Progressive taxation
 

Maybe I'm one of the few that can be naive, but I've just realized that I don't know enough about progressive taxation to save my life.

I understand that for every dollar that you earn, the government takes .20 on the dollar depending on your tax bracket. I understand that regressive taxes would come up as a sales tax or a tax on Social Security.

But I still can't wrap my head around how to make the US tax system more progressive with things such as the No Billionaires taxation.

Is there anywhere that people are explaining this in an easy to understand way that can be pointed to in a video?

The "No Billionaires" Taxation's not a bad idea. Though the problem is with wealth comes power. Stripping them of most of their cash won't be easy as they may go to great lengths to get around it/fight it.

But if it can become reality, then it could very well save our country.

I'm probably like, the only person in the world who is ok with America's current tax brackets. It tops out at just about 40%, I'm ok with that.

Seems like a pretty nice sweet spot, you still get to keep more than half your money over 400k and you can still get obscenely rich, just like... at a 5% slower rate. Besides, its not like most billionaires make the majority of their money from a paycheck anyways and I'm pretty sure the tax rates on capital gains top out way lower, like 20% or something.

I'm of the belief you shouldn't legislate against people getting rich, you just shouldn't legislate what rich people tell you to.

Progressive taxation is, simply, that people with less income should pay less taxes and people with more income should pay more taxes, as a percentage of their income (obviously rich people pay more money out in taxes as gross dollars, but this is not necessarily progressive)

Sales taxes are considered regressive because poorer people pay out a higher percentage of their income in sales taxes than rich people.

Payroll taxes may also be considered regressive when compared to the rate paid out by those whose income comes from capital gains (see below).

The current federal income tax is considered progressive because poorer people pay less of a percentage of their income (some 0%) than rich people (who may pay upwards of 35% or so, I believe it will go up to about 37%). It could be more progressive or whatever, but as it is it is progressive in this respect (but wasn't in respect to capital gains, see below)

The debate of last year revolved around the federal capital gains tax which had been cut back to 15% under Bush. Capital gains are, for the most part, a source of income going to richer people. Poorer people are, by and large, spending most of their income and not investing it, whereas richer people have large amounts of money left over after providing for their needs to invest. This is not absolutely true (I, for one, despite making only around ten dollars an hour, have managed to scrimp and save and invest some of my money in bonds and preferred stocks, but many people cannot scrimp and save because they make even less than I do).

These investments yield interest (in the case of bonds and preferred stocks) or dividends (in the case of regular stock). This income is called capital gains.

The debate revolves around the ethical quandary of rich people whose income comes almost entirely from capital gains instead of labor. These people would pay a smaller percentage of their income to the government than many people whose income comes from labor, because their income is coming from capital gains instead of labor income.

Most Democrats would have liked capital gains income to be taxed at the same rate as payroll tax income, which for many of the people getting capital gains income (again, not all rich people are dependent on capital gains, and not all poor people do not invest, but as a rule of thumb) would see their capital gains tax go up to 35% (now 37%) to match their labor income tax bracket.

Most Republicans would have liked to keep the capital gains tax at the 15% level and make up new revenue by creating a minimum federal income tax of 10%. This would cause many of the poor and working class's federal income tax increase from 0% to 10%. This would be a regressive move.

As a compromise, the new federal capital gains tax will be 20%. Also, the payroll tax holiday for poor and working class people may expire (I'm not sure, I believe it has already) which will cause them to see an increase in their taxes. This particular part of it would be regressive because you are making the taxes of the poorer people go up much more as a percentage of their income than rich people's taxes will go up.

The reason there is a debate around capital gains is it is believed if you tax capital gains too highly, or at the same rate as labor income, people will not invest their money. This may or may not be true. I personally believe this idea is not true, because investing their money has allowed them to avoid actual labor, so there is still an appeal in investing your money and living a life of leisure rather than going to work. Also, most of them receive payroll income AND capital gains income--cutting out investment would be decreasing the amount of money they receive from capital gains by 100% rather than by 37%. So it makes little sense that they would stop investing their money because they have a lower rate of return--a lower rate of return is better than no return.

On the flip side, however, if they are making less then they have less money to invest and etc. etc.

As such, it makes sense economically to give some incentive to capital gains investment by having a somewhat smaller tax on capital gains than labor income. HOWEVER, this needs to be balanced with not increasing taxes on poorer people to pay for it. So the 20% on capital gains is probably TOO LOW. It should be higher, although perhaps not as high as labor income tax (debatable). Presumably, the working class should be able to enjoy an overall lower tax than the rich if it were balanced properly (this involves all three kinds of income tax--federal labor income tax, federal payroll tax, and federal capital gains tax).

But there is always the ethical quandary of people paying less taxes on money they just sat around and invested than on the money they make from labor. Why should people pay less tax on money they didn't have to do anything to earn than they do on money from the sweat of their brow, especially when far more of the population makes money from the sweat of their brow than make from investments? Basically you are seeing real world economic theory clashing with ethical quandaries.

EDIT: You also have to keep in mind the different kinds of taxes and who (usually) is paying them:

Federal labor income tax: usually lower and middle class people but many upper class people. This is taxes from work. Usually progressive (in theory).

Federal payroll tax: this is an additional tax on labor income that is paid out week to week to the government. This includes payments into: social security, federal unemployment, etc. Before this past year there was a federal payroll tax holiday for poorer people. I believe this was canceled. As such poorer people will now pay out more federal payroll tax than they did last year. This would be a regressive move, though in theory the tax is progressive in nature (i.e. the more money you make, the more you pay out. The less money you make, the less you pay out).

State payroll tax: A tax levied by a state on people's weekly labor income check. This is usually used to pay for roads, etc. This is not controlled by the federal government but instead the state government. May or may not be regressive/progressive depending on the state. I would venture it is usually regressive from my own experiences.

State labor income tax: A tax levied by a state on people's yearly labor income. May or may not be regressive.

Federal capital gains tax: A tax levied by the government on income from investments yearly. Usually middle class and upper class people. Not regressive in and of itself but in comparison to who is collecting it and in comparison to federal labor income tax is probably regressive (currently).

State capital gains tax: A tax levied by a state on people's income from investments, yearly. Usually not differentiated from labor income at the state level (i.e. a person's total income from labor AND capital gains is taxed at the state level at the same rate).

Local income tax: a tax levied by the local municipality or township on one's labor income. This is used for local roads, township operations (snow removal) and the like. If you live in a city then this is what is paying for upkeep in a city, if you live in a town this is what is paying for upkeep in a town, etc. Usually lower or middle class people.

Local property tax: a yearly tax levied by a local municipality or township based on the value of your property. Usually middle or upper class people.

Keep in mind that many people have what is called withholding--where their federal or state labor income taxes are taken out of their paycheck week to week. This amount depends on your dependents. When you file your tax return you may end up getting most of this back (many people do on the federal level, usually not on the state level, however), but keep in mind that this means that they are still without this money in their monthly costs.

In regards to a 100% wealth tax on wealth over a billion dollars: this would be actual wealth redistribution because you are not proposing a tax on yearly income, but current wealth.

I personally would be fine with it but it is absolutely antithetical to capitalism. It cannot exist with any form of capitalism on an ethical level. You are basically saying "capitalism is fine until you reach this particular point, at which point your wealth cannot grow any further". That is, technically, not capitalism. You may run things like capitalism but if there is an absolute ceiling on the wealth you can accumulate then it is not capitalism.

If, say, they wanted to start taxing yearly income above a billion dollars at 99%, then you could still argue that it was a capitalist system, though barely. But taxing current wealth--no.

The No Billionaires idea is a decent economic plan in concept, but if it were to actually go into effect then we'd instantly have no billionaires because they'd move to other countries that won't tax them down. Moving to anywhere in the world is not out of the question and probably very trivial if you're wealthy enough to qualify for that tax to affect you.

And then those people make investments in businesses in other countries instead of here since we drove them off with our new tax. The moment anyone starts to make enough money here to qualify for it being taken away to that degree, they move out to somewhere else, potentially taking their business with them.

So in theory, it'd be a great economic boost to the US, but when you consider the fact that there are other countries with different tax systems then it turns out to be a bad idea, since the US would be lucky to get a single penny from that tax with all of the billionaires moving out. And because it'd create an effective "wealth ceiling" where millionaires stop making money after a certain point, they'd be driven to move out. We'd lose a ton of potential investors for businesses (realistically, not every rich person will invest in a way that creates businesses and jobs, but a lot do) and our country could very easily go into another economic crash because of it.

This would necessitate abandoning a lot of property and infrastructure they've already established, which would be expensive.

Yes it would, and in that case they would weigh whether or not that costs more than staying and paying the tax, and a tax that is taking anything over that billion dollars of wealth is very, very likely cost more. If they're clever enough, they may even figure out how to maintain their business and assets in the US while technically residing in another country. Either way, from a multi-billionaire's perspective, it is better for them long-term to simply not live in a country that taxes them that way.

Then the question immediately occurs, what is the value of capitalism?

It seems that we now have a simple and straightforward definition of capitalism as "the ability for a single person to possess liquid assets greater than a billion dollars". Or whatever ceiling we decide on. I really like this, and I hope it holds up. Cause then I think it would be impossible for anyone to defend capitalism as an ideology, like, what is the ideological merit of a person having the right to own more than they would ever possibly need when there's people starving, how does that right help anyone compared to any given alternative?

Now for a slightly topical international comparison of taxation: Here in Sweden we used to have a "fortune tax" that applied to any money you had in the bank above around 150 000 dollars. Not sure where it would max out, but there was a fun period where one particularly rich woman paid a tax of 102%. It probably was no different from this "No billionaires" tax in principle. A number of years ago the right wing party coalition got it removed, however, and since then the economy has declined pretty steadily according to a majority of economists. To the surprise of no one, it turned out that forcibly keeping those fortunes invested and in circulation did a lot more than letting people hoard money to their heart's content.

And yes, the very wealthiest always used to emigrate to tax shelter countries. Probably there should be a higher international standard of taxes so there's nowhere to run. There's a conundrum: do we have any way to theoretically pass any international law that benefits the poor more than the rich?

Capitalism is not fine ever.