Paying Their Fair Share - The Myth

[kelpdiver 2]

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I actually had a traditional 401, but when the Roth 401 became available I switched over as Roth IRA is limited to only 5k/year. Only disadvantage is I can't designate options for both the traditional and Roth portions as they are both in the same account. Everything is 'weighted' depending on contribution portion.

You can fake it in a couple ways - either by rolling a prior 401k into an IRA and then making future contributions to a roth 401k. Alternatively, and probably too difficult to manage, you can keep changing your elections (percentages and destination) every month to cycle between them.

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The big advantage of the Roth (IMO) is tax free growth. So, putting 16k in the Roth may cost 20 or 21k if you're in the top rates, but would you rather pay 30% on 560k or 15% on $1.8M?

but in this case, you would have more than 1.8 million. You take that 5k you didn't pay in taxes each year and put that into a brokerage account with the tax efficient ETFs. That adds another half million or so, so it becomes 15% (if you can avoid RMDs) of 2.3M.

I would also have the option to relocate to a state that doesn't charge income tax and save that 9.4% I'd otherwise pay in CA.

I'm choosing to straddle the two choices. My 401k has been all traditional, but only because I've been gradually converting my iras to roth iras, as much as I can do each year within the bracket. Then I'll go back to a near 50/50 split. In retirement, the plan would be to take IRA dists to the small bracket barrier, add in what SS actually pays, and then use the roth and any taxable accounts to complete. I suspect it will favor a larger IRA dist every other year.

[GeorgiaDon 379]

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...the sledgehammer approach of today is clearly a total system fail despite the best of intentions (in many cases anyway - there's still blatant self interest examples out there anyway).

I think a big problem with the current system is that it has developed largely without any defined principles or goals more involved than buying votes (or campaign contributions as the case may be). As a result it is haphazard, complex, and likely counterproductive.

Perhaps a simple flat rate without exemptions might work, though it does seem hard to do that without introducing other inequities into the process. Can the mechanic who must buy their own tools deduct that cost? If that's allowed (as seems reasonable to me), how do we exclude the real estate agent from writing off their skiing trip to Vail because they attended a 2-hour seminar on how to polish a turd house so someone will buy it?

Another consideration is the "cost" of various deductions (as in forgone tax revenue) versus the "benefit" in terms of increased tax revenue due to some consequent economic activity. Allowing people to deduct education expenses reduces revenue for a few years, but that education is likely to result in the student getting a higher paying job, in which case they may pay more in taxes than they otherwise would have, for many years. You could call the education deduction "social engineering", but you could also call it "investing". The question is, what would that student have done without the tuition deduction? If they would have gone to school anyway, the tuition deduction is just lost revenue from the government's perspective. If the deduction made school affordable so they could choose that route rather than opting for a lower paying job that only required a high school diploma, then the government has probably lost revenue in the long term. I'm sure similar arguments could be made for other deductions. But, has anyone ever actually done the math to really see which deductions are "investments in the long term" and which ones are "giveaways"?

Ultimately, it is possible that what is simple and arguably most "fair" (everyone treated exactly the same) may or may not be the most productive (in terms of revenue raised over the long term). One would have to first decide what is more important, simplicity/"fairness" or generating revenue. If it is generating revenue, then one would have to really crunch honest numbers (which may be impossible to determine) to figure out what deductions increase revenues over time. At least, if one wants to eliminate deductions and risk decreasing revenues long term as a consequence, based on a principle of "no social engineering", one should be aware of that possible consequence.

Don

_____________________________________
Tolerance is the cost we must pay for our adventure in liberty. (Dworkin, 1996)
“Education is not filling a bucket, but lighting a fire.” (Yeats)

[kallend 2,099]

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Meanwhile, is there any room for agreement?

What if there were a per capita exclusion, after which a flat tax applied? The basics of life would be covered by the exclusion. I could go for it being variable depending on geography. Some places cost more to live than others. Although, I tend to think that if you can't live someplace, you should try to move. I would also balk at having an exclusion that took into account such voluntary issues as marital status, children and the like. I would prefer government stay out of the family.

So, what if the first $30,000USD or so was tax exempt, and everything over that amount was...17% or so? Play with the numbers any way you want. It's just a concept.

Well, are we looking at the current lame duck Congress, or the not terribly different one coming in late next month?

I think if you can presuppose that they want to be reasonable and get the job done, this method of limited deductions good garner traction. But as I wrote much earlier, the details matter. Setting the threshold at a value like 30k makes it clear that the intent is to hit big city populations.

Lest anyone repeat that Californians and New Yorkers seek special treatment here...nonsense. Their disproportionate level of savings from the mortgage deduction for wildly overpricing housing is more than offset by their disproportionately high level of income taxes paid on corresponding inflated salaries. It would be highly unfair to remove the benefit of the high cost of living while maintaining the negative.

Though one more housing boom and the average home price (including condos) in SF will cross over a million and the interest limit will start to apply. Like every other piece of tax code, inflation is never written in, so most legislation start to rot after 10 or 20 years.

You can always move to Toledo or Peoria.

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The only sure way to survive a canopy collision is not to have one.

[kelpdiver 2]

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You can always move to Toledo or Peoria.

then the feds would be out another 20k in revenue.

Well, more than that, since suicide might follow. If I wouldn't move to a ice pit like Chicago, wtf would Peoria ever be entertained?

[DrewEckhardt 0]

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The big advantage of the Roth (IMO) is tax free growth. So, putting 16k in the Roth may cost 20 or 21k if you're in the top rates, but would you rather pay 30% on 560k or 15% on $1.8M?

That simple arithmetic ignores the time value of money. $1 paid in tax today is the same as $7.60 paid in tax 30 years from now (assuming a 7% real rate of return as on the S&P 500 from 1950 through 2009). A 30% reduction in what you put in with tax free growth is the same as tax free contributions with 30% out of the total when you make withdrawals and 30% is twice 15%.

The big Roth advantages are

1. Higher effective contribution limits. If you're going to be taxed at 20% (state and federal) on withdrawals, your contribution limit to a Roth 401k is like $21,250 into a traditional 401k not $17,000 although at a 32% state and federal tax rate today that's $25K less in net pay (I picked numbers in the ball park for middle class people that make nice round numbers when you do the arithmetic). You can put even more in by converting existing 401k and IRAs into Roths.

2. Roth withdrawals are not income which can make 85% of your Social Security benefits taxable or eliminate tax credits or deductions for things like paying a dependent relative's college tuition.

3. The same estate tax exemption applies regardless of how assets will be taxed after your death, although for a given asset value your heirs pocket more from a Roth IRA than a conventional IRA. A Roth effectively gives you a bigger estate tax exemption by reducing the size of your estate for a given value received by your heirs.

[Gravitymaster 0]

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>Works for me. However, I would also be in favor of increasing their salary
>considerably if they are in a combat zone.

I don't think this is a good time to increase spending again, but that's a separate discussion.

>One of the things that goads me the most is the complexity of out tax system.

Yes, that's a problem.

[rehmwa 2]

man with a helmet -.... when did you turn into a bleeding heart liberal?

got a little class envy there?
what's the point of it?
how is this different from some tradesman bitching about how a day trader makes more money than him? Or the technician complaining that the engineering manager also does?

I suspect that if the NFL had 10's of thousand of players, then it might be an interesting discussion point in an unrelated thread.

(as I said, everyone has their favorites in terms of trying to effect pay or tax preferential treatment, but if you don't look at ALL deductions, credits, etc, (yes, even the ones you like and the ones you can generate a ton of emotional response on) then you are part of the problem. Military is a great example, so are teachers I guess - it's such a tender topic.)

Pay isn't about someone's subjective and emotional response to a job role - it's about what the market will pay for someone to do a job - provided they can do the job. it's such a crappy discussion that simply derails reasonable discussion

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Driving is a one dimensional activity - a monkey can do it - being proud of your driving abilities is like being proud of being able to put on pants

[Gravitymaster 0]

Don't over-analyze it. It was just food for thought and a commentary on where we place our values.

[rehmwa 2]

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Don't over-analyze it.

too late

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Driving is a one dimensional activity - a monkey can do it - being proud of your driving abilities is like being proud of being able to put on pants

[champu 1]

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Pay isn't about someone's subjective and emotional response to a job role - it's about what the market will pay for someone to do a job - provided they can do the job. it's such a crappy discussion that simply derails reasonable discussion

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Don't over-analyze it. It was just food for thought and a commentary on where we place our values.

You put out food for thought like a saucer of milk and complain that the cats keep coming round...

There's a negative feedback loop in appreciating members of the armed forces such that you think they should have higher pay and giving higher pay to members of the armed forces. I'm not suggesting we pay them minimum wage to make sure they only join for the "right" reasons, but I am saying if they made what professional football players made, people would [rightfully] question why they were doing it.

Rather than how much they make relative to football players, I think looking after their physical and mental health and their reintegration into their family and the workforce back home is what demands attention. On top of being in a hellhole and getting shot at, they've delayed relationships, education, and careers during what's supposed to be some of the best years of their life.

[billvon 3,058]

I agree that there are sometimes good reasons to increase spending, and I hope you remember your advocacy to do so in the future. However this is not a good time to do it.

[Gravitymaster 0]

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I agree that there are sometimes good reasons to increase spending, and I hope you remember your advocacy to do so in the future. However this is not a good time to do it.

I would have less objection to increasing revenue if I thought government would use it to pay down the debt and they would stop with all the social engineering. However, history tells us that that will never happen. The only way to stop a child from spending more than they make is to take away their credit card.

Do you believe increased tax revenue will result in the money being used to pay down the debt?

[GeorgiaDon 379]

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Pay isn't about someone's subjective and emotional response to a job role - it's about what the market will pay for someone to do a job - provided they can do the job. it's such a crappy discussion that simply derails reasonable discussion

Out of curiosity, how would the government determine what the market will pay for someone to do a job for which there is no equivalent in the free market? Keep lowering the pay until they can't get anyone with half a brain to take the job? It seems like a good strategy if you want to fulfill the Conservative mantra that the government can't do anything right: only hire people who are too incompetent to get any other job.

Don

_____________________________________
Tolerance is the cost we must pay for our adventure in liberty. (Dworkin, 1996)
“Education is not filling a bucket, but lighting a fire.” (Yeats)

[billvon 3,058]

>I would have less objection to increasing revenue if I thought government would
>use it to pay down the debt and they would stop with all the social engineering.

?? You just advocated spending more on the military instead of using that money to pay down the debt!

This is why we're in the position we are. Everyone says they want to cut spending. Except for their favorite spending.

>The only way to stop a child from spending more than they make is to take away
>their credit card.

Do you get to keep your credit card to get that pay increase for soldiers? Do you get to keep it to even keep their pay the same? Or do we take your credit card away too?

[rehmwa 2]

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Out of curiosity, how would the government determine what the market will pay for someone to do a job for which there is no equivalent in the free market?

That's a non-starter - there doesn't have to be an equivalent private sector job, just an alternate private sector career option to set up the supply and demand for employees - the military has roles all the way from unskilled to highly trained and educated.....example - as an engineer, I could work for the military, or any number of private sector industries or companies.

I'd really challenge you to find a job in the military where that person has zero options in the private sector sufficient enough to estimate a competitive pay range.

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Keep lowering the pay until they can't get anyone with half a brain to take the job?

goofy - competition would drive the pay scale - they compete for labor like anyone else - people will take the best deal they could negotiate.

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It seems like a good strategy if you want to fulfill the Conservative mantra that the government can't do anything right: only hire people who are too incompetent to get any other job.

yawn - good question up to that point, glad you got a partisan jab in. Party stereotypes aside, competent people will take the best deal they can, government can compete in the same market for those employees as everyone else - and pay that much but no more or less....

supply and demand is pretty basic stuff don't you think? I don't understand why people assume a gov job needs to have better (not equivalent) pay and benefits and still assume worse performance

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Driving is a one dimensional activity - a monkey can do it - being proud of your driving abilities is like being proud of being able to put on pants

[Gravitymaster 0]

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>I would have less objection to increasing revenue if I thought government would
>use it to pay down the debt and they would stop with all the social engineering.

?? You just advocated spending more on the military instead of using that money to pay down the debt!

This is why we're in the position we are. Everyone says they want to cut spending. Except for their favorite spending.

>The only way to stop a child from spending more than they make is to take away
>their credit card.

Do you get to keep your credit card to get that pay increase for soldiers? Do you get to keep it to even keep their pay the same? Or do we take your credit card away too?

Not what I said at all. Here's what I said:

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Works for me. However, I would also be in favor of increasing their salary considerably if they are in a combat zone.

So once again, you have twisted what I said.

[billvon 3,058]

>However, I would also be in favor of increasing their salary considerably if they are in
>a combat zone.

Right. You want to use your credit card to increase those soldier's pay.

Should we take your credit card away?

[Gravitymaster 0]

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>However, I would also be in favor of increasing their salary considerably if they are in
>a combat zone.

Right. You want to use your credit card to increase those soldier's pay.

Should we take your credit card away?

Nope, because I have the discipline not to spend more than I have coming in.

Unlike some we know.

[kelpdiver 2]

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>However, I would also be in favor of increasing their salary considerably if they are in
>a combat zone.

Right. You want to use your credit card to increase those soldier's pay.

Should we take your credit card away?

Nope, because I have the discipline not to spend more than I have coming in.

Unlike some we know.

the entire war (either) were financed with a credit card. And you're suggesting spending a wee bit more. How is that discipline, exactly?

[champu 1]

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>What means a man of child bearing age?

Guy between 13-60 I imagine.

I'm 30 and I simply can't bear children.

[billvon 3,058]

>Nope, because I have the discipline not to spend more than I have coming in.

Sorry, you put us another $5 trillion in debt; I don't think we can approve any more spending on that card. But if you pay it down we'll be happy to give you a new one . . .

[davjohns 1]

Perhaps it would help if we didn't engage in wars we could not afford?

I know it just wouldnt be right to kill all the stupid people that we meet..

But do you think it would be appropriate to just remove all of the warning labels and let nature take its course.

[Gravitymaster 0]

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>Nope, because I have the discipline not to spend more than I have coming in.

Sorry, you put us another $5 trillion in debt; I don't think we can approve any more spending on that card. But if you pay it down we'll be happy to give you a new one . . .

Never happen. Guess that's why I would make a lousy politician. If you want to spend, then you need to make sacrifices in other areas to be able to pay for it.

[billvon 3,058]

>If you want to spend, then you need to make sacrifices in other areas people's programs
>to be able to pay for it.

And once again we see how we got here. Yes, everyone in Congress has your attitude; fund my program and cut someone else's. That's how we got to a $16 trillion dollar debt.

[jclalor 12]

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Perhaps it would help if we didn't engage in wars we could not afford?

Or perhaps just not engaging in the wars that have no bearing on the our national security interest.