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Thursday, April 06, 2006

Never pay taxes again

Posted by: Hammer / 1:02 PM

Three simple steps to never pay taxes again:

  1. Elect lots of Republicans
  2. Find $10,000,000 -- or more!
  3. Refuse all offers of work until you die

Here's David Cay Johnston reporting on tax cuts for investment income:

Americans with annual incomes of $1 million or more, about one-tenth of 1 percent all taxpayers, reaped 43 percent of all the savings on investment taxes in 2003. The savings for these taxpayers averaged about $41,400 each. By comparison, these same Americans received less than 10 percent of the savings from the other Bush tax cuts, which applied primarily to wages, though that share is expected to grow in coming years.

...Those making less than $50,000 saved an average of $10 more because of the investment tax cuts, for a total of $435 in total income tax cuts, according to the computer model.

15 Comments:

never pay taxes again: Elect lots of Republicans

I guess, if you keep that $10 million in your mattress. Of course, that's been true since before the GOP even existed. If you put it in, say, US Treasuries, according to Jambo's numbers you'd pay roughly $114,000 yearly. I don't know if his numbers are correct -- he says 8.2% isn't "way lower" than 22.3%, so I'm taking his arithmetic with a grain of salt.

By Blogger Joey de Vivre, at 12:02 AM  

I'm not sure about your math either, tho. Off the top of my head I would guess that t-bills are paying less than 5% right now and if I'm not mistaken under W's tax law the maximum tax rate on unearned income is 15%. 5% of $10 mil is an income of $500,000 and 15% of that is a tax of $75,000. Of course if you put it in municiple bonds your tax rate would be zero.

So the guy who gets $10 mil from Papa and Mumsie doesn't work a day, gets a half million dollar income a year, and pays a lower tax rate than a married couple who each make $50,000 a year in wages after you include the 7.65% they pay in Medicare and SSI taxes.

By Blogger Jambo, at 1:20 AM  

I'm not talking about current tax policy, but the policy suggested in the article which I neglected to copy. Sorry.

If taxes on investment income are reduced to 0, then you would have many options for generating an income stream without paying taxes. Dividend income is one example, in addition to the bonds Jambo suggests.

By Blogger Hammer, at 8:02 AM  

if I'm not mistaken under W's tax law the maximum tax rate on unearned income is 15%.

You are mistaken. I believe you're thinking of capital gains rates; this would be interest, which is taxed at the same rate as ordinary income.

So the guy who gets $10 mil from Papa and Mumsie

Not to mention Hammer's favorite, the inheritance tax, which on $10 million would be (I believe - I'm no tax accountant) around $3.68 million.

By Blogger Joey de Vivre, at 8:58 AM  

Or $0, depending on the year in which mumsie and pop-pop die.

If they died in 2006 and had the most basic of estate plans, which allows the exclusion of the $2 million, then the tax on the remaining $8 million would be $2.8 million.

By Blogger Hammer, at 9:06 AM  

A little more data. In 2008, the exemption for a married couple is $4 million. In 2009, it's $7 million. In 2010, there is no estate tax at all. In 2011, the estate tax reverts to the 2001 level, which I think is $1.2 million (single), $2.4 million (married).

By Blogger Hammer, at 9:11 AM  

$2.8 million? Does that calculator you link to do the $2 million credit for you, and did you manually deduct it as well?

For 2006:

($10 million - $2 million) * 46% = 3.68 million.

In either case, it's a substantially higher rate than Jambo's example married couple.

By Blogger Joey de Vivre, at 9:23 AM  

I assumed Dad died first, gave $2 million to the kids and the other $8 stayed with Mom. Then Mom dies. The first $2 million goes to the kids tax-free. She pays up to 46% on the remaining $ 6 million, which comes to about $2.8 million.

By Blogger Hammer, at 9:39 AM  

You misunderstand what I wrote.
Go back and look at the chart, which is still on the web at nytimes.com.
The $10m up group paid 22% of their income in personal federal income taxes, which is a lot of money even after the tax cuts.
Note that those making $100,000 to $200,000 paid roughly the same share of their income in personal federal income tax.
But you cannot live tax-free even if you get a $500k boost in your tax cut if you are in the top group, whose average income was $26m. You are still paying more than $5m annually in personal federal income taxes. That's not chicken feed.
David Cay Johnston

By Blogger David Cay Johnston, at 10:50 AM  

Thanks for the comment. My "never pay taxes again" joke was specifically referring to this quote in the article:

Stephen J. Entin, president of the Institute for Research on the Economics of Taxation, a Washington organization, and other supporters of the cuts said they did not go far enough because the more money the wealthiest had to invest, the more would go to investments that produce jobs. For investment income, Mr. Entin said, "the proper tax rate would be zero."

Under Entin's proposal, you could live tax free forever off investment income -- that's why you have to "refuse all offers of work". Joey read my post the same way. Obviously I should've included the part of the article that really caught my attention.

By Blogger Hammer, at 11:02 AM  

Question: why is dividend income treated differently than income on a certficate of deposit? Is it because the CD holder is taking no risk? The more CDs a bank sells, the more cash the bank has to loan to local businesses. Why do we treat differentiate between these forms of unearned income?

By Blogger Hammer, at 11:19 AM  

[W]hy is dividend income treated differently than income on a certficate of deposit?

Good question. An accountant friend of mine, a dyed-in-the-wool low-taxes Republican, says he thinks even capital gains should be taxed at the ordinary rate. His rationale is that they're already tax-advantaged, because the tax is deferred until the gain is realized. Makes sense to me.

Personally, I think all tax incentives are highly overrated at best, and in counter-productive at worst. Income is income, I say.

By Blogger Joey de Vivre, at 11:31 AM  

I may have gotten a little ahead of the game based on a 12-8-05 Wall Street Journal article that states:

"Thanks to the tax legislation enacted in 2003, dividends and capital gains are now taxed at a maximum rate of 15%. The President's Advisory Panel on Tax Reform recently proposed that the 15% rate be made permanent and extended to interest income as well."

While Joey is right for the time being about interest I'm still sticking with my numbers since instead of t-bills Lucky Ducky with $10 million can easily find stocks paying dividends in the 5%+ range (I have a couple myself) and make $500,000 a year and only pay a tax rate of 15%.

Now check my math on this one (it's late and I'm tired) but if a cleaning woman is working full time and makes $10/hour she will have an income of $20,000. Her standard deduction is $5,000 so she pays income tax rate of 15% on $15,000 plus SSI and Medicare tax of 7.65% on $20,000 for a total federal tax of $3780 or approx. 19%. Am I missing anything?

By Blogger Jambo, at 12:21 AM  

check my math

Alrighty. Your hypothetical cleaning woman is indeed in the 15% tax bracket, but that's her marginal rate. For the first $7550, she pays 10%. Like you, I'm tired and it's late, but I come up with $3,402.50, or just barely over 17%.

One dollar in six goes to the feds. Which is atrocious. Lower the SSI rate and raise or eliminate the cap, and have some kind of income-tax-like personal exemption of several thousand dollars.

Now, a big problem with changing SSI contributions is that benefits are tied to those contributions per individual, which obviously would have to change under this new system. Imagine 40 years from now, when, say, LeBron James is pulling down $200,000 a year in Social Security, and your cleaning woman gets $50 a month because her contributions were so small.

By Blogger Joey de Vivre, at 11:24 PM  

The counter-argument, of course, is that unless Social Security bear some relationship to earned income, then Social Security becomes just another welfare program on the chopping block every year.

FDR got something right. Social Security remains one of the most popular government programs while welfare remains one of the least popular.

By Blogger Hammer, at 7:47 AM  

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