Hermain Cain's 9-9-9 - Taxable Income multiplied by 9%
Rick Perry's 20% Flat Tax - Taxable Income multiplied by 20%
Obama's Millionaire Surtax - Taxable Income in Excess of $1MM multiplied by 55%
Do you see the common theme? Before you can ever calculate the taxes owed, you must know taxable income. This is what complicates every tax discussion. It's not the calculation of the tax that's difficult, it is figuring out what is Taxable Income?
And not all types of income are earned equally. Most often income is used to describe Wage Income, the amount shown on your W-2. Other types include Capital Gains, Interest and Dividends, Passthrough Income, Alimony, among others.
Even if we abolish all deductions, to "broaden the tax base, and lower the rates," we still need to decide if Grandma's Interest Income should be taxed at the same rate as Barack Obama's book royalties. Or if Warren Buffett's stock dividends should be taxed at the same rate as Albert Pujols' home run bonuses.
If you're thinking, "let's just call it all income. Anytime you get money, that's income, pay your fair share." Does it include money you receive for college scholarships? When you sell stock, are you taxed on 100% of the sales price including the amount you paid? What if your boss gives you a car and free rent in a house instead of cash, does that mean you have no income?
I kept a print copy of the Tax Code at my desk when I worked in public accounting and prepared tax returns. Trust me, it's big. And that doesn't even begin to count the Regulations, Court Cases, Publications, Form Instructions, Committee Reports, etc that you have to read in order to understand what the Code itself means.
No Presidential Administration will take office and make the tax code disappear. Or if they do, they're going to replace it with something that looks, smells, and feels exactly like a tax code, but happens to go by a different acronym.
My point is this: a discussion about taxes will never be cut and dried, black and white. We need to stop expecting our leaders to deliver a 15 word tax code that will solve our every loving problem. They can't do it. If they're telling you they can, be skeptical.
Wednesday, October 26, 2011
Friday, July 01, 2011
Millionaires & Billionaires
The president has spoken at length recently, and throughout his Presidency, about the need to raise revenues by taxing the "millionaires and billionaires." In the paragraphs that follow, I'd like to point out a few things that make this statement much more complicated than the President implies.
Simply enough, a millionaire is someone whose Net Worth is $1 Million or more. Net Worth is a function of your Assets (things of value: cash, stocks, property, business ownership) less your Liabilities (debts, mortgages). If you have a million dollars cash and no debt, you are a millionaire.
When you look at an individual tax return, however, at no point does the Form 1040 ask about your balance sheet. The form is blind to the value of your assets or the sum of your debts. It only cares about your Income. Assets and Income are related, yet far from the same thing. From the example above, you have a million in assets but if it's all sitting in stacks of cash under your mattress you have $0 in taxable income. If your million is in a bank savings account earning 1%, your taxable income would be $10,000 (prior to any exemptions or deductions allowed by the tax code).
On the flip side, some tax returns might show huge amounts of income without any net worth at all. It's possible for an individual to have $1,000,000 in taxable income without having a penny to their name. This happens because taxable income is not necessarily equal to the amount of cash coming in. If someone forgives your debt, you may have taxable income, but you did not receive cash. Also a person might make a million, but has no Net Worth either through large borrowing or lavish spending. This person is not a millionaire per our definition above, but shows a high taxable income.
So whose taxes does the President want to raise, the high earners with no net worth? What about the people who have a million in the bank through savings and frugality but still only make 75K a year, surely it's not right for them pay taxes at an elevated rate.
I guess the point I'm trying to make is that we shouldn't carelessly throw around terms like "millionaires and billionaires" without thinking about what the words actually mean. And after thinking about it, I'm not exactly sure whose taxes President Obama is hoping to raise.
Simply enough, a millionaire is someone whose Net Worth is $1 Million or more. Net Worth is a function of your Assets (things of value: cash, stocks, property, business ownership) less your Liabilities (debts, mortgages). If you have a million dollars cash and no debt, you are a millionaire.
When you look at an individual tax return, however, at no point does the Form 1040 ask about your balance sheet. The form is blind to the value of your assets or the sum of your debts. It only cares about your Income. Assets and Income are related, yet far from the same thing. From the example above, you have a million in assets but if it's all sitting in stacks of cash under your mattress you have $0 in taxable income. If your million is in a bank savings account earning 1%, your taxable income would be $10,000 (prior to any exemptions or deductions allowed by the tax code).
On the flip side, some tax returns might show huge amounts of income without any net worth at all. It's possible for an individual to have $1,000,000 in taxable income without having a penny to their name. This happens because taxable income is not necessarily equal to the amount of cash coming in. If someone forgives your debt, you may have taxable income, but you did not receive cash. Also a person might make a million, but has no Net Worth either through large borrowing or lavish spending. This person is not a millionaire per our definition above, but shows a high taxable income.
So whose taxes does the President want to raise, the high earners with no net worth? What about the people who have a million in the bank through savings and frugality but still only make 75K a year, surely it's not right for them pay taxes at an elevated rate.
I guess the point I'm trying to make is that we shouldn't carelessly throw around terms like "millionaires and billionaires" without thinking about what the words actually mean. And after thinking about it, I'm not exactly sure whose taxes President Obama is hoping to raise.
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