Taxing Efforts
One thing I miss about IJAB is that we'd get some of the crazies out of the woodwork, and commenting on all sorts of interesting things. Happily, Westy's Facebook page allows for some of the good stuff to come through. Here's the latest:
Sure, it seems like an innocent enough question. Then people start spitting out factoids.
I suppose that seeing these responses that took random facts, implying that they created an argument, made me annoyed enough to post this goodie, which I've used w/ my man OD from time to time.
Did you know that 1% of the people pay 214% of the taxes in America?Did you know that dogs and bees can smell fear?
Being rich, I totally agree that the rich should be taxed less.
And just today, I took a little field trip over to the HR offices. And I learned how being rich is even more awesome for taxes than I thought. It turns out that just about everyone can stash $16.5K, pre-tax, into a retirement account (401k, 403b, etc.). And you can actually tuck away another $16.5K as deferred payment, if you work for a state, gov't, or tax exempt organization (this is a 457b account). Essentially, I'm taking money out, untaxed, and leaving it in some account where I can invest it (returning about 17% last year, and so far about 6% this year) in a variety of mutual funds.
So, if you take this $33K, plus my 6.5% mandatory contribution (plus 6.5% employer match), you're looking at roughly $48K every year that I'm adding to my personal accounts, without paying a dime in taxes. So that's totally awesome.
And even more awesome, this sends me back into a lower tax bracket, and probably gets me to qualify for a Roth IRA (which is another sweet deal, totally worth the $5K post-tax). And the really awesome part is that I can draw from this money, without paying taxes on it, so long as I pay it back (with minimal interest) within 3 years. So it's not like I'm even missing the money.
Now, you're saying, "Chairman (or Param, as I'm now known on Facebook), everyone has those benefits. It's not just you, and it's not just for the rich." Which is true. But who out there can take $42K out of their paycheck, and put $5K into a Roth IRA, and not blink? Certainly not people who make less then $47K. Based on strictly anecdotal evidence, beyond $25K is where people can realistically save more than a couple hundred bucks a month, provided that you're not into things like living in a great apartment, having a great car, etc. Below that, you're probably living paycheck to paycheck. But to stash $47K? That still requires a salary of $72K to be able to pull this off. And if you're supporting some stay-at-home wife (or other low income spouses, like social workers or teachers) and/or, heaven forbid, kids? Yeah. You're probably not going to be able to pull off this magic.
So what percentage of the US makes enough to actually take advantage of these benefits? Well, the typical U.S. household is about 2.6 people. It's not quite an apples-to-apples comparison, but if you multiply $25K by 2.6, you get something like $65K, where a household of 2.6 people can really start saving money. That number seems a bit high, so we'll ballpark discount it by 20%, and call it $52K or so where a household can start legitimately saving. The median household makes roughly $44,400. And only about 45% of the households in this country make $52K.
So, really only about 45% of the households in this country are saving anything. And if the typical household wants to take advantage of $47K worth of tax benefits, you're looking more like $100K (which is conservative, since household size increases with income such that when you get to $100K, you're typical household size is 3.33 people). So, it's fairly conservative to say that only 15% of the households in this country can pull the sort of tax break that I'm able to pull off. And we're just talking about direct tax shelters for income.
Why am I against taxing the rich? I'm rich. I'm going to get richer. It isn't rocket science.
And when you're rich, you get to do all sorts of other things that help out your tax situation. When you get into things like tax benefits for mortgage interest, depreciating rental properties, etc., then the numbers get even more ridiculous. Basically, the story is that I can make $100K, and be taxed, as though I were only making $40K (or less, if I'm doing it right). And that, to put it plainly, is awesome.
So, what I'm saying is that I'm all for keeping the tax code the same (or cutting taxes on the top 10%, so that it will trickle down).
I'm not saying that I'm pissing on the poor. It's just that sometimes I don't pay attention, and go wide right.
Statistically speaking, there's a good chance that you make less than me. And statistically speaking, there's a very good chance that I'm paying a lower effective tax rate than you, and there's probably a pretty good chance that I've paid less in taxes altogether, particularly if you're one of those suckers who makes enough to get taxed well, but not enough to take advantage of the tax benefits (basically between $30K and $60K if you're a single person, and up to $100K if you're a "household"). So, drum up the troops on Facebook. I like being rich, and if you get the taxes going in my direction, like you have been, then I'm going to like being even richer.
-Chairman
5 comments:
You illustrate the holes in the system well.
Your contention largely hinges on the alleged 17% gain last year. What funds?
Abe - the 17% gain is sort of incidental (just gravy on top). The big number is the $47K that I can stash away tax-deferred. But you're right - if you can put that money to work, then it's an even better deal. I'm just illustrating the chunk of cash that I'm allowed to stash away tax-deferred. Once you factor in compound interest (even at something conservative like 4%), then the benefits become exponentially stronger.
As for the returns? In 2010, the Willshire 5000 was 17.9% and the S&P 500 was up 15.1%. So 17% isn't exactly spectacular - no need to allege that :-)
But, FYI, I use Fidelity. Contrafund (FCNKX) is my large cap. The 1 yr. return as of 6/30 was 28.4%%. Small Cap Discovery Fund (FSCRX) for the same period was up 39.6%. I've got smaller positions in a Canadian fund (FICDX - up 29.6%), two worldwide funds (FWWFX - up 37.2%, and FIDKX - up 31.7%). And I do put some into bond-based funds (FGMNX - up 4.9% and FFRHX - up 8.1%), mainly for peace of mind. My Roth IRA didn't fare quite as well, as I was choosing individual stocks there (got stuck w/ BAC and GE, which were flat last year).
But it's been a good year in the market, so I went small cap and international heavy. I was able to play the game because I'm rich, and the tax rules worked in my favor. But even in bad times in the market, I can fall back to heavier investments in the bond-based funds, and still lock in a steady 4%.
Here's my timeline. I started working as an "adult" in July, '09. I maxed out my 403b for 2009, as well as 2010, so I stashed away $33K in that first 18 months of employment. So not only was I able to invest the prorated max each of those 18 months. I had enough excess to stash away another 6 months worth so that I maxed out my 2009 contribution. In 2011, I'm putting away my prorated max for the first 6 months. And now that I'm a state employee, I have the option of kicking in the extra $16.5K for my 457b, in addition to the $16.5K for my 403b. I haven't figured out if I want to do that, yet, but the answer will probably be yes. Basically, I'm going to squeeze my monthly paychecks so that my cash flow is only slightly above even, so that I can max out tax-sheltered portion. And if I'm working the markets well, even after you factor in the penalty for early withdrawal, if I run into a stretch where I'm unemployed, I'm possibly still better off if I'm treading my "retirement" account as a liquid account, because of the tax benefits I got initially.
Let's say that I make $120,000. I must put in something like 6.5% into a retirement fund, which my employer matches. So initially, my take-home, taxable drops to $112,300, but I've added $15.4K into a retirement account. Now, I can stash away another $33K between my 403b and my 457b accounts. This takes my taxable down to $79,300.
After you factor in things like my deductions, charitable contributions, investment "losses" (which you can play tax games with, in a totally legal way), mortgage income, etc., you're probably looking at taxing me on something like $45K. So not even considering the possibility that I'm making additional money on the $33K, this is a sweet deal. When you factor in a return of, say, 8% annually, that gets compounded? That's why I'm saying that being rich is awesome.
A rough comparison would be to compare me to someone who makes about $70K, but doesn't stash anything away in retirement, and rents a place. We're probably paying about the same in taxes. But I promise you that the effective tax rate that I'm paying is much, much lower.
Thanks for the detailed reply, my man. I had no idea about the 457b. But to me it seems like you've only made a good argument for reforming the rules for tax exempt status. One of the major problems we have is that the government employs far too many people. Regardless, how would your scenario and numbers change for those privately-employed? Furthermore, how many people do you estimate have the prudence to drive an old Sentra for so long? These considerations should mean that there are fewer people jumping through these "holes" than you estimated.
Abe, I think that in a strict sense, you're right. However, I'd suggest that the net result of reforming rules for tax exempt status, is essentially raising taxes on those rich enough to shelter income from taxes.
For those who don't qualify for a 457b, then you just subtract $16.5K from the numbers. Basically, the way the tax system is set up, you're shooting yourself in the foot if you're not maxing out what the tax code allows you to. Of course, there's a tiered system here. Everyone needs to have some basic amount to live off of. I used $25K as a number that reflects what I've seen from a lot of people that live relatively comfortably - can make rent, bills, support a car, eat regularly, and splurge occasionally, but are still paycheck to paycheck (i.e., not saving anything). So, the tax savings only kick in after you've hit that level of income.
As far as who actually uses these tax shelters? Beats me. You can probably find those stats floating around somewhere, if you're looking for the impact in dollars. I'm just pointing out how the current tax system is set up such that there is a limited percentage of people who can take advantage of the benefits, if they had that desire, and that it is systematically geared to benefit those with greater incomes.
There are a lot of social psychologists who have spoken about using different default options as a way to balance things out. Basically, we're comfortable with keeping things the same. And the current default is to do no retirement savings, unless otherwise stated. If you changed the default such that everyone invested the max, unless otherwise stated, you get more participation, smarter spending, and people who are probably better off at retirement.
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