For some years I have wondered about what the guys in top tax brackets pay, and why some of the very rich move to Bermuda. Is my rudimentary math below correct ...?
... For a family with subtantial investments in stocks:
Corporate tax rate 38% (reduces earnings, which reduces the price of the stock, commensurately) Capital gains tax rate 15% Estate or inheritance tax 45%
100 (index) x (1 - .38) = 62
62 x (1 - .15) = 52.7
52.7 x (1 - .45) = 28.99
28.99 = what's allowed to the family after taxes.
It seems to me that the minimum the family pays is an effective 71% tax. For 28% cap gains tax rates, and 55% estate tax rates, that goes up to 80%.
Of course the more often one realizes capital gains, the more often that tax is paid, and the more often one dies, the more often the estate tax is paid.
========================================= MODERATOR'S COMMENT: fortunately, I plan to only die once
I can use the same double counting, false assumption process to dishonestly demonstrate that out of 365 days in a year, a full time worker doesn't spend one hour on the job.
Not included in my original question was earned income. Taking a max bracket of 38%, ignoring State taxes, and using 45% estate tax, the total taxation on earned income *that is not spent* is 66%. The time periods in which the income is generated are not a factor (e.g. higher earning and saving years after 40 are taxed at 38%, then the estate tax).
I did work with the other numbers, which should be considered separately, and I think I see where you say I double counted. The original capital invested is not taxed (cost basis). But, as it is invested, gains resulting from it are taxed. Time periods are also a factor, since presumably major investments would be made in later years. Using assumptions near a 7% investment return, it doubles in 10 years. If it is realized and reinvested three times, the tax paid approximates 15% on all gains, then the subsequent unrealized gains are subject to estate tax.
A table may help show this (in brief):
10 year periods, at 7% return Investment // Tax @15% $ $
100 //
185 // 15
342 // 27.75
633 // 51.30 Total tax paid $94.05, on total gains of $627 = 15%. Then the final double over ten years (an assumption of investment horizon) brings the amount subject to estate tax to $1265, all based on a $100 initial investment 40 years prior. I'm not sure how reasonable it is to "assume" an investment return consistent with 7% over 40 years, but if one considered only the original investment, the effective tax on that
100 is much higher than 15%. I have not worked out a schedule of investments over time - clearly the later investments would have fewer years to accumulate gains.
The effects of the corporate tax rate on the returns from investments in common stock are not a straight-line function, and I don't think one can assume that a reduction on that rate would translate into earnings increases (it seems unlikely). But the multiplier rate or the speed of money is a factor tending towards pushing earnings higher. I believe this is a widely recognized and accepted principle. If nothing else, the reduced taxes could be paid out in dividends, or used in stock repurchases. If dividends were paid out, those would be taxed annually.
I understand that deductions from income and available loopholes mean that few people pay the effective max bracket on all their gross income, and I understand that this isn't a very simple set of computations, but for those who are very wealthy, is my 70% number really that far off? A lot of wealth is accumulated from privately held businesses, where investment returns are higher than 7% annualized.
see that 2005 corporate tax to> taxable net income is right at 26%.>
[snip]
{Humor appreciated :-)
Thanks you for the pointer. Very interesting data - actually, I looked for those numbers about 10 years ago and had no idea where to find them :-) As to the 26% v. higher, the averages include companies with losses - I made an assumption that successful investing would result in owning companies with tax rates higher than average. No big deal. It just seems to me that the double and triple taxation makes one wonder if some legislators are experimenting with some asymptote towards 100% taxation. Where taxation has the most deleterious effects (according to Greenspan, in any case) is capital. There has been some talk of lowering corporate tax rates, and I got into trying to estimate effects. (Accounting is not my forte. I'm far too impatient.)
The maximum individual income bracket is not 38%. Re your earlier post, capital gains taxes are not paid unless the capital gains are realized. Most wealthy people die with a lot of unrealized capital gains which means that 15% is never paid.
Also, for most people the estate tax is zero which makes the estate tax rate be 0%. The first $2,000,000 of an otherwise taxable estate is excluded from the estate tax. Effectively for a married couple with just a tiny bit of planning, $4,000,000 can be passed onto the children free of estate tax.
A couple with 2 married kids and 4 grandchildren (8 people) are able to gift 16*$12K ($192K/yr), not an insignificant amount of money. I think the estate tax concerns are overblown. Those who actually have such sums can afford to structure their assets to avoid much of the hit.
Or mead. As well as being taxed repetitively, every dollar is earned many times, but that's macro econ (multiplier effects, velocity of money, etc.). Probably more accurate to call it 'aggregate econ.' The picture of global corps is interesting, I agree, but while foreign interests here may flow capital back home, I believe U.S. entities pay tax overseas (usually at lower rates) and then again here if they try to bring their profits back home (I haven't read up on it, but there was the 'tax holiday' a few years ago for repatriating foreign income). Ireland seemed to have attracted a lot of business with their low taxation rates (and I haven't heard much recently about the IRA, bombings, etc. - perhaps because there's more ale flowing). And there is some interstate competition in the U.S.. I think most dividends paid are taxed - I know U.S. holders of BP pay U.S. tax on dividends.
Someone somewhere on the web I read recently talked about (macro) taxes as a % of income, and from what I recall, there is a rather narrow (macro) band between 16%+ and 18%- within which the economy operates. Sorry I don't have that link.
Wanted to thank everyone for their comments on my topic.
========================================= MODERATOR'S COMMENT: With this reply, it may be time to consider this thread 'closed'.
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