Re: The Birth Tax



js wrote:
Islander wrote:

js wrote:


Islander wrote:


Alvin Toda wrote:


On Wed, 28 Jun 2006 07:54:43 -0700, Islander <nospam@xxxxxxxxxxx>
wrote:




Fred Ghadry wrote:



Islander wrote:




Fred Ghadry wrote:


Islander wrote:




I understand the appeal of the consumption tax. It could
potentially encourage frugality, not a bad trait. Your proposal for
a consumption tax assures that the wealthy will pay at least some
tax where today they can avoid paying tax.



You obviously aren't familiar with the federal Alternative Minimum
Tax (AMT).


I am and don't see the relevance to the thread.


Think about the title.



Thinking, thinking, thinking. Nope, still don't see the relevance.


OK, here it is in very short words and sentences. You claimed that the
wealthy can avoid paying tax (see above). I pointed out that to "solve"
that problem, the Congress had enacted the Alternative Minimum Tax,
which cannot be avoided. You said you didn't see the relevance (of the
AMT) to your claim. I am pointing out its relevance. Your turn.

First, the thread was about a proposal by js for a consumption tax.
Second, inflation has overtaken the AMT, so it now applies to middle income.
Third, the majority of the current tax advantages that the wealthy have
are not impacted by the AMT.


I would agree. It's also unfortunate that those who take advantage of
the vagueness of the tax law tend to be the wealthy.

It is not so much the vagueness of the tax code, but its complexity IMV.
If one had the time and inclination to read the code and then plan
your financial activities to take advantage of the code one could avoid
paying a lot of tax. Unfortunately, for the average person that is not
an effective use of your time.


Excuse me?



Likewise, if one could acquire the
services of a good tax attorney and plan your financial activities
according to his advice one could also avoid paying a lot of tax.


And so? Do you make it a habit of overpaying for things?



This
also is not cost effective for the average person.


No? Why not? Because the amount of tax the average person pays is
miniscule? The bottom 50% of income eaners pay little or no tax. What
is there to save?



It is only the
wealthy (or the idle obsessed like me) who can afford to do this. For
me it is a small protest against this current administration. I have
lived comfortably and paid only a few hundred dollars in federal taxes
over the last 5 years. All legal.


Lovely anecdote. One can live comfortably on a pension of 20K a year
and pay little or no Federal tax. In fact, even at incomes of 40K the
tax liability at the federal level for a retiree is in the few hundred
ballpark. You aren't unique in this. In fact, I would argue that you
are probably more like than unlike retirees.

On the other hand, at incomes in the six figures and above, all these
wonderful deductions and credits disappear. In fact, at incomes over
200K you are in the AMT bracket and there is NO excaping paying big
chunks of income to the tax man.



I guess this proves that the tax
code is fair to everyone in the minds of those on the right.


I find the tax code repulsively progressive. Making it more so is an
even greater tragedy.



I should
note that I have not found any loopholes to offer the typical working
stiff who brings home a wage. Kind of tells you something, doesn't it!


Gee - let's start with the EITC, the Childcare tax credit, the standard
deduction, the mortgage interest deduction, the education tax
credit...these aren't loopholes - they are legal ways to exclude gross
incomne from federal taxes - all that are capped or completely
eliminated for high income earners.

Now, what loophole are you refering to?? The one that makes your tax
bill so small?

js


I feel fairly confident that you are aware of the loopholes,


No, I am not aware of any "loopholes" that treat those with high
incomes preferentially over those with low incomes. I do believe there
are a large number of examples where low income earners are treated
preferentially with regard how the same income sources are taxed.


but have
found a way to rationalize your way around them since you are hung up on
taxation based on income vs taxation based on consumption.


The current tax law at the federal level is based on income. I would
support a consumption tax.


Neither has
anything to do with the accumulation of wealth except that both are
biased in favor of the wealthy.


Again with the bias statement and no evidence. Do you think that by
saying it enough it becomes some type of accepted truth?


Let's take a simple example. Most people of means recognize that they
have two piles of money.


Most people realize they have two types of consumption - current and
future.


One is what they need or choose to use to live
on and the second is their various approaches to investment, real
estate, businesses, stocks, bonds, etc. It is relatively easy to avoid
paying tax on the second pile


There is no way to avoid paying taxes on the "second pile" that is
different based on the size of the first pile that favors the people
with a bigger first pile. Thedre are limits to how much of the second
pile can be financed by pretax income in the first pile. The limits
apply fairly equally across income groups though as a percent of total
incoime favor the lower income earners.


and this is where the major inequities
exist


There is no inequity. These piles of resources are treated the same
though certain tax law conditionals favor those with lower incomes by
allowing greater exclusions.


since most low to middle income people either have only very small
piles or cannot afford to invest to grow wealth while paying minimal or
no tax.


That is not a bias in tax law. Investment to grow wealth is not income
- dividends, vapital gains, interest earned are all considered income
at some point in time and are taxed accordingly using a specific tax
schedule. The right to do this is not dependent on income.


It is only when money is moved from the second pile to the
first that taxable income is incurred and there are specific examples
where even here income tax can be avoided.


Death?


A case in point: Shared equity approaches to real estate purchases.
Let's say that you have a relative or friend who cannot afford to
purchase a home. You enter into a shared equity arrangement with them
where you own part of the home with the understanding that after a few
years your relative or friend will refinance and pay you back the
principal plus appreciated value of your share of the property. You
arrange for him/her to pay you fair rent for the share that you own and
you agree to further help him/her by using that rent to pay utilities,
garbage collection, insurance, condo fees, etc., all of which you can
write off as "business expenses". The new homeowner gets to deduct the
interest on his/her homeowners mortgage and you get to deduct the
depreciation on the value of your share of the structure (which of
course is denied to the homeowner). There may or may not also be some
state/local tax advantages depending on your state. You both assume the
risk of an appreciating real estate market.

After 5 to 7 years, the homeowner refinances for enough to buy you out
at a profit equal to the real estate appreciation. You can then do a
tax deferred rollover into another investment. Sounds like a good deal
for everyone, right? Not quite! While this seems to be a way for
people to get in to home ownership who might otherwise not be able to,
it is very much dependent on the homeowner being able to refinance for
the larger value or he/she can cash out and move to a less expensive
region. The investor has not paid any tax, however, and will make out
handsomely in most real estate markets today.


What you describe is less common than you think. However, you miss two
very crucial points. First, the "loan" for the original investment
needs to be made and this will need to come from after-tax income. So
the basis of the investment has already seen it's share of tax.
Second, once the cycle is complete, the capital gain on the investment
is taxed at the capital gain rate. How has tax been avoided? It
hasn't. The type of tax paid and the timing of tax is dependent on how
the investment is managed. Expemnses to maintain the property are
deductible (as they are expenses, not profits) and the depreciation
taken as period expense reduces the cost basis.

This is NOT a way to avoid taxes because you are rich. Your example
fails to meet the test. It does not preferentially treat wealthy
better than less wealthy. It does not exclude income from taxes.


Playing for higher stakes, this same approach has been used for years in
commercial properties where there are even more interesting tax advantages.


You call them "tax advantages" yet fail to support that in fact the way
investment and business income are treated from a tax perspective
differentially favors rich.


This is only one of the many ways that wealth can accumulate tax free in
the second pile.


Look at the 401K or a typical IRA. Wealth accumulates. Look at real
estate. Same thing. Your problem seems to be less with the income tax
laws at the federl level and more with the fact that the tax laws tax
incoime, not wealth. If you want a wealth tax, move to Sweden.


The more that you have in this pile, the easier it is
to get excellent investment advice and to find more ways to avoid paying
tax. Note that in any case it makes no difference whether we are
talking about income tax or consumption tax, the second pile is immune.


That is the law. Until the accumulated wealth is realized beyond a
paper gain, it is immune from the tax man for the most part (few
exceptions with mutual funds etc). But at the same time, you can't use
it to fund consumption.

You have not made your case that the current tax laws favor the
wealthy. There is no doubt that the current tax laws incentivise
saving - and I believe that is the intent. However, the law does not
discriminate based on income to the benefit of the wealthy. To realize
a benefit from from one investment over another from a tax perspective
(long term versus short term capital gains, capital gain versus
ordinary income from interest, or whatever) one needs to make that
investment. The situation you describe that suggests that because poor
people cannot make these investments because they don't have the
resources to make those investments is a strawman. The tax law doesn't
care who you are.

In fact, it is overly evident that as wealth increases, there is less
favorable treatment. One of the biggest deductions allowed is the
mortgasge interest deduction. It has a cap of 1 million loan. If you
own a 5 million dollar home and owe 50%, you can't deduct all the
interest.

Standard deduction - phases out as income goes up

Childcare tax credit - phased out

and on and on and on. The federal income tax law is written to be
progressive, both from a rate perspective as well as an exclusionary
perspective. As income goes up you pay more and more and get to deduct
less and less.

I shlould you how this works. Now, unless you can show the same thing
happening in reverse, we are done.

js


You have clearly convinced yourself that the benefits that I claim for the wealthy are not benefits but unrealized income or legitimate business expenses or similar rationale. So be it.

It remains, however, that the money in the second pile, even if not taken as income, has value and accumulates according to a different set of rules than for personal income or your proposed consumption tax. I can use this money in a variety of ways that benefit me without paying tax and the more money that I have in this pile, the easier it is for me to accumulate more wealth. Yes, there are limits on some of the ways including how I choose to move the money into the first pile, but this is again an issue of scale. In all of this, those with less discretionary money to spend are at a practical disadvantage.

If you have not mastered these techniques, you need to get better assistance from your tax attorney or your CPA. If you are wealthy, be grateful to a system that favors you and quit complaining about the pittance that is thrown to those less fortunate.

Yes, we are done.
.



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