Yes. It took me a minute to figure out exactly how, but those claims are basically complete bullshit. He didn’t pay $12k in tax on a taxable income of $11k, he paid (note: they don’t break it down so these are guesses, but it will look something like this) $2k in federal income tax on a federal taxable income of $11k, plus $10k of state income tax on a state taxable income of some much higher number. This is because the state’s definition of “taxable income” doesn’t allow for nearly as many deductions, as is mentioned in the article. It makes zero sense to compare the amount of state tax you paid to your federal taxable income, which is what’s being done here.
The best illustration of why this makes no sense is: if all else stayed equal and he managed to find another federal deduction that didn’t apply to state, he’d pay less in taxes, but his fake “tax rate” would increase, because his state taxes would state the same while his “taxable income,” which has zero to do with state taxes, would go down. If he found another 10k in federal deductions he could conceivably be crying about a 20000% tax rate.
I might do this once tax season is over, but given how certain credits and deductions are phased out over certain ranges, I have to wonder if it’s possible that one can pile up enough of such items on the same return such that one’s effective marginal tax rate is greater than unity. Certainly the huge changes that I see on some returns after adding a relatively small amount of income that reduces multiple phase-out items suggests that the highest effective marginal tax rate is probably higher than the nominal one if conditions were just right.
I have heard that when income exceeds 400% of the poverty level, Obamacare subsidies suddenly end. If income is right at that level, earning an extra dollar can be very costly, although this might not be considered a tax. I have also seen plots of disposable income vs income that show sudden drops in disposable income at certain levels of income. These may be due to the way things like Medicare, child care credits, and earned income tax credit change with income.
There are a lot of “welfare” programs that work that way-- Medicaid is another one. It’s baffling to me that, for all that people complain about effects like that in taxes (where they don’t actually occur, since the tax brackets are only marginal), nobody complains about them in benefit programs.
People do sometimes complain about this. But then somebody explains to the the Iron Triangle of Welfare and then the air is taken out of their sails.
Iron Triangle of Welfare
[INDENT][INDENT][INDENT] The iron triangle of cash welfare programs indicates that there is no way to reform a simple cash welfare program in order to simultaneously achieve the three goals of welfare programs. These goals include: (1) Encouraging work, (2) Redistributing income, and (3) Lowering costs. Government has only two tools to work with in order to make these alterations. It can change the level of benefit guarantee, and it can change the benefit reduction rate. There is no way to change these two parameters and meet all of these goals.(Gruber, Chapter 17, Page 494.)
For example, suppose the government lowers the benefit reduction rate for a given guarantee level. This would not encourage work or lower costs. Suppose the government reduces the guarantee for a given benefit reduction rate. This will encourage work and lower costs, but it will decrease the amount of income redistribution since the poor will receive less in a system with a lower guarantee. If the government raises the guarantee, this will increase income redistribution, but it will not encourage work or lower costs.(Gruber, Chapter 17, Page 494.) [/INDENT][/INDENT][/INDENT] Generally, if you improve incentives, you end up redistributing less income for a given budget. Of course a very high budget can give you great incentives and a generous safety net. Or you can have a stronger safety net and create some perverse incentives. Tradeoffs.
People still reasonably shake their heads at some of the cutoffs or fast phaseouts. But they are there for a reason, though there are decent arguments for other formulas.
During the Bush I admin, Jack Kemp emphasized incentives; White House budget director Richard Darman thought the former football player turned congressman was long on talk and short on knowledge: [INDENT][INDENT][INDENT] Darman then appeared at the door. Declining Kemp’s offer of a seat, the budget director absorbed a few minutes of the familiar oratory. As a top planner in the former Department of Health, Education and Welfare, he probably knew more about welfare than any of the dozens of officials in the room. And he was not one to disguise it.
Work disincentives were a concern, he agreed. But Darman pounced when Kemp suggested that welfare recipients should be allowed to keep 85 cents of every new dollar they earn without having their benefits reduced. Doing some quick arithmetic in his head, Darman concluded that such an approach would allow people to collect welfare when they were earning as much as $70,000 a year.
Darman also noted that the group had talked of cutting off welfare benefits after two years. What, Darman asked, then happens to the family’s children? Do they simply starve? The budget director talked on for 15 or 20 minutes, before ending his lecture with a curt suggestion. There is a large technical literature on welfare, he said. Perhaps, before your next meeting, you should read it. [/INDENT][/INDENT][/INDENT] https://www.nytimes.com/1993/02/28/magazine/how-jack-kemp-lost-the-war-on-poverty.html
Don’t get me wrong though: knowledgeable experts take welfare incentives very seriously. My point is that it translating it into political outrage is trickier than it looks, as the alternative isn’t obvious.
That triangle is made out of awfully soft iron, because even a policy weakling like me can bend it. I can come up with a policy that would accomplish all three of those points fairly easily, while simplifying the tax code at the same time.
The key there is the international aspect. Which can seriously undercut or muddy that logic. The most accurate assessment would be that taxes on natural resources exports are just apples and oranges with the tax burden in general. It’s not a public policy of Norway that it has far greater value of natural resources relative to its population than the US. Moreover it would be easy to avoid that complication by comparing to countries with broadly similar public policies to Norway which don’t have comparable natural resource riches.
But for the point more generally assuming the company’s stock is owned by citizens of the country whose tax burden we are looking at, and its employees live and work there (which isn’t strictly true of big ‘US’ companies wrt the US but much more true of them wrt US than wrt Norway) you definitely cannot say a tax on the corp’s profits isn’t a tax on the citizens of that country. In the end only people pay tax just like in the end only people produce stuff or consume stuff. Corps are just a way of organizing people. Some combination of the shareholders, employees and customers of a corporation are paying the corporate income tax (or a resource excise tax, sales tax or any other tax the corp collects). It’s complicated to say how much each group pays. Assuming it’s mainly the shareholders, and assuming shareholding is concentrated among richer people it might be a progressive tax on the people in that country, but still is a tax on them. And not necessarily more progressive than an income tax depending on the details.
And how much of the tax is really borne by shareholders could vary a lot. For example in case of a resource excise tax which affects one particular type of company there’s no reason to think that tax lowers the return on capital for that type of company compared to other types of companies, return on capital seeks its own level like water. That sort of tax is probably borne almost entirely by customers for that type of product. With a tax which applies to all companies, like a corporate income tax, it’s more plausible to assume it falls more heavily on shareholders, except, in the real international economy it also leads to a movement of economic activity to places where corporate taxes are lower, which does blow back on ‘Joe Average’. In a single global or closed off national tax system that wouldn’t be as true.
Which is why, despite the recent tax reform execution arguably being a hash, there was support on the Democratic side in the Obama years for not having the US corporate tax rate as among the highest in the world.
It was once mentioned to me that this was Margaret Thatcher’s appeal. She eliminated a lot of welfare “giveaways” to simplify the system. If you made less than X you got cheap butter, make less than Y pay nothing for council housing, make less than Z and your children get free milk at school… There was a serious disincentive to increase any income - not just in taxes but is subsidized giveaways. (Although she famously became the person who took away schoolkids’ milk.)
The discussion is relevant when comparing Americans and oranges. What I get for “free” with my taxes in Canada, many Americans have to pay thousands of dollars for the same service, and then often thousands in deductibles before that insurance kicks in.
Property taxes are another issue - renters in Canada (and most places?) pay not taxes to the municipality - the rent they pay their landlord helps pay it instead. So it probably falls in the category of “cost of living” not income tax; plus it is irrelevant (in general) of income. Whereas, health insurance you can’t really avoid unless you plan to “self-insure” and go bankrupt in the event of a catastrophe.
The other point is that I’m sure VAT, like GST and much of PST (Provincial sales tax) in Canada, does not apply to a vast amount of what a person spends to live - i.e. not to rent, car insurance premiums, assorted health and grocery items. So it’s not like you’re paying a flat tax on all you spend.
(Fun note - GST applies to snack foods, but not groceries. Baked good in bulk are groceries. One as take-away - snack. Hence the old commercial… “You want complicated? One donut…GST. Six donuts… no GST.” )
If you have stock options (of a certain variety), then when you convert them to actual stock, you have to pay tax on the gains. This may exceed whatever normal income you had that year. If, later, the stock crashes, then you’ve paid tax on dollars that you never received.
The system recognizes this and allows you write off those losses against further taxes, but there are severe limits and it’s possible that this will take so long that you’ll never get the money back. And you’ll lose out on the time value of that money.
Is it fair to tax when the options are exercised? Well, there’s certainly an argument–you’re receiving an asset, so you should pay tax. But the options were already worth that much; you could have sold them for the same price as actual shares (less the exercise price). So you haven’t really received something new of greater value. It would make more sense to tax when it gets converted to actual dollars.
Are you convinced you have an accurate perception of the status quo? Because the ACA was designed by folk that had a pretty good grasp of incentive issues.
I’m not trying to snark, btw. The iron triangle shows up a lot once you get into the weeds. Milton Friedman’s negative income tax proposal had good incentives, but probably wasn’t sufficient to support someone at very low income levels. To get around the iron triangle, policy makers set different rules for the able bodied and disabled, which produces new potential for gaming with associated public complaint. A number of welfare programs have phaseouts to avoid wholly perverse incentives, but the marginal benefit loss rate is high - 80% or more.
Digging, this website shows a fairly even ACA subsidy phaseout. But this website seems to think there’s a steep cliff in some of the subsidy phaseout schedules, at least in Colorado. Remember states have some freedom to tinker IIRC. Other sites peg the cliff to the point at 400% of the poverty line for people who’s age is just short of medicare eligibility. No, I don’t have a firm grip on these rules.
I assume that smoothing the cliff so that those at 400% of the poverty line can now receive something until they are at say, 500% of the poverty line would produce its own set of complaints.
Ok, here’s what the Obamacare’s architect said about the tax credit cliff: [INDENT][INDENT][INDENT] Assessing which consumers wind up with the “better deals” can be complicated, policy experts say, because the lowest-cost silver plans available in different regions likely have different coverage details, such as deductibles and networks of doctors and hospitals.
Although some older and poorer residents in high-cost regions might have the chance to leverage tax credits, others in those same communities run a risk of what might be described as a “tax-credit cliff.”
Individuals with incomes up to nearly $46,000 receive tax credits so they don’t pay more than 9.5 percent of income for their benchmark plan. Those with income just above the cut-off don’t get a tax credit.
A 50-year-old man in one section of Nevada who barely qualifies for a subsidy pays only 8.8 percent of his income for the lowest-cost silver plan, according to the analysis. A man who earns just a bit more than the cut-off, meanwhile, pays 17 percent of his income for a similar policy.
The tax credit cliff is an inevitable consequence of having limited funds for a government program, said Gruber, the economist at MIT. Cliffs would be bigger, he added, if the income cut-off for tax credits was lower. [/INDENT][/INDENT][/INDENT] …and cliffs would be lower if we spent money on those between 400 and 500% of the poverty level to maintain better incentives. Tradeoffs.
I am self-employed AND employed by a business I own AND employed by a large corporation in a W2 position. So, I’m not picking on self-employed people, but I think counting the full SE Tax that way is a little dishonest because regular employees pay it, too, just indirectly. The employers have to pay the match so it’s really part of the total compensation package in actual dollars. Plus, as others have said, there is a cap.
As far as unemployment tax, the company I own that employs me does pay that but I do not have to pay it at all for my self-employment income.
Not much different than inheriting something - stocks, or house, etc. IIRC when the house (or cottage, if the house is capital gains exempt) is inherited, the estate has to treat it as sold and pay capital gains, even if it is simply deeded to the heir and no sale takes place. So again, you owe a big whack of taxes on something you did not actually buy. At least with stocks, presumably, you could sell *some *to pay taxes on the rest.
There was a recent spate of discussion about graduate student tuition, too. A grad student may have a very high tuition rate, but if they work for the university as a tutor or such they got a significant discount. Under Trump’s tax bill, that discount would have counted as a taxable benefit - your tuition is $40,000 less because you are a poor starving grad student? that’s a $40,000 taxable gift from your employer.
There was a trust company in Canada back in the S&L collapse days that had a similar interesting problem. To make sure the senior employees were committed to the company, they had to buy several hundred thousand dollars worth of stock. Most junior management obviously couldn’t afford that, so the company advanced them loans - repayable over time - to buy the stock. Then the company collapsed, the stock was almost worthless, but the loans were still on the books for full value for the takeover company. If the company forgave the loans, the employees would be considered to have gained a taxable gift of several hundred thousand dollars. If the company bought the shares back at the sale value, then it’s still the equivalent of a gift, buying stock from an employee far above market value. I don’t recall the final outcome, I think the government had to make a special case…
I would say it’s very different: in the case of inheritance, you’re gaining an asset that you didn’t have before. On day 0 you’re worth $0; on day 1 you’re worth $1M.
But the stock option was already worth almost the full amount. A certificate that says “the holder is entitled to purchase 1 oz of gold for $1” is worth only $1 less than the price of 1 oz of gold. You could sell the certificate for that price if you wanted. Exercising the option just transitions from one non-dollar asset to another.
Now, I’m not necessarily saying that they should change the law (it’s possible the alternatives are worse), but it has gotten many people into trouble, and doesn’t really make sense as it is.
I don’t think that is correct. Check into “step up in basis”.
Here is some more information on something I had mentioned earlier about the 50% penalty for missing a required minimum distribution (RMD) from an IRA. I am not sure if that counts as penalty or a tax, but the lines on the tax forms where that amount is filled in calls it an “additional tax” (see line 59 of Form 1040 and line 55 of Form 5329).
For an extreme example, say somebody 111 years old with no income inherits a $25 million IRA from a friend after his friend passed away late in 2017 prior to taking his RMD. Being late in the year, the 111 year old does not manage take the RMD in 2017 either. For an 111 year old with an IRA inherited from a friend, the RMD is the full IRA. There is a 50% federal tax due on the missed RMD, so he owes about $12,500,000 million dollars on his 2017 taxes even though he had no taxable income.
In 2018, the 111 year old has to pay his $12.5 million 2017 tax bill before April 16, and he doesn’t want to get another penalty, so he takes the $25 million out of his IRA. Federal tax on that would be around $9.2 million. His state taxes (California resident) would be around $3.3 million, and would not be deductible under the 2018 rules. Of the $25 million, $12.5 million went toward his 2017 taxes and $12.5 million toward his 2018 taxes.
As may have already been mentioned, you’re completely wrong about inheritance - at least in the US. The only income tax you have to pay as a beneficiary is from income that was not taxed to the decedent yet. This is either because they died before they received the money (Income with respect to a decedent), or because it was in a tax-favored account due to be taxed when taken out (IRA). If you sell publicly traded stock you inherit immediately when you inherit it, you will owe no tax, because its basis will have been stepped up to fair market value at the time of death. Of course, by the time you actually get the right to sell it, it may be worth more or less than that amount, and if it’s appreciated in value you will be taxed on that post-death appreciation.
There’s also Estate Tax, in which the government takes 40% of the amount of an estate over (currently) $10 million (up from $5ish million last year), and the government may come after the heirs for it if the funds were distributed before paying the estate tax. But that’s not the same thing at all.
Additionally, the phrase “taxable gift” does not, in the US, mean whatever you think it means. There is such a thing, but your examples do not mention any of them. You have instead either taxable compensation or taxable cancellation of debt. A Taxable Gift is when you give someone gratuitously over $14,000. And most of the time there is no tax due, you just reduce your lifetime gift & estate tax exclusion. Gift tax, when due, is paid by the donor, not the receiver.
What would be the most fair is to collect the tax in the same “currency” as the award. You get 1000 shares’ worth of “income”? Your income marginal rate is 33%? Ok, you give up 330 shares to the government. If the stock values goes to zero, you owe 330 shares of jack squat, because you ended up receiving 1000 shares of jack squat. It makes perfect sense.
Step 1: Give everyone what they need. This could be in the form of a Universal Basic Income that’s enough to cover all needs, or it could be piecemeal, in the form of free healthcare and free college tuition at state schools and free groceries and so on, or it could be a combination (most likely a combination, because some things are cheaper each way, and we want to incentivize some things).
Step 2: Set a very high flat tax rate, high enough to cover the cost of Step 1. Every dollar you make, other than from the Step 1 safety net, you pay 50 cents or whatever to the government.
This is progressive, because the poor will get most of their income from the untaxed income from the safety net, while the rich will get most of from highly-taxed other sources. It never discourages work, because working more will always increase your disposable income. It redistributes income from the rich (who pay more in taxes than they get from the safety net) to the poor (who pay less in taxes than they get). It decreases costs, because everyone is eligible for the safety net, so you don’t have to spend any resources on figuring out who should be eligible, and ever dollar gained from other sources is taxed at the same rate, so you don’t have to have any overhead to figure out what dollars are taxed at what rate.
The only problems are political ones. There are a large number of people who object to giving people what they need, and a large number of people (largely overlapping) who object to high taxes for the rich. And so, in order to try to appease those people, we implement half-assed compromises like the ACA which don’t work nearly as well.
Well, if you structure a situation so you pay penalties, especially around a date where the rules are different before and after, then you can certainly get a situation where the tax payable is enormous. But if the 111-year-old had followed the rules, as I understand it, he would have withdrawn the $25M and paid his 50% in taxes.
OK, not familiar with US tax law. But if Uncle Albert dies and leaves me his mansion worth $10M, that he bought for $1M - is there not a capital gains due on the $9M difference? True, his estate must pay that, but if the estate does not have the ready cash, then the house must be sold to cover it - my point. Either way, you think you’re getting something and then you (or rather, the executor) are forced to sell and you get less than the value. …Or you could loan the estate the money if it’s not too complicated, or buy the house from the estate and then get the money back… etc. If you have the extra cash.
Or am I misunderstanding that?
OK, I said “taxable gift” when I meant “taxable benefit”. If your employer gives you anything of value related to your employment, it is income in another form and therefore taxable income. Forgiving a loan of say, $300,000 counts as income of $300,000 for the purposes of calculating tax due. Your employer buying shares worth $300 for $300,000 is $299,700 of taxable income. And so on…