Who REALLY pays income taxes?

[Frank Ettin]

But taxing income reduces money available for the purchase of goods and services, the production and sale of which provides employment and thus income to others (so that they can buy goods and services, including food and shelter).

 

[Redworm]

But taxing income reduces money available for the purchase of goods and services, the production and sale of which provides employment and thus income to others (so that they can buy goods and services, including food and shelter).

And yet taxation also provides basic, common services for all. The key is finding the right balance. We can't operate with no taxation. That's simply not possible. Government would cease to exist.

 

[sasquatch]

But taxing income reduces money available for the purchase of goods and services, the production and sale of which provides employment and thus income to others (so that they can buy goods and services, including food and shelter).

Yep.......that's why tax cuts are a proven way to stimulate the economy.

 

[Redworm]

I know of no economic theory that holds as you assert that high marginal tax rates are an incentive to productivity.

I think you are terribly mistaken. It does not matter whether the taxation is on a good or a service. Taxation discourages the activity or transacting either purchase. The following are instructive.

http://www.heritage.org/Research/Taxes/bg1765.cfm

http://www.youtube.com/watch?v=fIqyCpCPrvU

http://www.youtube.com/watch?v=YsB_rnzBA08&NR=1

Fascinating stuff there. It looks a bit more complex than simply stating that higher taxes are always bad.

But my point holds, just because smokes and booze are being taxed is not stopping their use or manufacture. And just because someone gets taxed 35% does not mean he's discouraged to produce. Can you honestly think of a single example in which someone chose to not make more money in order to stay in a lower tax bracket?

 

[toybox99615]

federal tax fact

an earlier poster implied there were no Federal taxes until 100 years ago. I refer those who are interested to http://www.tax.org/Museum/1777-1815.htm where you will find the history of taxes for the Federal government.

Argue if you must that the first taxes were tariffs and not taxes. You can find taxes beginning with the writing of the Articles of Confederation. Since that time taxes in some form have been administered by States and Federal government. Some times the taxes were based on merchandise, other times based on land and property, and finally income taxes. Sin taxes (tax on alcohol and tobacco) have been collected since the beginning of the country in 1776. The greatest scheme was to simply put tax (tariffs) on good coming into the country from foreign ports.

The first actual income tax provisions established a 2% tax rate for incomes over $ 4,000. One might also note the following excerpt from the site: "the Reform parties from the Greenbacks and Anti-Monopolists in the 1870s and 1880s to the Populists in the 1890s had called for a graduated income tax in their platforms."

It would be fair to say that taxes (tariffs) have been with the country from day one and since day one there have been ongoing disputes on which method of taxation is fairest. It seems that since day one most people agreed on the need for taxes but they disagreed on who should pay taxes. Regardless of the attempts to develop a tax system with some fairness it always get back to those who pay always dislike the system.

 

[zukiphile]

Fascinating stuff there. It looks a bit more complex than simply stating that higher taxes are always bad.

Is it genuinely your understanding that the entirety of my point is that higher taxes are always bad, or did you intentionally introduce this strawman?

But my point holds, just because smokes and booze are being taxed is not stopping their use or manufacture.

No one argued that taxes stop the transaction, so how exactly does your point hold?

Under which scenario do more cigarettes sell?

1. A total price including taxes of $5 per pack.
or
2. A total price including taxes of $2 per pack.

And just because someone gets taxed 35% does not mean he's discouraged to produce. Can you honestly think of a single example in which someone chose to not make more money in order to stay in a lower tax bracket?

Of course.

Let's say a man makes $25 per hour. He is a normal man with hobbies and a family, and wants the spare time to devote to each. He recognises a need to make a living, and diverts some of his time to earning a living. He values his time at $20, and will perform work that nets him more than that.

If he is taxed at a marginal rate of 15%, he can work a full 2000 hours a year, and still have an adequate incentive to work all 2000 hours, since the 2000th hour still nets him $21.25.

Let's say that the marginal rate for income beyond $50,000 per annum is 35%. Our man's 2001st hour now nets only $16.25. Since it would pay less than his valuation of his own time, he will optimise his return on his efforts and work only 2000 per year.

The wealth that would have been created by his 2001st hour and each hour thereafter will never be created. The 35% marginal income tax rate won't even be paid, but the threat of this level of confiscation will discourage the man from further productivity.

 

[Redworm]

Is it genuinely your understanding that the entirety of my point is that higher taxes are always bad, or did you intentionally introduce this strawman?

Seems to be. Guess I misunderstood your argument. Mea culpa.

No one argued that taxes stop the transaction, so how exactly does your point hold?

Under which scenario do more cigarettes sell?

1. A total price including taxes of $5 per pack.
or
2. A total price including taxes of $2 per pack.

Do you smoke? Because I know that when cig taxes in Cook County, IL my friends and I didn't change our smoke buying habits one bit. We paid more and we griped about it but the nature of the product kept the buying the same.

But my anecdote doesn't mean much; unless there's something that clearly shows cigarette sales drop when they're taxed higher (and not due to anti-smoking campaigns) then we'll never know for sure.

Higher taxation can reduce transaction on some items but there seem to be plenty on which it has little or no effect. Now if cigs were suddenly $20 a pack instead of $5 a pack then we'd probably see a change. But they're not. When the taxation is a small amount it doesn't seem to have the negative effect you're referring to.

Of course.

Let's say a man makes $25 per hour. He is a normal man with hobbies and a family, and wants the spare time to devote to each. He recognises a need to make a living, and diverts some of his time to earning a living. He values his time at $20, and will perform work that nets him more than that.

If he is taxed at a marginal rate of 15%, he can work a full 2000 hours a year, and still have an adequate incentive to work all 2000 hours, since the 2000th hour still nets him $21.25.

Let's say that the marginal rate for income beyond $50,000 per annum is 35. Our man's 2001st hour now nets only $16.25. Since it would pay less than his valuation of his own time, he will optimise his return on his efforts and work only 2000 per year.

The wealth that would have been created by his 2001st hour and each hour thereafter will never be created. The 35% marginal income tax rate won't even be paid, but the threat of this level of confiscation will discourage the man from further productivity.

No I mean a real life scenario, not a hypothetical. And preferably one that uses more realistic tax brackets. Jumping from 15% to 35% is a bit different than going from 25 to 28 or 33 to 35.

Plus, this man you speak of doesn't seem to be very smart if he would stop working at 2000 hours because he's afraid of being taxed more.

 

[zukiphile]

Is it genuinely your understanding that the entirety of my point is that higher taxes are always bad, or did you intentionally introduce this strawman?

Seems to be. Guess I misunderstood your argument. Mea culpa.

If you reviewed the linked materials, you might understand the impact of marginal rates better. The effect of progressive income taxation is best explained as thenimpact of those increasing marginal rates.

No one argued that taxes stop the transaction, so how exactly does your point hold?

Under which scenario do more cigarettes sell?

1. A total price including taxes of $5 per pack.
or
2. A total price including taxes of $2 per pack.

Do you smoke? Because I know that when cig taxes in Cook County, IL my friends and I didn't change our smoke buying habits one bit. We paid more and we griped about it but the nature of the product kept the buying the same.

But my anecdote doesn't mean much; unless there's something that clearly shows cigarette sales drop when they're taxed higher (and not due to anti-smoking campaigns) then we'll never know for sure.

I used to. Higher prices reduce demand at the increased price. This is rudimentary economics.

When the taxation is a small amount it doesn't seem to have the negative effect you're referring to.

I am intrigued by the idea that you think 35% of a fellow's income is a small amount.

Of course.

Let's say a man makes $25 per hour. He is a normal man with hobbies and a family, and wants the spare time to devote to each. He recognises a need to make a living, and diverts some of his time to earning a living. He values his time at $20, and will perform work that nets him more than that.

If he is taxed at a marginal rate of 15%, he can work a full 2000 hours a year, and still have an adequate incentive to work all 2000 hours, since the 2000th hour still nets him $21.25.

Let's say that the marginal rate for income beyond $50,000 per annum is 35. Our man's 2001st hour now nets only $16.25. Since it would pay less than his valuation of his own time, he will optimise his return on his efforts and work only 2000 per year.

The wealth that would have been created by his 2001st hour and each hour thereafter will never be created. The 35% marginal income tax rate won't even be paid, but the threat of this level of confiscation will discourage the man from further productivity.

No I mean a real life scenario, not a hypothetical.

You mean you would like me to produce an individual, his tax return, and an affidavit attesting to the fact that he refrained from less remunerative work because it paid him less?

That is unserious.

And preferably one that uses more realistic tax brackets. Jumping from 15% to 35% is a bit different than going from 25 to 28 or 33 to 35.

Each is an increase in marginal tax rates. The principles illustrated don't change. I thought the simplicity and clarity of the example would make the princples less elusive.

Plus, this man you speak of doesn't seem to be very smart if he would stop working at 2000 hours because he's afraid of being taxed more.

Kindly re-read the example you requested. If the man's time is worth more than he would net from working, not working is the only rational economic choice.

 

[hogdogs]

Without going into details as this is public... I know of many but one first hand that has for the majority of work career has worked "under the table" so as to do exactly as mentioned... Nature of the beast...
Brent

 

[Redworm]

I am intrigued by the idea that you think 35% of a fellow's income is a small amount.

35% compared to 33% for the next tax bracket down. Yes, a 2% higher tax rate is a small amount. Even a 10% different could still be considered a small amount.

Here's an idea, though. I would suggest that the progressive tax system remain in place, maybe move the brackets further apart? No idea what that would do, though, just idle speculation.

You mean you would like me to produce an individual, his tax return, and an affidavit attesting to the fact that he refrained from less remunerative work because it paid him less?

That is unserious.

No, not a specific individual's numbers but at least more realistic circumstance.

Each is an increase in marginal tax rates. The principles illustrated don't change. I thought the simplicity and clarity of the example would make the princples less elusive.

Actually it fudges the issue because it makes the jump in tax bracket seem far more extreme than it truly is. A man's work hours dropping from $20 to $16 and change is more significant than if it was only dropping to $18 or $19.

Besides, this man's basic necessities are already met. He's able to feed and clothe his family on the money he makes. If he wants to enjoy more luxurious items then he will need to put even more effort into being...more productive?

Kindly re-read the example you requested. If the man's time is worth more than he would net from working, not working is the only rational economic choice.

The crux of his stupidity is setting a specific dollar amount for his time and being too stubborn to realize that being a little flexible with that time could net him a much larger gain in the future.

It's only a rational choice if he's narrow-minded and short-sighted. I'm sorry but I still can't see how any reasonable person would stop working specifically because he's going to be taxed more, especially when the change in tax rate is less than half a dozen percent.

 

[ZeroJunk]

I'm certain you worked hard for your income however many do, there are those who work very hard and never gain and it's all part of life but to believe your any better or worked more in life then other with less money is somewhat naive.

One of the great problems America families face today is self worth being placed on how much you earn, me I will take friendship, family and a quite quality life anytime but that is me.

Wingman, there is a lot more to it than how hard you work.

There may be some concientious,enthusiastic, detail oriented, reliable, educated, honest, smart people out there that are unsuccessful. Personally, I have never met one.

 

[Redworm]

Wingman, there is a lot more to it than how hard you work.

There may be some concientious,enthusiastic, detail oriented, reliable, educated, honest, smart people out there that are unsuccessful. Personally, I have never met one.

I've met a few that are all those except educated.

Also, from some of the folk I've had to deal with over the years I can tell you honesty is not a requirement for success.

Let's also not forget that many personality traits are not merely genetic. Whether or not someone is reliable and detail oriented can have as much to do with how they were raised. It's a terrible cycle when bad parents improperly raise children and let them loose on the world.

 

[zukiphile]

Each is an increase in marginal tax rates. The principles illustrated don't change. I thought the simplicity and clarity of the example would make the princples less elusive.

Actually it fudges the issue because it makes the jump in tax bracket seem far more extreme than it truly is. A man's work hours dropping from $20 to $16 and change is more significant than if it was only dropping to $18 or $19.

RW, changing numbers does not change the principle involved. It is not economically rational to work for less than your time is worth. This fact works against progressive marginal rates even more when you consider the fact that the more people work, the more they value their time. In other words, a fellow's subject value for his time increases the more he works, and a progressive marginal rate decreases his net marginal compensation the more he works. When the two lines cross, the rational decision is to stop working.

Besides, this man's basic necessities are already met. He's able to feed and clothe his family on the money he makes. If he wants to enjoy more luxurious items then he will need to put even more effort into being...more productive?

He may need to, but he won't. People don't normally work more for a marginal pay cut.

Kindly re-read the example you requested. If the man's time is worth more than he would net from working, not working is the only rational economic choice.

The crux of his stupidity is setting a specific dollar amount for his time and being too stubborn to realize that being a little flexible with that time could net him a much larger gain in the future.

It's only a rational choice if he's narrow-minded and short-sighted. I'm sorry but I still can't see how any reasonable person would stop working specifically because he's going to be taxed more, especially when the change in tax rate is less than half a dozen percent.

RW, economics is not the study of how you personally would manage a career. It is about how people make choices. Reveiwing the links above may be instructive.

Whether or not someone is reliable and detail oriented can have as much to do with how they were raised.

I'm sure I was born reliable and detail oriented! Honest!

 

[Redworm]

RW, changing numbers does not change the principle involved. It is not economically rational to work for less than your time is worth. This fact works against progressive marginal rates even more when you consider the fact that the more people work, the more they value their time. In other words, a fellow's subject value for his time increases the more he works, and a progressive marginal rate decreases his net marginal compensation the more he works. When the two lines cross, the rational decision is to stop working.

Changing the numbers certainly changes the principle. If the decrease in money is insignificant compared to eventual increase in overall income then the rational economic strategy is to take the short term hit for the long term rewards. If the decrease in money per hour is more significant then the long term rewards don't seem as important. The numbers are very important.

If this guy is making 25 bucks an hour he has every incentive to push himself to making 50 an hour. He will be taxed more for each hour but overall he's still making more money.

I don't believe it's common for people to slowly creep up the tax scale and hit a brick wall at the bracket line.

He may need to, but he won't. People don't normally work more for a marginal pay cut.

Only it's not a pay cut. If he sees his income as merely an hourly unit then he has lousy financial planning ideas in the first place.

RW, economics is not the study of how you personally would manage a career. It is about how people make choices. Reveiwing the links above may be instructive.

Yes and I still don't see people making the choice to not work because they'll be taxed more. No one is going to refuse a raise from their employer because they'll be paying an extra five percent on their taxes.


edit: especially when that five percent can be mitigated by a wide variety of investment options and other tax "loopholes" (for lack of a better term, I do realize they're entirely legal) available to those with more disposable income!

I'm sure I was born reliable and detail oriented! Honest!

You certainly may have been. Information processing is sometimes and inherited trait. You may be genetically predisposed to seeing minute details over the big picture but reliability is probably more due to your upbringing than anything else.

Fortunately it's a different type of psychological issue and doesn't alter any "other" arguments.

 

[sasquatch]

Yes and I still don't see people making the choice to not work because they'll be taxed more. No one is going to refuse a raise from their employer because they'll be paying an extra five percent on their taxes.

There was an interesting study done in Canada. People were finding out that their higher tax rates in Canada were having a negative effect on their standard of living, as compared to the US. Many in the upper tax brackets left Canada for the US because of the lower income taxes here.

Socialized medicine, anyone?

 

[Redworm]

There was an interesting study done in Canada. People were finding out that their higher tax rates in Canada were having a negative effect on their standard of living, as compared to the US. Many in the upper tax brackets left Canada for the US because of the lower income taxes here.

Socialized medicine, anyone?

What are their tax brackets, though? If their differences are more pronounced than ours - say, if their brackets jump from 20% to 30% then to 45% or something similar - it makes sense.

But I still find the idea that our current brackets are causing the same effect.

I'll try to find that study. ^_^

 

[mvpel]

If this guy is making 25 bucks an hour he has every incentive to push himself to making 50 an hour. He will be taxed more for each hour but overall he's still making more money.

from 1951 to 1963, the top tax bracket was 91%, which mean that for every extra $100 you earned over a certain amount, you owed all but $9 of it to the government.

Some incentive to push yourself, there, eh?

 

[JuanCarlos]

from 1951 to 1963, the top tax bracket was 91%, which mean that for every extra $100 you earned over a certain amount, you owed all but $9 of it to the government.

Some incentive to push yourself, there, eh?

I think 35% is a far cry from 91%. I'm probably never going to put in $100 worth of extra work to earn $9...but to earn $65? Probably. Depends if there's $65 worth of stuff I want/need but can't afford (also how badly I want/need it). Also depends on what kind of work I'm having to do to earn that $65...I'm guessing most with income in the 35% bracket aren't breaking bricks for a living.

But yes, what kind of taxes you are charging on somebody's last dollar of income will have some effect on whether they decide to put in that extra hour of productive effort or whether they go fishing instead. For most in the top 5%-10% of income, though, I'm thinking that the marginal utility of that last dollar or even just personal motivation probably has more to do with it, though.

I'm pretty sure nobody in this thread is arguing that a 90% tax rate on any level of income is reasonable, though, even those supporting progressive schemes in general.

 

[Redworm]

from 1951 to 1963, the top tax bracket was 91%, which mean that for every extra $100 you earned over a certain amount, you owed all but $9 of it to the government.

Some incentive to push yourself, there, eh?

Was it really that high? If so, wow.

But fortunately this isn't 1963 and the top tax bracket is 35%.

 

[sasquatch]

But fortunately this isn't 1963 and the top tax bracket is 35%.

Unfortunately both Hillary and Obama have plans to change that........upward.