Re: Revisiting the last time this MPD came up before the voters which was defeated 78% to 22%
Posted: Thu Sep 14, 2023 11:12 am
When you ask experts, you need to understand the terminology enough to understand the answer.
Yes, the "federal income tax" is progressive. But it is really a tax on earnings, not all income. If I have capital gains they are taxed at a much lower rate. If one can aggressively manage their investment portfolio that capital gains tax rate might be zero. Some years you might be able to write off investment losses and your overall tax rate might be zero.
Also, the regressive effects of the social security payroll tax and (to a much lesser extent) the medicare payroll tax are pretty noticeable and dominate what lower-income taxpayers end up paying. I used data from nerdwallet.com and the Google to calculate approximate tax rates for hypothetical taxpayers:
For a taxpayer earning 15_000 per year (about the Federal Minimum wage) they pay an effective tax rate of 26%
For a taxpayer earning 30_000 per year (about the Washington State Minimum wage) they pay an effective tax rate of 27%
For a taxpayer earning 150_000 per year (a pretty comfortable upper middle income wage) they pay an effective tax rate of 35%
For a taxpayer earning 1_500_000 per year (so a well-to-do member of our aristocracy) they pay an effective tax rate of 39%
So yes, if you are just counting straight up payroll taxes the "system" is progressive, sort of. Though probably not as much as you'd expect or like.
But the fact of the matter is that our hypothetical mid-level Amazon manager making 1_500_000 per year has some options (literally) that lower-income folks do not. They probably take a pretty large portion of their income as stock options or restricted stock. So they can effectively defer their income and pay less tax.
For a taxpayer earning 1_000_000 per year and having 500_000 per year in capital gains, they can pay an effective tax rate of 30%
For a taxpayer earning 750_000 per year and having 750_000 per year in capital gains, they can pay an effective tax rate of 26%
For a taxpayer earning 500_000 per year and having 1_000_000 per year in capital gains, they can pay an effective tax rate of 22%
So it is a lot more complicated than the top line numbers show. And this all comes down to someone making the major bucks has options and flexibility that someone living paycheck to paycheck can never imagine. Also, like I said, if you aggressively manage your portfolio it is possible, with tradeoffs and other risks (not including going to prison, though), to make your effective tax rate zero. Which you'll never be able to do working at Starbuck's or McDonald's for minimum wage.
The effective tax rate described above includes the Medicare Payroll tax, the Social Security tax, the Federal Income tax, and the Capital Gains tax. All of this was for a single taxpayer for simplicity.
Note that I am not saying this is right or wrong. And to be honest, some of the provisions of the capital gains tax code I heartily support even though they probably seem excessively generous to normal people. But I do not think that the overall system can be described as progressive. How we fix that or if it even needs to be fixed are bigger questions than my pay grade.
Yes, the "federal income tax" is progressive. But it is really a tax on earnings, not all income. If I have capital gains they are taxed at a much lower rate. If one can aggressively manage their investment portfolio that capital gains tax rate might be zero. Some years you might be able to write off investment losses and your overall tax rate might be zero.
Also, the regressive effects of the social security payroll tax and (to a much lesser extent) the medicare payroll tax are pretty noticeable and dominate what lower-income taxpayers end up paying. I used data from nerdwallet.com and the Google to calculate approximate tax rates for hypothetical taxpayers:
For a taxpayer earning 15_000 per year (about the Federal Minimum wage) they pay an effective tax rate of 26%
For a taxpayer earning 30_000 per year (about the Washington State Minimum wage) they pay an effective tax rate of 27%
For a taxpayer earning 150_000 per year (a pretty comfortable upper middle income wage) they pay an effective tax rate of 35%
For a taxpayer earning 1_500_000 per year (so a well-to-do member of our aristocracy) they pay an effective tax rate of 39%
So yes, if you are just counting straight up payroll taxes the "system" is progressive, sort of. Though probably not as much as you'd expect or like.
But the fact of the matter is that our hypothetical mid-level Amazon manager making 1_500_000 per year has some options (literally) that lower-income folks do not. They probably take a pretty large portion of their income as stock options or restricted stock. So they can effectively defer their income and pay less tax.
For a taxpayer earning 1_000_000 per year and having 500_000 per year in capital gains, they can pay an effective tax rate of 30%
For a taxpayer earning 750_000 per year and having 750_000 per year in capital gains, they can pay an effective tax rate of 26%
For a taxpayer earning 500_000 per year and having 1_000_000 per year in capital gains, they can pay an effective tax rate of 22%
So it is a lot more complicated than the top line numbers show. And this all comes down to someone making the major bucks has options and flexibility that someone living paycheck to paycheck can never imagine. Also, like I said, if you aggressively manage your portfolio it is possible, with tradeoffs and other risks (not including going to prison, though), to make your effective tax rate zero. Which you'll never be able to do working at Starbuck's or McDonald's for minimum wage.
The effective tax rate described above includes the Medicare Payroll tax, the Social Security tax, the Federal Income tax, and the Capital Gains tax. All of this was for a single taxpayer for simplicity.
Note that I am not saying this is right or wrong. And to be honest, some of the provisions of the capital gains tax code I heartily support even though they probably seem excessively generous to normal people. But I do not think that the overall system can be described as progressive. How we fix that or if it even needs to be fixed are bigger questions than my pay grade.