The U.S. Tax Code 201

I thought I’d pop in and clear up a few more things about our U.S. Tax code (at 73,608 pages long and growing, it can be confusing).

I promise this one won’t be nearly as long as the last one :)

Progressive Tax: A kind of tax where the more you make the larger percentage you are required to pay.  We currently have a progressive income tax system.  Those who make less pay a smaller percentage of their income in taxes (currently 49% of the U.S. population pays no income tax.)  Those who make more, pay a larger percentage of their income.  As of the 2011 tax year, those who made $379,151 or more in taxable income (aka after deductions like mortgage interest, children, qualified investment contributions, etc) will send 35% of the money they earned to Washington.

Federal Income Tax: If you have a traditional job with an employer, this is tax taken directly out of your paycheck and sent straight to Uncle Sam.  This goes into a big pot in Washington called “revenue“.  As I said before, this is a progressive income tax.

State Income Tax: If you have a traditional job with an employer, this is tax taken directly out of your paycheck and sent straight to your state Capital.  Some states have no income tax.  Texas, Washington, Alaska, Nevada among others have no state income tax.

Sales Tax: This is a tax that you pay when you buy things.  This is a state tax.  Some states have no sales tax.  Oregon, Alaska, Delaware have no sales tax, for example.  There is currently no federal sales tax.  This is NOT a progressive income tax.  Those who make $10 a year pay the same percentage of sales tax as those who make $100,000.

Capital Gains Tax: A tax levied on profit from the sale of property or of an investment.  For example, if you buy a house for $100,000 then you sell it for $150,000 you will pay a tax on the $50,000 difference.  Another example, if you make $100,000 of contributions to a 401K or IRA and after 30 years your 401K or IRA are worth $10,000,000, you will pay a capital gains on the income that you withdraw from said 401K or IRA.  If you withdraw nothing (aka leave it all in there) you pay nothing.  If after you retire you withdraw $50,000 a year to live off of, you will pay capital gains tax on that $50,000.  If you withdraw the entire $10,000,000, then you will owe capital gains tax on that entire chunk (not a good idea since your retirement account is supposed to keep you from eating alpo when you are old and gray.

Estate Tax or Death Tax: If you die, the value of your total estate (land, house, cash, investments, other assets, etc) is taxed.  This is also progressive tax.  The larger your estate, the larger the percentage you (or your children, as the case may be) owe to the Federal Government.

There are several other kinds of taxes (property tax, Social Security, Medicare, Payroll tax, etc.) that I won’t get into today because they don’t have anything to do with the subject at hand.

Now that we have those definitions out of the way we can get into my commentary.

There’s really just one thing that I have a problem with (or rather, there’s just one thing I will mention today).

What really has me riled up is the so-called Buffet Tax or Buffet Rule.

The argument states that (and this comes directly from the Whitehouse.gov) that:

Under the current U.S. tax system, a number of millionaires pay a smaller percentage of their income in taxes than a significant proportion of middle class families. Warren Buffett, for example, pays a lower effective tax rate than his secretary, and that’s not fair.

Considering the complexity of our tax structure, it is understandable why a lot of people would believe this kind of statement.  It is true that Warren Buffett would pay around 15% federal taxes while his secretary pays 35%, however when you take a step back and look at it in context, the suggestion that Warren Buffett or other others like him pay less in taxes than their employees is an insult to thinking people everywhere.

Let’s continue with Warren Buffett.  He is worth about $44 Billion dollars (includes land, investments, businesses etc.).  He is rich beyond any of our wildest dreams.  He is also retired.  Warren Buffet does not pay much INCOME tax because he lives off of his investments, for which he pays a CAPITAL GAINS tax.  Warren’s secretary pays an estimated 34% in INCOME tax (because she is his employee and he pays her an income) which means she makes somewhere between 200k and 500k a year.

That is like comparing how much I pay in sales tax a year with what my neighbor pays in income tax.  They are two completely different things!  Of course I will pay less in sales tax because the sales tax rate is so much lower (assuming my neighbor is making enough to pay more than 7% in income tax).

Lets dig deeper.  If I were to pull a number out of thin air and say that Warren Buffett withdrew $10 million out of his investments to live off of and do his business with (Likely a fraction of the actual amount withdrawn.  According to this article his taxable income and investment earnings were more like $40 million.), at 15% Cap Gains rate (again, I don’t know the exact percentage he pays, it’s around 15%) he would send $1.5 million to Washington for taxes.  If his secretary has a taxable income of $500,000 and pays 35% in taxes, she sends $175,000 to Washington.

Still following me?  In plain English: in no way, shape, or form, does Warren Buffett pay LESS in taxes than his secretary.  At all.

They are comparing apples to carrots.

I could go on and on about the implications of this lie being propagated by the president, the media and Warren Buffett himself; but I promised to be short.  I’ll let you draw your own conclusions :)

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2 Comments Add yours

  1. Alexa says:

    Really great explanation… thank you!

    Like

  2. Heather B says:

    Awesome post!

    Like

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