Let me guess – you already knew that, right? Because you can feel it in your pocketbook. From the New York Times:
Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money than at the peak of the last economic expansion, new government data shows.
Of course, there were some folks that made out like bandits over the last five years: those making more than $1 million:
The number of such taxpayers grew by more than 26 percent, to 303,817 in 2005, from 239,685 in 2000.
These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000.
And what about the masses? Well:
Nearly half of Americans reported incomes of less than $30,000, and two-thirds make less than $50,000.
I have never understood how so many people argue in favor of eliminating the estate tax, when it affects so few. I have never understood how so many people argue in favor of a favored tax rate on capital gains and dividends, when it affects so few. Two thirds of Americans make less than $50,000! By nearly any measure out there, that is far from rich.
Years ago, I asked an economist how it was that the American public bought into the idea that if they aren’t rich now, someday they would be, and, therefore, they wanted favorable tax treatments for the rich. He said he had no idea.
I don’t, either.
VIVIAN J. PAIGE | All Politics is Local 
What, Vivian, no apology for: “Do you ever bother to read the links, AEM?” I read all of the links. You could have simply changed the title and deleted my comment, but you chose to be rude instead.
“How do you think wealth is created, but for labor?”
When did I say wealth was created by labor? Some labor, though, such as that of accountants’ doing taxes, does NOT create wealth. However, it is not just the labor of people that creates wealth. The labor of machines does also. Those who designed and invented the machines, and those who take the financial risk of buying those machines, reap the profit from their increased production. If they did not, there would be no incentive to take the financial risk of buying the machines. The owners of a company, and those who buy its bonds, have taken a financial risk. If there were no reward, they would not take the risk. That is the essence of capitalism.
“Oh and about the sales tax- do you think that there is no accounting associated with it? Tell that to the companies that program the registers, or the accounts who prepare the sales tax returns. Heck yeah there is accounting associated with it. Just because you don’t see it on your end doesn’t mean it doesn’t occur.”
Is the accounting required for a sales taxes anywhere close to that required to do income taxes? Most companies already have that accounting in place. Only companies that operate only in states without sales tax do not. The addition of a federal sales tax would increase that accounting only minimally. The elimination of corporate income taxes would save a lot of time and money. What accounting and bookkeeping requirements are required of individuals to pay sales taxes?
“Besides, I noticed that you didn’t answer the question: how does the sales tax not come from your income?”
My apologies for the oversight. Purchases certainly are made from income of one sort or another. Thus, a sales tax would tax income, as you desire. However, it would do so without the ridiculous complexity of our income tax system. Additionally, all forms of income — labor, capital, interest, inheritance — would get equal treatment. Under the proposd plans, everyone would get a check from the government covering taxes on the first X dollars of purchases, making the tax progressive. So what’s the problem (besides the risk to your business)?
Now, explain to me how Bill Gates will be affected by an estate tax? First, he will be dead. Second, he has no children. Third, a transfer to his wife is tax-free anyway.
Have I missed any other questions?
Facts rarely, if ever, overcome faith.
I forgot:
“The capital gains rate is a maximum of 15% (in most cases), while the personal income tax rate is 35% (in most cases). So essentially by the rate being significantly lower, it has taken into account the effect of inflation, among other things.”
That does not answer the question, which was, “Please explain how the preferred tax rate makes the cost basis indexed for inflation. “
Vivian, most folks I know who’ll never pay an estate tax see it as an issue on principle. They don’t like the idea of the IRS swooping in with its hand out when somebody dies.
As far as capital gains, when it is as high as the income tax rate, the economy doesn’t exactly crank along too well. The government likes it when there are few disincentives to investment.
And your point about “revenue neutral,” your right. But those who want tax cuts that actually cut government spending are vastly outnumbered by those who want to increase it.
AEM: “No, because individual incomes are rising, just as the trees in the forest grow, but the average height of the trees does not increase.”
I was responding to your claim that part of the decrease in average income between 2000 and 2002 was due to new entrants replacing retirees in the labor force. My reply still stands – this happens every year and yet we do not see a decrease in average income every year. Therefore, that is not a plausible explanation. While it is generally true that individuals’ earnings increase over their lifetimes, it does not necessarily follow that all new entrants in the labor force earn less money than individuals in “their peak earning years.”
Back to your analogy – if the trees in the forest grow, the average height of the trees MUST be rising. It is not mathematically possible for the trees to grow without the average height rising.
“I was responding to your claim that part of the decrease in average income between 2000 and 2002 was due to new entrants replacing retirees in the labor force.”
Ah, I’m sorry if I miswrote — I did not intend to say that at all. I was trying to get across that, while the average in 2005 was lower than in 2000, the income of most working individuals has probably gone up.
To my analogy, MOST trees in the forest will be growing, but the oldest, the tallest, will be dying off and falling down. Similarly, the oldest workers (those in their peak earning years) are retiring.
“But those who want tax cuts that actually cut government spending are vastly outnumbered by those who want to increase it.”
See, that’s the problem. Tax cuts just cut taxes. They don’t cut spending. The unholy compromise that’s been reached in the last few years has been to cut taxes, but not cut spending. See, for example, the war in Iraq. Yes, I know, and many, many other things.
“Ah, I’m sorry if I miswrote — I did not intend to say that at all. I was trying to get across that, while the average in 2005 was lower than in 2000, the income of most working individuals has probably gone up.”
OK. No problem. However, the only way most individuals could be earning more while the average is decreasing is if there are outliers skewing the data. That is, there must have been either an increase in very low income earners dragging down the average or a reduction in incomes earned at the very top. Getting back to Vivian’s original post that during this time there was a 26% INCREASE in the number of taxpayers in the top .25% of income earners, it would seem more likely that the income of most working individuals has gone DOWN.
The problem with what you write, AEM, is that all it does is show your lack of knowledge in the areas of economics, accounting and finance. A little knowledge is a dangerous thing, AEM, and as I said before, you sound exactly like Jack.
If you don’t think that doing taxes doesn’t create wealth, you don’t understand what it entails. If you think that companies have in place the accounting mechanisms to handle sales tax, you are sadly mistaken. Again, you are looking through your own lens and not that of the greater whole.
You cannot understand that a lower rate compensates for inflation. By not taxing it at a higher rate, essentially the basis is increased. Do the math, AEM.
You talk about how the sales tax means less complexity for the individual but that has nothing to do with the question, which was how does it not come from income. It comes from income just like anything else that is paid.
About the only thing that you got right was the transfer between spouses for estate tax purposes. Such a simplistic view, though, of what estate taxes are about. What happens when she dies, AEM? Do you have any idea?
As for my apology – nope. Brian pointed out that the data I referred to covered the 2000-2005 change. Had you said that, I would have changed what was obviously a typo.
Brian – the question is why is it an issue at all with people who will never be subject to it? All of the energy in wasted on the estate tax – principle or not – would be better utilized on getting the tax burden reduced on the shrinking middle class. The fat cats have duped Middle America into taking up their cause, while ignoring their own.
Which is what I started with in this article. Two thirds of Americans make less than $50,000. Why are we talking about estate taxes at all? I venture to say that not a single one of those 2/3 will have a taxable estate.
Vivian,
Two answers:
First, if we are going to assume that the government (federal for the sake of simplicity) must be funded at the rate is now, then yes I would prefer a national retail sales tax. I do not understand why the feds should automatically have a claim on my income. I further don’t see why they should even know how much I make. I hope that demonstrates why a sales tax is fundamentally different from an income tax.
Second, I would prefer to see a far smaller and less robust federal government. I’d like to be rid of half or more of the cabinet departments and wast swathes of the federal bureaucracy. We will unfortunately never be able to go back 100+ years in terms of the size of government – the world has changed too much. But we could do with much less of the legacy of Wilson/FDR/LBJ/Bush43.
I suppose that the tax issue is more than simply a financial/monetary concern to me.
Brian – I understand the differences between a sales tax and the income tax. My biggest problem is that they are both claims on income, that a sales tax, by definition, is regressive, and that most people (again, think about the 2/3s of folks earning less than $50K) will pay more. We’ve been down this road before and we will just have to agree to disagree on this.
I don’t disagree that the size of government needs to be reduced. But even if we did that, the entitlement programs, of which Social Security is the largest, will continue to cost more money. We discussed this earlier.
Evidently Anon doesn’t read because Bill Gates does have a child. Vivian, any thing that comes out of your pocket regardless of what it is called is a tax. That is any amount over and beyond the actual cost of the product. Sales taxes, fines, user fees, income taxes, access fees, etc… are all taxes and Democrats will say that unlike Brian and his cohort ANON. The Republican line has always been and always wll be to cover up a tax through the use of ingenious names.
“If you don’t think that doing taxes doesn’t create wealth, you don’t understand what it entails.”
Explain it to me. How does the time and effort used to compute income taxes produce wealth? It may save the company money, but it does not produce anything.
“If you think that companies have in place the accounting mechanisms to handle sales tax, you are sadly mistaken.”
Then how do they pay the sales taxes the states require them to collect?
“You cannot understand that a lower rate compensates for inflation. By not taxing it at a higher rate, essentially the basis is increased. Do the math, AEM.”
Fair enough — let’s do some math:
An investor bought gold at $303 per oz. in January 1985, when the CPI was 105.5. He sold in January of 99 at $354 per oz., when the CPI was 164.3. So in constant 1983 (CPI=100) dollars, he bought the gold at $303/1.055=$287, and sold it for $354/1.643=$215.
Now, please explain how the reduced capital gains tax rate on his $51 “gain” compensates for his real loss due to inflation.
“You talk about how the sales tax means less complexity for the individual but that has nothing to do with the question, which was how does it not come from income. It comes from income just like anything else that is paid.”
No argument there. It all comes from income, so why bother with the complexity of an income tax when you can have the simplicity of a sales tax?
“About the only thing that you got right was the transfer between spouses for estate tax purposes. Such a simplistic view, though, of what estate taxes are about. What happens when she dies, AEM? Do you have any idea?”
Indeed I do. I’ve just finished dealing with that situation in my own family. The answer is that the government takes a chunk of the estate over a certain exemption. (How that is constitutional, I do not know, since the estate is not income, but wealth, and so not covered by the 16th Amendment.) The bases of all capital assets in the estate are reset to the present time.
“As for my apology – nope. Brian pointed out that the data I referred to covered the 2000-2005 change. Had you said that, I would have changed what was obviously a typo.”
No surprise there. In any event, 2005 average income seems to be the second highest in history. My expectation is that we have already passed the mark set in 2000.
Vivian, would you also please also explain how a sales tax is regressive, especially if one is, as per the proposals, NOT paying sales taxes on the first X dollars (let’s say $5000, since the 4-person-family poverty level is about $20,000) of purchases.
GEM, you are correct. I had no idea that Gates had children. When they grow up, let’s ask them if they want the government to take half of their inheritance when their father dies. (If they say, “yes,” we can still eliminate the tax, and they can contribute the money to the government voluntarily.)
I disagree with the notion that “any thing that comes out of your pocket regardless of what it is called is a tax.” When I go to a National Park and pay a fee to camp, it is a fee, not a tax. Similarly, a toll on the Jersey Turnpike is a fee to use the road, not a tax.
Sorry the link for the gold prices didn’t work properly. Just go to the left under Historical Charts and click “Gold.” Then under YEARY GOLD CHARTS select “1968 – 1999 Monthly Averages” and click the “View CHarts and Data” button.
“Explain it to me. How does the time and effort used to compute income taxes produce wealth? It may save the company money, but it does not produce anything.”
It produces a service. A nation’s wealth is measured by its productivite capabilities – its ability to produce goods AND services. Look at the measurement of GDP or GNP, for example. Not everything produced in an economy is tangible. Are you seriously saying that services such as accounting, financial, medical, education, etc. are not included in national output?
“I disagree with the notion that “any thing that comes out of your pocket regardless of what it is called is a tax.” …Similarly, a toll on the Jersey Turnpike is a fee to use the road, not a tax.”
That’s what a toll is…a road tax. You can call it whatever you like but GEM is correct, you may like the sound of it better but it has the same exact effect as a tax.