A Followup to the Most Recent McCain vs. Obama Tax Plan Blog
Obama: "Obama would also introduce new tax breaks for lower and middle-income groups. Such breaks include expanding the earned income tax credit, giving those making less than $150,000 a $500 tax credit per person on the first $8,100 in income, giving those making under $75,000 a 50% federal match on the first $1,000 of savings, and exempting seniors making less than $50,000 from having to pay income tax. The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $160 under Obama's plan. That means their after-tax income would rise by 0.3%.... those in the lowest-income groups would enjoy the biggest after-tax income rise as a percentage of income - between 2.4% and 5.5% (worth between $567 and $1,042). By contrast, the highest-income households - those with at least $603,000 in income - would see a dramatic decline in their after-tax income - a drop of 8.7%, or $116,000."
McCain: "The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $1,200. That means their after-tax income would rise by 2%. But those in the lowest income groups would only see their after-tax income rise by less than 1% (or between $19 and $319). By contrast, the highest-income households - those with incomes of at least $603,000 - would see a boost in after-tax income of 3.4%, or more than $40,000."
Some Thoughts: Warren Buffett has repeatedly stated that when tax breaks are given to those on the lower end of the spectrum, they are going to spend it because they need it. They will go to Wal-Mart or Target or Borders or Home Depot or J.C. Penny to buy clothes, food, put in new carpet, et cetera. When those at the higher end of the spectrum get tax relief, it is almost always, without exception, put to work in the stock market or other investments because they don't need the money. For the sake of kicking up the economy, that's partly why profits rose so heavily under the Clinton - Gingrich era because the average lower class and middle class households saw their purchasing power increase by thousands of dollars. These demographic sectors spend income increases. Those making $250,000 per year don't.
That played a big role in my decision to switch out of my usual party alliances (as many of you know, I'm a Republican who is voting for Barack Obama). Again, here we're only dealing with the economics and investing side of it - you're personal convictions on social issues and other topics don't factor into this and, to be honest, that's not what we're here to discuss at Investing for Beginners so I'll quietly bow out of those issues, if you'll pardon me.
Comments
Maybe the lower end incomers should pay their debts rather than look for new ways to spend. That’s the problem. Sounds like government.
For my own edification — it sounds like your position is opposite that of trickle-down economics theory, correct?
Can you explain the trickle-down theory then? i.e. why would people believe that relieving the tax burden of the rich is a better way to stimulate the economy?
Thanks
Marco,
I believe in Milton Friedman’s theory that the greater the rate money circulates through the economy, the more cash flows the treasury. If you get to keep more of your paycheck, you’re going to want to work more because there is a greater reward for your labor. Let’s say you take those excess funds and buy a piano for your house – now you generate income tax on the part of the piano retailer, in addition to sales tax. The piano maker buys the goods from the manufacturer, who also has income tax triggered. They hire more people, who themselves are now paying income tax. Money circulating equals a more prosperous nation.
My argument was based on Friedman’s assertion that by cutting the effective tax rates on roughly 50% of America by 2.5 to 5+%, it would have a greater kick start effect on the economy because these are the people that are likely to spend the money. The McCain plan had very little cuts in place for the huge portion of the population that is likely to spend the money and generate corporate profits. If I get a tax rebate, I’m going to invest it – not go to the store and buy something. That’s my point. Here’s an example …
As you read in my last blog, I have a big position in Wal-Mart stock. Even if my tax rate stays the same, if half of the American population has more disposable income and is buying more cereal, coffee, laundry detergent, DVDs, televisions, video games, clothes, perfume, or candy bars, I’m going to be much better off thanks to my holdings in the stock – in other words, I’d be willing to be a substantial sum of money that if Wal-Mart’s tax rate stayed the same, but the 50% of Americans making below the average experienced a respectable tax cut, the company is going to be drowning in higher profits thanks to increased volume. It’s a formula that has always worked = LOWER TAX RATES EQUALS GREATER REVENUE FLOWING INTO THE TREASURY. When taxes are low, the amount of money that flows to Washington is higher because there is greater reward for your work.
*WE SHOULD GO TO A FLAT TAX OR CONSUMPTION TAX MODEL*
To be perfectly honest, if I were given control of the tax system, I’d cut rates across the board to a combined 10% and 20% on all forms of income with no deductions. My favorite example is from years ago when Ross Perot generated a rumored $300 million in tax-free municipal bond income and wasn’t subject to a penny in income taxes, whereas a school teacher is approaching 50% rates. In my system, if you made $100,000, you’d pay $10,000 to $20,000 – social security and all – and if you made $10 million, you’d pay $1 to $2 million. As it is now, the wealthier you are, the more it becomes necessary to shield assets in accounts such as simplified employee pension funds so that you may theoretically be in the 35% rate, but you’re paying nowhere near that. Warren Buffett reported that he only paid an estimated 17% on his $40+ million in personal income (that has nothing to do with his $60 billion Berkshire Hathaway fortune). If so many loopholes didn’t exist, it wouldn’t be necessary to have tax rates that looked so high.
In other words, under the current system, the wealthier you are, you can put assets to work in such ways that you aren’t effectively paying taxes. If you held, say $20 million in General Electric stock, you could effectively borrow against it until the day you died and never pay a dime in taxes. There has to be a better, simpler way.
Put simply, I believe the following:
1. I don’t think you should be punished for success. Everyone should pay the same percentage of their income with no loopholes or deductions. If your pre-tax profits are $1 million, you should pay the same percentage as someone making $50k – whether that’s 10% or 20%.
2. Absent a system like that, the next best alternative is a fair tax, or flat tax, where the first, say, $10,000 or $15,000 is tax-free to help families get out of poverty, but above that, everyone pays a national sales tax. That way, those who use enormous resources – think heiresses that jet around the globe and spend $300k on shoes and clothing – will pay a much higher percentage of the burden than a middle class family that is saving to put a down payment on their house. This would let those who are responsible amass a lot more money faster and those who are irresponsible pick up the bill for everyone else. Mike Huckabee proposed a plan like this and it was very, very good in my opinion.
Those are my opinions. Do I think anyone in Washington is going to actually do this? No. It would mean companies like H&R Block going out of business and they can’t stand up to the lobbying pressure even though 99% of American’s would probably have a better, if not much easier, relationship with their tax filings.
Joshua,
I like the way you think. I’ve been subscribed to your blog for quite some time. But, I have to say, that you and I are very similar. I’ve mostly voted Republican for most of my life, but this time I’m thinking of voting for Obama, just because of the Economy and Energy issues. Now, I don’t know where you stand on the Energy issues, but I agree totally with your stance on the the Economy and the candidates. Thanks for posting this and I look forward to receiving more blogs from you.
David
If you truly wanted to “bow out” of the “other” political areas, you should not have included the party that you are leaning toward voting for. The bottom line is that finances can be corrected but once ground is lost in the social & moral realms, it is much more difficult to regain that ground & our country is truly at a very serious place in its social & moral values. In other words, the social & moral issues ARE the more important issues & I would suggest that you reconsider these before you actually switch your vote.
Barack Obama!!!!!!Woohooo!!!!!
That’s the point. I’m not a fan of Friedman, but it seems the tax designers are the rich themselves. I live in Europe, and in my country you pay in taxes for your job from 25 to 45% of the income (the higher the income, the higher the tax). But surprinsignly, if you got ANY quantity in stocks, bonds or whatever growing capital, you pay just a plain 18% at the time of collecting it.
That leaves us in a situation similar to the described by Buffett: the poorest you can imagine will pay a tax of 25%, but Buffett himself would pay a barely 18%.
The plain tax you propose (lets say 20%) for everyone, no matter the source or the quantity of the income would be more fair, in the face of what most people think. Let put it in numbers:
I earn a gross of $10.000 per year, and thus $2.500 go in taxes (25%).
Some Rich earn a gross of $50.000 per year, and receive $150.000 more in stocks. He pays $22.500 (if he is in the 45% range) in taxes and $27.000 for the stocks (if he decides to cash them), a total amount of $49.500. If his both earnings have been subject to the same taxes than me, he would have paid $50.000. So the rich are paying less than the poor. The lower the regular income and the higher the stock income, the higher the difference.
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