What If the Tax Donkeys Rebel?

Since federal income taxes are in the spotlight, let’s ask a question that rarely (if ever) makes it into the public discussion: what if the tax donkeys who pay most of the tax rebel? There are several likely reasons why this question rarely arises.

1. Most commentators may not realize that the vast majority of income taxes are paid by the top 10%–and that roughly 60% are paid by the top 4% of households. (A nice example of the Pareto Distribution, i.e. the 80/20 rule, which can be extended to the 64/4 rule.)

As David Stockman noted in Trump’s 1,500-word Airball“Among the 148 million income tax filers, the bottom 53 million owed zero taxes in the most recent year (2014), and the bottom half (74 million) paid an aggregate total of just $45 billion. So let me be very clear. There was still $4 trillion left in the collective pockets of these 122 million taxpayers — even after the IRS had its way with them!

By contrast, the top 4% or 6.2 million filers paid $802 billion in Federal income taxes. That amounted to nearly 58% of total Federal income tax payments.”

2. Few commentators draw a distinction between earned income (wages and salaries)and unearned income (dividends, interest, and more broadly, rentier income streams from the ownership of productive assets.

Here are a few examples to clarify the difference. Let’s say a couple earn $300,000 a year–a nice chunk of change, to be sure, but since this is earned income, it’s exposed to higher tax rates: 33% and up.

The primary tax breaks available to wage earners are mortgage interest and tax-deferred retirement contributions (IRAs and 401Ks). But there’s only so much income that can be sheltered with these deductions. The household earning $300,000 may not own much in the way of wealth, and might even devote much of that income to servicing student loans, paying private school tuition, supporting elderly parents, etc.

If this household is typical, its primary wealth/assets are home equity and retirement funds. A house doesn’t generate income, and any income generated by retirement funds is unavailable until retirement age, unless the owners are willing to pay steep penalties.

Now compare the hard-working folks earning $300,000 with a couple who don’t work at all, but live off a rentier/investment income of $300,000 annually. Long-time readers know I often distinguish between assets that don’t generate income (the family home, etc.) and assets that produce income, i.e. productive assets such as family businesses, stocks, bonds, commercial real estate, etc.

If these wealthy folks are typical, much of their income is taxed as capital gains at 15%, not 35%, and they also avoid the Social Security/Medicare payroll taxes paid by wage earners and the self-employed.

If we separate out these sources of income and types of wealth, we can distinguish two separate classes of high-income taxpayers: those who earn a lot of money and pay a lot of taxes, but who don’t get much income from productive assets/wealth. Furthermore, any increases in the value of their primary assets (the family home and retirement funds) are not available in the same way as gains registered in stocks, bonds, and other income-yielding assets.

These high-earners are tax donkeys–they pay much of the nation’s income tax but have to work hard for that privilege. While they typically have considerably more wealth than lower income households, their wealth is either inaccessible or unproductive, i.e. doesn’t generate income.

The top 9.5% of households are tax donkeys to some degree, while the top .5% are typically rentiers who live very well off the income streams flowing from productive wealth (apartment buildings, ownership of businesses, stocks, bonds, etc.)

At some point, tax donkeys may decide that it’s no longer worth it to work so hard, and so they downsize, retire, sell the business, etc.–get out while the getting’s good. The average wage earner may reckon that those making the big bucks and paying the big taxes would never stop slaving away because their net income would drop–and who would voluntarily let their income decline?

I would hazard a guess that an increasing number of tax donkeys are considering dropping out as a means of increasing their happiness and satisfaction with life. When the often overworked tax donkeys start bailing out, there may be no substitute source of taxes.

Those who reckon some new tax donkey will quickly take the place of the retiring tax donkey overlook the fact that many are entrepreneurs and/or highly experienced professionals who can’t be replaced as easily as a typical salaried person.

Courtesy of my esteemed colleague Lance Roberts, here are some charts that illuminate the widening disparities of income and wealth that differentiate those who pay little income tax, the tax donkeys and those who pay lower rates of taxes on unearned income: (Fed Admits The Failure Of Prosperity For The Bottom 90%):

Family income:

Family financial assets:

Business equity:

 

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  • exomike

    So, what’s your point? Spit it out man!

    • kimyo

      he’s trying to frame the taxation issue as ‘rich vs. poor’.

      apparently corporations shouldn’t pay taxes? how did he manage to forget about them? the multinational tax dodgers which use their ill gotten gains (see: novartis) to purchase politicians?

      Bernie Sanders says tax share paid by corporations has fallen from 33% to 9% since 1952

      Biggest Corporate Tax Cheats, From General Electric to Google to News Corp.

      As reported Friday, General Electric concluded 2010 with $14.2 billion in profit, for which the Internal Revenue Service is paying them a tax benefit of $3.2 billion, thanks to a shrewd use of U.S. tax loopholes, aggressive lobbying and favorable international tax provisions. They’re far from alone.

      Last year, Google reduced its tax burden by $3.1 billion by altering its tax practices. Boeing hasn’t paid any federal corporate income taxes in the last three years, despite earning $10 billion in domestic pre-tax profit. Pharmaceutical companies Pfizer, Eli Lilly, and Forest Laboratories habitually avoid paying U.S. income taxes by recording profits in a country a world away from where the sales occur. A study released in 2008 by the Government Accountability Office concluded that 57 percent of U.S. companies doing business in the country paid “ no federal income taxes for at least one year between 1998 and 2005.”

      • Shiggity

        Organic growth vs. inorganic growth are very different things and more people need to understand these economics terms.

        There has been little to no organic growth at all in the US since 2000.

        It’s all been mergers / acquisitions / printing funny money to pump up assets. That’s not real, it’s just a ponzi scheme to keep the rigged game going.

        • TimeToWakeUPAmerica

          Shiggity ~ DIGGITY! Right on. We are living in an open air CASINO. And, the house ALWAYS wins!

  • ICFubar

    Actually those earning wages and salaries are not required to file but seeing as tax is deducted at source they are hoodwinked into the scam.On the other end the loopholes for tax evasion are many and storied and at the extreme trillions of dollars go untaxed sitting in offshore tax havens. The USA provides such havens for non US entities while others provide such for American entities. All this while trillions of dollars are disappeared from US government department budgets as the government is run as a criminal enterprise. I do believe Americans have much larger problems than some symptoms that Smith is concerned with here.

  • TimeToWakeUPAmerica

    The entire problem in Western Civilization, is that EVERYTHING has become monetized. It’s ALL a “race to the bottom”. How many people place TRUTH ahead of FIAT $$ ? The TRUTH shatters the LIES.

    Are YOU hungry for some TRUTH? Are you? Really? (I doubt it. But, I’ll proceed anyway, just in case.)

    There really are but two questions to be asked (ok, maybe three): 1) WHO, EXACTLY, GAVE US WESTERN CIVILIZATION? 2) Are the so-called “Jews” [really, 90% YIDZ] famous for their MANY & GREAT civilizations of antiquity? 3) Can EITHER the YIDDISH-SPEAKERS (of EASTERN-EUROPEAN origin, whose descendants comprise 90% of those who today call themselves “Jews”), or their 10% “Sephardi” co-religionists ~ can EITHER of these two groups ~ claim descent from the ancient Ibri, or Iberi, of Illyria or Siluria, who, according to COMYNS BEAUMONT, are the true, original Jews (who inhabited the ancient land, that we today call Britain)? BTW, Edinburgh, Scotland = JERUSALEM (both Old Testament & NEW). Put that in your pipe & smoke it. I know, it sounds “crazy”, until you read the extensive & detailed evidence and proof, which COMYNS BEAUMONT provides in his books, the most important of which are 1) THE RIDDLE OF PREHISTORIC BRITAIN, 2) BRITAIN: THE KEY TO WORLD HISTORY, and 3) THE GREAT DECEPTION: SYRIA, BRITAIN AND THE ROMAN CONSPIRACY.

    I. WHO, EXACTLY, GAVE US WESTERN CIVILIZATION? (Athens, & Sparta, Greece. From WHOM ~ from which TRIBE, exactly, are the ancient Athenians & Spartans descended? (Both Greeks & Romans correctly claimed descent from ancient Trojans, who originally hailed from an area on or near the BALTIC SEA!) Also, who exactly, gave us the Declaration of Independence, & the U.S. Constitution, AND ITS BILL OF RIGHTS?)

    Was it Asians? Arabs? Africans? Latinos? Eastern-European Slavics or Yidz (Yiddish-speakers)? (Think about it.)

    II. Are the so-called “Jews” [really, 90% YIDZ] famous for their MANY & GREAT civilizations of antiquity? I simply cannot lower myself to further comment on, or explain the blatantly obvious answer.

    The “rabbit hole” goes deep, but not deep enough, for an average amateur historian, like myself, or any other (with enough tenacity, and determination to steadily pursue the TRUTH) to plumb its depths. It’s really a piece of cake, ultimately.

    III. Can EITHER the YIDDISH-SPEAKERS (of EASTERN-EUROPEAN origin, whose
    descendants comprise 90% of those who today call themselves “Jews”), or
    their 10% “Sephardi” co-religionists ~ can EITHER of these two groups ~
    claim descent from the ancient Ibri, or Iberi, of Illyria or Siluria,
    who, according to COMYNS BEAUMONT, are the true, original Jews (who
    inhabited the ancient land, that we today call Britain)? This question may take a little more time to answer. Ignatius Loyola was supposedly a “Marrano” or “Converso” “Jew” from Spain, who created the SOCIETY OF JESUS, or JESUITS in 1540 AD.
    Now, IBERIA is the ancient name of the Spanish Peninsula. However, just because the name of the country Ignatius Loyola lived in, was named IBERIA, does NOT automatically mean that Ignatius Loyola could actually claim descent from the ancient Iberi of ancient Britain. Similarly, just because the WARBURG family (of 16th Century VENETIA or VENICE, then called the “Del Banco” family), lived in VENETIA which was the Mediterranean location where the more ancient people of PHOENICIA (in Britain) re-located ~ this does NOT mean, that the “Del Banco” family was necessarily descended from ancient PHOENICIANS. This same method can be applied to, for example, Benjamin D’Israeli, the Rothschilds, and any of the other “Jews” who essentially HIJACKED the so-called “British” Empire during the 1800’s.

    I cannot recommend the books of COMYNS BEAUMONT highly enough, as they TOTALLY CLEAR UP ~ A LOT OF CONFUSION ~ REGARDING TRUE ANCIENT HISTORY.

  • ArtBell

    A friend of mine had a small aircraft maintenance business doing mostly privately owned airplanes. The first 10 years he did pretty good ended up buying a modest house and even an old Cessna for himself, his parents had financed the hanger his business was in so his debt wasn’t too bad.

    Over the next decade he saw his property tax quadruple, utilities triple yet the industry average rate for his labour had only risen by 40%. Just before he closed his doors for good he told me that his insurance company, the county and provincial and federal government made made more money than he did off his business in the last year of operation. He now works as an instrumentation tech at a chemical plant. He works less hours and takes home more money than when he had his shop. Small business owners are calling it quits.

    This was in Canada but I imagine the US wouldn’t be much different.