benefit from lower taxed capital gains – if we got to the point we actually *have* capital. Instead of spending more than we earn on instant gratification we put some aside… (I need to practice what I preach.)

  • Pat Dolan

    As pensions were eliminated, more of us will depend on interest and dividends from our 401K savings to support us in retirement.  Should these earnings be taxed at the same rate as Mr. Romney’s?  Eeek!

  • http://profiles.google.com/caleb.b.king X X

    Dear Robin Young and David Johnston,

    I have been waiting for today’s excellent radio show for years.  Alone, as if in the wilderness, I have walked naked and barren crying from the rooftops about these exact inequities in the code, the quickly forgotten (or rather suppressed) dramatically progressive history of the code, the demand-driven growth statistics (versus supply side theories) and all the rest.

    Let’s return to Johnson-era rates.  Let’s get rid of all write-offs and exemptions in the corporate code for any and all reasons.  Let’s get rid of all write-offs and exemptions in the income tax for anyone making over $200,000.  Let’s tax capital gains at rates HIGHER than income.  Let’s scrap the $200,000 INCOME CAP for Payroll tax. Let’s eliminate interest carry-overs.  Let’s lower tax rates for incomes $30,000 and under and increase the EITC.  Let’s go after off-shore tax havens instead of raw milk and pot smokers and eliminate the practice of off-shoring profit declarations.  With all the added revenue, let’s eliminate all sales tax, close the deficit, fund public health, public ed, public trans and public works and let’s cut military spending by 75%.  Let us return to a just society.

  • Henry

    My feeling is our tax system encourages people to make money with money rather than with employees. Could our tax system be restructured to reverse this? Is anyone discussing this, or do I miss understand our current system?

    • http://profiles.google.com/caleb.b.king X X

      You are correct. Reversing this would require taxing capital gains at rates higher than income, eliminating all tax loopholes and deductions on profits and incomes over $200,000 and preventing profit off-shoring.

  • Isernia

    David Cay Johnston is a Western New Yorker, as am I of late.  He has been my principal source of all information on taxes since reading his book FREE LUNCH several years ago.
       It seems most folks in the US finally now believe that the great disparity in wealth is due to inequities in the tax system law; but the average Joe  still thinks that is MAINLY because of tax write-offs.  Until all citizens come to realize how tax laws are written by the powerful wealthy  to their own advantage, and the degree to which political trade-offs account for these laws, there is no hope for reform.  
         Like others, my eyes have been opened to the legal “scams” that operate within the tax code.    I recall my now 92 year old sister’s adage thirty years ago—”As long as your money in earned  as wages, you don’t have a chance of escaping the onus of taxes.  If most of your money is in investments, you are among the fortunate”.  She prepared simple tax returns for elderly folks at a Senior Center (AARP volunteer program).  Her clientele were NOT wealthy seniors.  Those were going to  mahogany paneled CPA offices for tax advice. 

  • chris robbins

    Capital gains are not indexed to inflation. So for example, if you make 5% on your stock in a year, but the inflation rate was 5% that year, you made no money. But you still have to pay tax on the increase in your stock’s value (assuming you sold it). This situation rewards short-term investment and punishes long-term investment. Is there any way to index capital gains to inflation, or would it be too complicated? (incidentally, this was one element of the “Contract with America” in 1994.) I suspect it would be too complicatd, & that’s why capital gains are taxed at less than ordinary income.

    • Goethe Behr

       Convoluted.  While that capital gain of 5% breaks even.  MY 1% in a savings account loses its value, big time.  Why again should we further subsidize the fat cats?  This is like the stupid argument that capital gains is “double taxation,” since the company paid corporate tax.  That’s like saying the guy who plows my driveway shouldn’t pay taxes on the money I pay him, since i pay taxes.  With that logic, only one person in America would pay taxes, and the rest of us would claim double taxation, because that money already paid tax.

  • Roadwarrior429

    I’ve listened with interest the damning of Mitt Romney over his only paying a tax rate of 15%.  What has been missing from that story is what his tax liability for 2010-2011 actually is.  From what I’ve found online, Romney’s 15% comes out to something like $6.2 million in taxes paid.  That is more than I will pay over my entire lifetime, and yet I’m not sure that Romney gets that much more return in services on his tax bill from the federal government – at least before he starts receiving Secret Service protection as a presidential candidate, than do I.  So why has the media only talked percentages and not actual dollar amounts when it comes to Romney?  

    • http://profiles.google.com/caleb.b.king X X

      No, he does not get more in services you’re right, nor should he; he takes valuable equity and wealth away from the workers who produce the value that he extracts via his shares.

      Curb the largest entitlement programs in the country:
      rent,
      interest,
      dividends and
      royalties.

      • Mcljixrh

        I disagree.  I think the one makes, the more one receives from the government.  One of the most important jobs of our government is to protect property rights.  I would argue that the more one is worth, the more the government has to protect, exponentially so.  And it is not unfair to tax based on that protection.  And RoadWarrior, the fact that Romney has paid more than you or I will is a poor argument for him not paying a higher percentage than we do.  He has benefited to a much greater extent from living here than you or I ever will.

  • Donna Cohen

    A great book which explains tax policy in a readable fashion: by John O. Fox, If Americans Understood the Income Tax: Our Most Expensive Ignorance.

    Also, just out in 2011, An Inconvenient Tax, a wonderful DVD, creatively
    and engagingly done, which has interviews with folks from the full
    political spectrum – all discussing how the tax system is not working!

    Just want to say that we _ so much_  need to be discussing this. The politicians are talking tax reform but we only get a tiny and partisan piece from them.  We need to become more educated about overall tax policy, especially  _tax expenditures_ which cause $1 trillion to be “spent” on mainly higher income individuals. Deductions, deferrals, etc. are _gov spending_  and are not fairly distributed. Let the government collect the money and more transparently spend it for the benefit of all, or lower tax rates and provide more help for folks whose income is so low they don’t file taxes.

  • Iamunurme

    This is only for those who do not watch Fox.

  • Claude

    Although I found this discussion on tax rates highly informative, I’m really surprised and quite disappointed that  the total taxes paid by an individual was never mentioned. If the point of taxes are to raise funds for society to maintain schools, infrastructure, etc, for each of us to use, I think any discussion on taxes has to include the total dollars an individual actually contributed to the treasury. Whether a tax rate is high or low will always be debated since most people generally feel that they pay too much. The fact is that Romney, with an income of $40 million, pays $5.6 million in taxes even with the low 14% rate. If an individual earns $80,000.00 and is subject the higher 25% tax bracket, that individual pays $20,000.00 in taxes. In reality, Romney actually pays 99% more in real dollars into the treasury. If the point of taxes are for wealth re-distribution and social engineering, than a tax debate can focus solely on tax rates. I think a real and complete discussion on taxes is warranted and should include a “use” tax and other means where the majority of an individual’s taxes are based on services actually used by the individual. 

  • cindy davis

    Why does someone who makes $10,000 a year in capitol gains pay at the same rate as someone who maked $10,000,000? Is it possible to add tiers to the capitol gains tax?

  • Grumpy retired military

    Something that has “irked” me for a while as a fiscal conservative is my personal case with our tax code.  I am a recently retired military officer (retired last March after 20 years),  and my salary alone exceeded $100K, not to mention investment income and capital gains.  However, the 1st 3 months of 2010 were tax-free due to my 6+ months Afghan deployment,which lowered my AGI enough to qualify for the EIC.  I received over a $5000 refund and had no income tax due.   Similar situation for 2009 (4 months tax free from deployment) where I paid no taxes on an AGI of under $46K; refund of $5450.   Now I have no problem with this since Afghanistan is a bona-fide combat zone (as Iraq was), and this is considered a reward for servicemembers’ sacrifices.  (The militaryalso adds other entitlements as well.)   However, in 2007 I was deployed to Qatar – definitely NOT a combat zone, but a HQ for commnad & control for combat operations – and I again paid no tax on $3900 AGI (total wages over $74K of which only $25K considered wages on my W2) and got a refund of $3600.  When I consider all the servicemembers deployed to these tax-free ”non-combat” zones, especially the higher-ranking members paying no taxes, and with our nations high debt and deficit, it just strikes me as wrong.  Contractors too get the same tax-free benefit, unless something has changed.  If you’re single, deployments to countries like Qatar, Kuwait, Oman, Bahrain, and Kyrgyzstan, where you don’t typically carry a weapon or wear a flak vest or Kevlar helmet, can be a financial windfall.  Now that combat operations in Iraq are formally over, I hope the DoD and Congress review what is considered a Combat zone Tax Exclusion area so a little more revenue can come in and help this country get back on the road to fiscal stability.

  • Kevin Morriss

    Great interview and discussion.  I have two questions:

    What effect, if any, do estate and gift taxes have on the analysis of overall tax progressivity?  Surely, the estates of the ulta rich, even after careful estate planning, will be subject to substantial estate tax liability (in most jurisdictions, both state and federal) that the vast majority of Americans will not be subject to.  If we look at effective tax rates over the course of a lifetime, after taking into account estate taxes, does the analysis change?

    Secondly, the argument seems to be that we should really be looking at overall effective tax rates, after taking into account all tax liability, including regressive taxes.  For the tax system to be fair, as I understand the argument, overall effective tax rates should be progressive, not just income tax rates.  It is therefore unfair that in Alabama the poor’s effective overall tax rate is double that of the top 1% of earners in Alabama.  

    I agree that income tax rates should be progressive.  With regard to income taxes, those who earn more, should pay more; the increased tax rate is related to that which is being taxed: income.  How does that rational work with regard to regressive taxes?  Whether an individual who buys a candy bar is a billionaire or a hundredaire, what is the rational for charging the billionaire more in sales tax (either by charging more at the counter or reworking the tax system to achieve the effect)?  Each the billionaire and hundredaire walk away with the same benefit.

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