9 Things The Rich Don’t Want You To Know About Taxes

“John Paulson, the most successful hedge-fund manager of all, bet against the mortgage market one year and then bet with Glenn Beck in the gold market the next. Paulson made himself $9 billion in fees in just two years. His current tax bill on that $9 billion? Zero. Congress lets hedge-fund managers earn all they can now and pay their taxes years from now. In 2007, Congress debated whether hedge-fund managers should pay the top tax rate that applies to wages, bonuses and other compensation for their labors, which is 35 percent. That tax rate starts at about $300,000 of taxable income—not even pocket change to Paulson, but almost 12 years of gross pay to the median-wage worker.”

This is a stunning, eye-opening article about taxes in the USA. Reading it made my head swoon – there’s so much corruption, deception, and outright lying going on when it comes to the issue of taxes, it makes you wonder how much longer this can continue. I’d classify myself as “anti-unnecessary tax” – I have no problem paying taxes every year because I know that my taxes go toward funding the things that make the lives of my family better: healthcare, defence, roads, police, fire-fighters, etc. I don’t embrace extra taxes, however; the GST we have in Canada (currently at 5%) irks me because it’s a tax everyone has to pay, regardless of income level, and when you combine it with the taxes we already pay on fuel, property, etc. it adds up. Paying taxes are part of what it means to live in a society where services are provided though, and seeing people – very wealthy people – manage to get away with paying nothing is infuriating.

  • You’ve just made a very compelling argument for a flat tax: 17-20%, no loopholes, no deductions, no credits. You pay 20% of what you earn and that’s your income tax, end of story. Then you can’t “get out” of it.

    Something interesting to add, though, is that in the United States, 43% of households have zero income tax burden whatsoever, while the top 1% who have 20% of the wealth pay roughly 42% of the taxes.

    If that doesn’t demonstrate to you that the tax system in the US is completely screwed up, nothing will.

    Everyone should pay something. Poor, rich, and so on. End of story.

  • Vinny is dead on. The reason we get away with it is people confuse “rich” and “wealthy” with income tax. Politicians use class warfare “Tax the rich! Make them pay their “fair share” while people never stop to think about what that means. An income tax is obviously a tax on income, not on wealth already earned.

  • My bad for forgetting to link to the actual article. Here it is:

    http://www.wweek.com/portland/article-17350-9_things_the_rich_dont_want_you_to_know_about_taxes.html

    I think a flat tax is a great idea – but it will only work if there aren’t loopholes to get out of paying it (which rich people, who can afford expensive accountants and lawyers, are great at finding). If it was fair and firm, it would simplify things.

    I’m less convinced that someone earning $12,000 per year should need to pay 20% of that as income tax – I think there should be a bottom limit; when you’re poor, paying 20% of your money as income tax does nothing but make you even more poor.

    Check out point #1 in that article: even without an income tax burden, people still pay other forms of taxes. I don’t think there’s any true “tax freeloaders” in society except, perhaps, homeless people who aren’t part of the tax system.

    I have serious concerns for the USA: the increasing debt, and the refusal to accept that paying more taxes and cutting military spending is the way to tackle the problem, makes me worry what things will be like 10 years from now. 🙁

  • While I agree that a “retroactive tax” isn’t the answer – income tax should be on what’s been earned in that tax year, not on your overall wealth – it’s hard to argue with the numbers when you look at what would happen if the Bush Tax Cuts were overturned…the US debt would shrink by a significant amount over the long term. And let’s not forget the loopholes that allow people to defer income for umpteen years, waiting until it’s advantageous for them to pay taxes. That’s just ridiculous.

    I’ve had good years and bad years making a living over the past decade, and when I’ve made good money, earning a little less really wouldn’t matter very much. That’s what I don’t get: when you’re someone earning $800,000 per year for instance (I wish!), if instead of paying $256,000 (32%) you were paying $280,000 (35%), would your life really be that different? Is that extra 3% going to cause you hardship? The 32% and 35% are just imaginary numbers; I don’t know what the actual numbers are (they’re strangely hard to find).

    Some good info here on Wikipedia: http://en.wikipedia.org/wiki/Bush_tax_cuts

    This was quite a shocking figure:

    “In August 2010, the Congressional Budget Office (CBO) estimated that extending the tax cuts for the 2011-2020 time period would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.”

  • You’re wrong about one thing: raising taxes won’t solve the problem.

    Throughout the United States’ history, tax revenue has never risen above 18%
    of GDP (and by never, I mean within a few percentage points between 16 and
    20). In the worst of the Carter years, when taxes were at their highest and
    the top tax rate was around 72% for the top earners, tax revenues were in
    the neighborhood of 18.5% which proves that when you make it unprofitable
    for those with the money to work, they simply stop working, shelter money,
    lie about earnings, etc. When Reagan cut that top marginal rate, all of a
    sudden we had a higher GDP, more productivity and more money and even though
    we were still pulling in 18%, we had more money.

    It’s counterintuitive, but that’s what happened. It was so obvious that it
    was the right strategy that Clinton never touched the tax rates when he was
    President even when Congress forced him to balance the budget. Even he
    understood that you can’t balance the budget on the back of the people
    paying taxes. So he made cuts.

    Military spending isn’t the answer by itself. EVERYTHING has to be on the
    table, including Medicare, Medicaid, Social Security, and so on. Cutting
    the military budget and raising taxes will not solve the problem. There are
    all kinds of issues with discretionary spending that need to be solved as
    well as mandatory spending that might need to be re-addressed as to its
    effectiveness (why, for example, do we have 50 states with their own
    Department of Education, every locality with a similar one, and a Federal
    one was well? And that’s just one example). Last year, the NY Times ran an
    article on the budget and said “Can you balance the budget?” It had an
    interactive part where you make cuts or raise taxes and it tells you how
    well you did. In 15 minutes through cuts and not one increase of taxes I
    had a huge surplus in five years. But I made cuts. And I didn’t care who
    they affected. We can’t stomach that in this country in 2011,
    unfortunately.

    The argument that “raising tax rates will solve the debt” doesn’t stand up
    to history. Whether we had 72% tax rates or 38% tax rates (right now it’s
    35%), we still had 18% of GDP as our tax revenue. That tells me we don’t
    need to take in more, we need to spend less. The US government’s budget
    went from 2.4 trillion to 4.6 trillian in 4 years. At the same time,
    discretionary spending went from 4 to 8 to 12 percent and now it’s scheduled
    to hit 14-16 in the next budget. Something has to give and it isn’t the
    taxpayer.

  • A well-reasoned reply Vinny (as always). Thanks for educating me! I agree that spending is essentially at the root of the problem, but the people cheating their way out of paying taxes can’t be ignored either. Have people making millions and paying little to nothing in the way of taxes isn’t a fair tax system. The answer might not be raising taxes, but it should be about making everyone pay their fair share of the taxes (which you acknowledged above in your comment about the flat tax). The thing is, it’s not usually the middle class people paying nothing income taxes – they can’t afford the expensive professionals who find loopholes.

  • Anonymous

    I look at it this way, the politicians and media just LOVE class warfare. If you’re “poor”, you have the freedom to work your way to being “rich”. Quit whining and do something about it. “Poor” people can implement similar tax strategies that “rich” people execute.

    On the subject of the government’s budget, here’s how I see it, millions of people lost their jobs and these people and companies had to tighten their budgets in the past few years. The government needs to do the same. Do not increase the budget and raise the debt ceiling. Cut the crap and government handouts.