[sitetest]

Dear clee1,

"The current code allows the very richest to shelter their earnings in ways that are unavailable to Joe Sixpack,..."

Well, not really. One way to shelter earnings is through active investment in real estate. Many wealthy folks derive significant amounts of income from real estate investments, and much of the income from these investments is essentially un-taxed (technically, taxes are deferred, but that's another story, and they can be deferred for very, very long times).

Well, non-wealthy people who are frugal can also invest in real estate. Over the years, several of my employees have invested carefully in residential real estate, buying fixer-uppers, fixing them up, renting them out, and enjoying income that is mostly, or even completely long-term tax-deferred. These are ordinary folks.

Another way that the wealthy reduce their tax burden is by investing in shares of companies that pay dividends or that significantly appreciate in value. When they collect their dividend checks, the income is taxed at a maximum of 15%. So, too, their capital gains when they sell their stocks for a profit. However, keep in mind that dividend income is paid by corporations that are usually paying a federal corporate tax rate of 35%, so that dividend money, taxed at the personal level of 15%, is actually taxed twice by that point.

And for the wealthy, capital gains are always taxed upon realization of the gain.

Of course, if one doesn't sell one's stock, one doesn't realize the gain, and one pays no tax.

However, individuals who are frugal and who manage to save a bit can also participate in this form of wealth-building. In fact, most middle class Americans enjoy a relative advantage over wealthy people, in that most middle class Americans can build their wealth from these investments mostly or entirely through tax-deferred accounts.

Of course, both the wealthy and non-wealthy can purchase tax-free bonds, but frankly, the returns on these bonds are worthwhile only for generating current income and preserving capital nominally. Capital invested in these instruments will erode over time against inflation. If you're not a relatively short-term investor, you must be very wealthy indeed to have the luxury to permit your investment to become a wasting asset.

The primary advantage that the very wealthy enjoy is that their earned income may be relatively low in comparison to their overall income, and their payroll taxes, if paid at all, being fixed at about $13,500 (if self-employed), although just as great in absolute terms as anyone else's will be a very small percentage of overall income.

Thus, the effects of taxation become diluted by the large income that these folks enjoy.

But that would happen under a national retail sales tax, as well. The fact is, folks who have multi-million dollar annual incomes typically spend a significantly lower percentage of their income than middle class folks. Someone with, say, $100 million, likely has reported income in the range of around $1 million - $3 million, perhaps some realized capital gains of a couple of million or so, with the rest of his increase in wealth coming in the form of unrealized capital gains.

Currently, this individual will pay taxes on some of that $1 million - $3 million, and will pay capital gains taxes on the realized capital gains. For this individual, taxes will likely run from a few hundred thousand dollars per year to perhaps a million or more dollars per year.

Considering that his increase in wealth will likely be close to $10 million, that seems rather low.

But, under the national retail sales tax, this individual will only pay tax on consumption. Even if this person is spending several hundred thousand dollars per year on new stuff, taxes will amount to less than $100,000 or so.

And, of course, if this individual consumes a significant part of his wealth through the acquisition of antiques, works of art, classic cars, existing properties (rich folks often buy existing real estate, rather than build new), pre-owned yachts, then even the overwhelming bulk of his retail purchases will go tax-free as well, paid for with income and capital gains that will be untaxed, as well.

The truly rich will make out very, very well in all of this. It seems to me that they will make out much better than under the existing code, which has the dreaded AMT, which is difficult to escape without really bolixing up one's investments.


sitetest

[Mind-numbed Robot]

You make an excellent analysis but I would like to make a couple of comments about it.

What you say about the poor or middle class's access to some tax benefits is correct but unlikely because wisdom is rare. In order to accomplish what you suggest, the middle class would have to live like the poor for a period of time in order to save to make the investments, to give time for the investments to start paying off, and finally until the investments paid off enough that they could live like the middle class they are. If they stay that wise and disciplined they could eventually climb into the upper class.

Most aren't that disciplined, aren't aware of the opportunities, and wouldn't know how to take advantage of them they did. In addition, those that do take advantage of them are still guided by the tax laws, as the politicians intend, rather than the best business decisions, and must keep records and take actions according to tax schedules. They then must correctly report it all.

Real estate appreciation can be deferred, tax wise, but the rent on the property can't be and that is when they get into all the tax shenanigans to minimize their taxes and maximize their gain. That takes lots of sophisticated effort that most poor and middle class are not going to participate in.

The rich also have trusts, foundations, and other avenues they utilize to shelter large amounts of wealth from taxes. The middle class can't participate in that because they don't have that much money. I suppose they could go through the motions but it would be meaningless. The tax laws, like all laws, are supposed to be written for all, not just a few. These laws meet that criteria only technically as only a few can access them.

I recall an especially egregious case when Jim Wright was Speaker of the House, before his shenanigans got him booted so as not to shine too much light on the rest, was a provision of the tax code that excluded everyone living at a certain address in Ft. Worth from taxes for a particular year. Of course that was fair to everyone as all could access it, but not really. Only those living at that address could, so the rest were screened out. His elderly benefactor was saved from four million dollars in taxes because of that provision. I am sure that is more common than not.

The Fair Tax eliminates all that and leaves the poor and middle classes with more money to do the things you suggest, and they do them for the money they will make rather than for the money they will keep away from the government.

As for the rich, who cares how much they have or what they do with it. Unless they keep it in millions of mattresses or jars buried in the backyard, they will put it to work helping the economy. Even if they just stuff it in the bank or other financial instruments that money is reinvested in the economy. That creates jobs and millions more people buying things. That more than makes up the money they spent on used yachts rather than new ones.

You seem too smart to have overlooked all this. Another agenda?

[pigdog]

It's very clear that any "accumulation" of wealth today must be done primarily using only income after it has been taxed which reduces the capital that can be used for savings/investment.

Under the FairTax there is no taxing of income so that savings and investment may be done with untaxed money. This alone gives a person more working capital. In addition, there are no embedded tax costs in the prices of things purchased under the FairTax as there are today which also make for more working capital.

Since income is not taxed under the FairTax, the capital accumulation will progress much more rapidly than at present and it is only when someone chooses to spend on taxable items (and not all things are taxable) that such consumption is taxed. There is no requirement as at present to jump through a myriad of hoops, forms, and regulations in the hope of minimizing the income tax to some degree. There is no tax on income under the FairTax, and it seems ridiculous to have to go to such lengths under the present system - all caused by the income tax system.

What your post really seems to illustrate is the arcane complexity of trying to minimize taxation now and the class-envy rhetoric in the latter part of your post is misplaced since under the FairTax anyone consuming taxable things will be paying at the same tax rate. If they (or you) have your money invested instead of consuming, power to all of you. That will, overall, eventually redound to the economic benefit of the country and help create jobs in doing so.

A lot of folks buy used goods right now (and not just rich ones eoither) and that is perfectly legal under the FairTax. Trying to present it as some sort of illegal or questionable tax dodge is just plain silly since you could do that also.