A Guide to the Tax Changes

[bluehende]

You missed the point. What gets stashed in banks gets turned over into the economy (via loans, etc.) and primes the economy. It is not hoarded, as the early poster implied.

You are correct for deposits , but not for the banks own money. Deposits can only be used as reserves or loans. Profits can be used for many reasons only 1 of which is lending out. As people have said history shows that profits are much more likely to be returned to shareholders as dividends and buybacks. When you can borrow from the fed at about 1% why would you use corporate profits for this. Most shareholders would be upset if the corporation used money to save 1%.

 

[bluehende]

This has long been proposed as the Fair Tax, but has never gone anywhere. The basic thought is that companies don't pay taxes, customers do. Since in the end, taxes are a cost of doing business and the customer pays for everything. So simply move the taxes to the customer would make sense. Pricing is then taken over by the free market and companies will lower prices to compete since they won't have to pay taxes anymore.

Thanks for posting this. It made the old researcher in me go try to figure out what the sales tax would have to be. Here is my very high level estimate.

Average tax rate in the us is around 15%.

Savings rate is about 6 and would of course not be in the sales tax This only takes it to 16%

Now for the real problem. Person income taxes only account for 47% of revenues. So now the sales tax has to be about 35%.

If you exclude lower incomes then it has to go up. I did not take the time to figure this out, but the lowest quarter of our incomes does have an effective rate around 6% not including payroll taxes. I think very conservatively the sales tax rate would have be 40% to gain the same amount of revenue. So tomorrow every bill (since we used savings rate) goes up 40%. Mortgage, Health care, etc.



A few interesting things I learned in my research.

1. Corporate taxes only represent 11% of federal revenue

2 all taxes income, corporate , and payroll are 95% of revenue. SO all those other taxes we pay only represent 5% of revenues. These are all excise, lease fees, tariffs etc are only 5%.

 

[dioxide45]

I intentionally said personal income tax. Corporations can have a tax too. Yes, if they did they just pass the costs to us but many would feel better if corporations weres taxed. It could be a flat tax for them too.

Corporations are consumers too, buying products and services to run their operations. So they too would pay a consumption tax just like end consumers.

 

[dioxide45]

So tomorrow every bill (since we used savings rate) goes up 40%. Mortgage, Health care, etc.

Not necessarily. Every product today has payroll and corporate income tax built in to its ticketed price. There are also many other taxes built in to the price of a product that we buy that are not seen on the ticket. If you strip all those taxes out of the price and then tack the 40% back on, the increase in product price may not necessarily be 40% higher. Also consider that about 45% of households pay no personal income tax. However all of those people are consumers and would be taxed under a consumption tax except those 15% under the poverty level that wouldn't be subject to the consumption tax. There is another 30% that would be paying taxes under such a proposal, so that would be new revenue.

 

[bluehende]

Not necessarily. Every product today has payroll and corporate income tax built in to its ticketed price. There are also many other taxes built in to the price of a product that we buy that are not seen on the ticket. If you strip all those taxes out of the price and then tack the 40% back on, the increase in product price may not necessarily be 40% higher. Also consider that about 45% of households pay no personal income tax. However all of those people are consumers and would be taxed under a consumption tax except those 15% under the poverty level that wouldn't be subject to the consumption tax. There is another 30% that would be paying taxes under such a proposal, so that would be new revenue.

Thanks for reading and trying to poke holes. I think of this like a peer reviewed paper. My analysis was way oversimplified. The gorilla in the room with all of this are the payroll taxes. These are a lot of the revenues of the government. If you do not get rid of these with this type of tax system becomes very regressive. I will push back in that if prices fall would not the sales tax need to increase to make up the revenue?

 

[isisdave]

Well, deductibility of home equity loans seems to be a murky area. The Forbes article says "no." This Orange County Register article says yes if it's "Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence". That's a funny definition of acquisition, since you can't get a HELOC until you HAVE equity. I've seen other articles, from just after the law was passed, that said that interest for home improvement was, but interest for other purposes, including tuition, wasn't. I guess we'll have to see which gurus prevail.

 

[klpca]

My personal opinion, no personal income tax, flat sales tax on everything else. For the needy a card that exempts them from the tax.

Now there's your simplification!

Btw, we were on food stamps back (for about a year) in the 70's. What I remember most from that time was the terrible attitude of the people who we interacted with at that time, especially the checkers at the grocery store (a close second would be some of our neighbors). There was a *ton* of judgement about us and who we were, without any real knowledge. (Back story - dad left, mom lost her job, grandparents refused to help in order to teach my mom a lesson - "you made your bed, now lie in it"). So I have a soft heart for those who are at that point in their lives, especially hungry children. I also benefited from government financial aid during college, (I went through on a combination of Pell grants, Cal grants, academic scholarships, private scholarships, and student loans). Those two things - food stamps and financial aid - were life changing for me, and since I have never been unemployed and have raised three kids who went through school with no student debt and are all employed and paying taxes, I think that my debt to society has long since been repaid, but I am good with paying things forward. My motivation for personal success was to never be treated the way were were during those tough years. We are comfortable, not rich (although by some standards we are, I suppose) and I will hopefully work for a long, long time. I don't ever want to be poor again. I honestly don't care that much about how much tax we have to pay because I know what a difference the safety nets made in my life. On a policy level, I am concerned about the national debt, and our crumbling infrastructure. I truly believe that we as a country have the financial wherewithal to fix both problems, but lack the political will.

 

[klpca]

Well, deductibility of home equity loans seems to be a murky area. The Forbes article says "no." This Orange County Register article says yes if it's "Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence". That's a funny definition of acquisition, since you can't get a HELOC until you HAVE equity. I've seen other articles, from just after the law was passed, that said that interest for home improvement was, but interest for other purposes, including tuition, wasn't. I guess we'll have to see which gurus prevail.

Heloc for personal expenses - no bueno. Heloc to add a room - good to go.

 

[VacationForever]

We are terrified of being in debt that we don't have a mortgage, don't have HELOC, and I closed a short-term line of credit taken against my investments account so that I could borrow money to help my son pay for his home, while awaiting for my Californian home to be sold. Once my house was sold, I closed the line of credit. Making life simple is good.

 

[klpca]

Not necessarily. Every product today has payroll and corporate income tax built in to its ticketed price. There are also many other taxes built in to the price of a product that we buy that are not seen on the ticket. If you strip all those taxes out of the price and then tack the 40% back on, the increase in product price may not necessarily be 40% higher. Also consider that about 45% of households pay no personal income tax. However all of those people are consumers and would be taxed under a consumption tax except those 15% under the poverty level that wouldn't be subject to the consumption tax. There is another 30% that would be paying taxes under such a proposal, so that would be new revenue.

I was surprised to see 45%. I did a quick google search and came up with this article: https://www.marketwatch.com/story/45-of-americans-pay-no-federal-income-tax-2016-02-24

Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.

I suspect that a large chunk of the no taxable income people are retirees living on SSA only. No tax there when your AGI is low enough. The other half are most likely the working poor. They pay payroll tax (FICA, medicare etc) but probably receive an earned income tax credit to offset some of these taxes. I'm not making any particular statement here, just fleshing out who those people are, because it's easy to see them as lazy people sitting around doing nothing. I am sure that those people are out there, no doubt, but there are other less obvious reasons that people show up in this statistic.

 

[bluehende]

Now there's your simplification!

Btw, we were on food stamps back in the 70's. What I remember most from that time was the terrible attitude of the people who we interacted with at that time, especially the checkers at the grocery store (a close second would be some of our neighbors). There was a *ton* of judgement about us and who we were, without any real knowledge. (Back story - dad left, mom lost her job, grandparents refused to help in order to teach my mom a lesson - "you made your bed, now lie in it"). So I have a soft heart for those who are at that point in their lives, especially hungry children. I also benefited from government financial aid during college, (I went through on a combination of Pell grants, Cal grants, academic scholarships, private scholarships, and student loans). Those two things - food stamps and financial aid - were life changing for me, and since I have never been unemployed and have raised three kids who went through school with no student debt and are all employed and paying taxes, I think that my debt to society has long since been repaid, but I am good with paying things forward. My motivation for personal success was to never be treated the way were were during those tough years. We are comfortable, not rich (although by some standards we are, I suppose) and I will hopefully work for a long, long time. I don't ever want to be poor again. I honestly don't care that much about how much tax we have to pay because I know what a difference the safety nets made in my life. On a policy level, I am concerned about the national debt, and our crumbling infrastructure. I truly believe that we as a country have the financial wherewithal to fix both problems, but lack the political will.

Thank you so much for sharing. I hear you about cashiers and their attitude. I was behind a women with 2 kids buying groceries with food stamps. She came up short by 6 something. The cashier announced in a very loud voice how much she was short and in a very condescending voice asks her if she has the money. I could tell by the look that she did not. I stepped up and said I had 6 dollars at about the same volume and tone. My checkout wasn't exactly friendly. I have been very fortunate in my life and stories like yours remind me to thank god that I do not have the struggles that others have to endure.

 

[dioxide45]

I was surprised to see 45%. I did a quick google search and came up with this article: https://www.marketwatch.com/story/45-of-americans-pay-no-federal-income-tax-2016-02-24

Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.

I suspect that a large chunk of the no taxable income people are retirees living on SSA only. No tax there when your AGI is low enough. The other half are most likely the working poor. They pay payroll tax (FICA, medicare etc) but probably receive an earned income tax credit to offset some of these taxes. I'm not making any particular statement here, just fleshing out who those people are, because it's easy to see them as lazy people sitting around doing nothing. I am sure that those people are out there, no doubt, but there are other less obvious reasons that people show up in this statistic.

Interesting article, it does appear that about the lowest 40% actually get more back in the form of refundable tax credits. So instead of paying tax, they get money back?

 

[klpca]

Interesting article, it does appear that about the lowest 40% actually get more back in the form of refundable tax credits. So instead of paying tax, they get money back?

Yes, EITC is a refundable credit. Another form of welfare, but targeted at the working poor.

 

[lizap]

We are terrified of being in debt that we don't have a mortgage, don't have HELOC, and I closed a short-term line of credit taken against my investments account so that I could borrow money to help my son pay for his home, while awaiting for my Californian home to be sold. Once my house was sold, I closed the line of credit. Making life simple is good.

We don't like debt either.

 

[Panina]

Now there's your simplification!

Btw, we were on food stamps back in the 70's. What I remember most from that time was the terrible attitude of the people who we interacted with at that time, especially the checkers at the grocery store (a close second would be some of our neighbors). There was a *ton* of judgement about us and who we were, without any real knowledge. (Back story - dad left, mom lost her job, grandparents refused to help in order to teach my mom a lesson - "you made your bed, now lie in it"). So I have a soft heart for those who are at that point in their lives, especially hungry children. I also benefited from government financial aid during college, (I went through on a combination of Pell grants, Cal grants, academic scholarships, private scholarships, and student loans). Those two things - food stamps and financial aid - were life changing for me, and since I have never been unemployed and have raised three kids who went through school with no student debt and are all employed and paying taxes, I think that my debt to society has long since been repaid, but I am good with paying things forward. My motivation for personal success was to never be treated the way were were during those tough years. We are comfortable, not rich (although by some standards we are, I suppose) and I will hopefully work for a long, long time. I don't ever want to be poor again. I honestly don't care that much about how much tax we have to pay because I know what a difference the safety nets made in my life. On a policy level, I am concerned about the national debt, and our crumbling infrastructure. I truly believe that we as a country have the financial wherewithal to fix both problems, but lack the political will.

You had no debt to society. No one should be hungry and an education helps with success. Your story is an example when help is needed we must have that safety net.

Maybe my opinion is too simple but the complex system does not work and you are right when you say we lack the politic will. Just think as long as our representatives have better medical, pensions , etc. then most of us they will not have the political will to change things.

 

[mdurette]

Well, deductibility of home equity loans seems to be a murky area. The Forbes article says "no." This Orange County Register article says yes if it's "Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence". That's a funny definition of acquisition, since you can't get a HELOC until you HAVE equity. I've seen other articles, from just after the law was passed, that said that interest for home improvement was, but interest for other purposes, including tuition, wasn't. I guess we'll have to see which gurus prevail.

Technically you can use a home equity to acquire a property. Some blended mortgage programs back in the day were all about that 80/20 mortgages. 80% 1st mortgage and 20% Home Equity to avoid PMI. Even now you can blend a mortgage to avoid higher rates that may be associated with jumbo loans.

 

[rapmarks]

I am not overly concerned about my tax liability. I am not living paycheck to paycheck. I am worried about people like my children, decent jobs but not high pay. My son can't afford to live where he teaches, he drives about an hour each way and even then has a huge mortgae. He itemizes and the rise in the standard deduction won't help him, I just hope the tax bracket changes enough to offset the loss of the personal exemptions. There have to be a lot of young families in this situation. Someone said only thirty percent itemize, as if that is insignificant. What percent voted in the last election, and what percent did it take to win. I think thirty percent is very significant.

 

[CalGalTraveler]

This article is from 2013 but indicates that the most personal bankruptcies are caused by medical bills - even for some who have insurance. Bad luck not laziness. This could happen to anyone.

https://www.cnbc.com/id/100840148

 

[Talent312]

We are terrified of being in debt that we don't have a mortgage, don't have HELOC, and I closed a short-term line of credit taken against my investments account so that I could borrow money to help my son pay for his home...

I don't like debt, either; however, there are situations where common sense should prevail. When I have a return on investments averaging ~11% (incl. bonds), it simply makes more sense to keep my $$ parked there than to pay-down a car loan at -0-% or a mortgage at 3.25%. Also, as the last poster said, the day may come when it's needed for an unexpected expense, and better to have a rainy-day fund.

.

 

[klpca]

I am not overly concerned about my tax liability. I am not living paycheck to paycheck. I am worried about people like my children, decent jobs but not high pay. My son can't afford to live where he teaches, he drives about an hour each way and even then has a huge mortgae. He itemizes and the rise in the standard deduction won't help him, I just hope the tax bracket changes enough to offset the loss of the personal exemptions. There have to be a lot of young families in this situation. Someone said only thirty percent itemize, as if that is insignificant. What percent voted in the last election, and what percent did it take to win. I think thirty percent is very significant.

I honestly believe that the bracket shifts and increased child credit will result in a net decrease in tax for most of these young middle class families. (Not that I support this bill, just trying to be fair). I'm not sure what will happen in the high tax states where both spouses work full time in order to afford the mortgage and property taxes on their expensive "starter" home (expensive because of the high cost of real estate in urban areas). Those folks stand to get hurt a lot and I am not sure that the bracket changes and child credit (if applicable) will be enough to offset the loss of deductions.

 

[rickandcindy23]

One-income households do benefit greatly by not having to pay federal income taxes. It's great for them, and I applaud the government for not charging them anything.

I know because our son takes care of our granddaughter, while our daughter-in-law travels to other states as a Wells Fargo auditor. She makes okay money, Wells Fargo is notorious for not paying people well, but her income is decent enough to pay the bills and buy groceries. There is very little left after paying bills. They don't really pay income tax after deducting their house interest and other expenses. It helps a lot.

Rick's stepmom pays a tiny bit of income tax. She makes about $60K a year in retirement and lives alone. It's a lot of money for her, with Rick's dad's retirement income and her retirement income and her SS. She has no bills and always tells people she is on a fixed income. Whatever.

My stepdad gets $1,800 or so per month in SS. He pays no tax and has his house paid off as well. My daughter thinks that is a lot of money to just pay utilities and food. It definitely is not a lot of money. What Colorado did for seniors is they only pay half of the property taxes. So once we are 65, we will benefit from that, which saves $1,200 per year for my stepdad and will be about the same for us.

Our son is looking for a job, now that the little one is old enough for preschool. He had his own issues a year ago, if you all remember. He is dealing with alcoholism and no longer drinks, but he has other behaviors that are just odd. He is brilliant and has a degree from School of Mines, then he did get his master's degree project management as a followup, and he earned his PE in civil engineering. He just has strange behaviors and habits, but he can do math formulas in his head. I cannot explain our son. But I know of many other engineers who are just as odd. Most put their energies somewhere else, usually work.

 

[mdurette]

We are terrified of being in debt that we don't have a mortgage, don't have HELOC, and I closed a short-term line of credit taken against my investments account so that I could borrow money to help my son pay for his home, while awaiting for my Californian home to be sold. Once my house was sold, I closed the line of credit. Making life simple is good.

I understand and don't try to carry debt myself. Just my opinion though....every financially responsible person should have a HELOC out on their house for easy access to quick funds in an emergency. I carry maximum HELOC on my house at all times. It cost me $50 per year in an annual fee, but worth it. It never gets used, but I know it is there in case of an emergency.

 

[CalGalTraveler]

Well, deductibility of home equity loans seems to be a murky area. The Forbes article says "no." This Orange County Register article says yes if it's "Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence". That's a funny definition of acquisition, since you can't get a HELOC until you HAVE equity. I've seen other articles, from just after the law was passed, that said that interest for home improvement was, but interest for other purposes, including tuition, wasn't. I guess we'll have to see which gurus prevail.

We used our Heloc to add solar to our home. Hope we can still write this interest off. It's a great for home improvements like this that we don't want to roll into a 30 year mortgage. It is also good to have a Heloc available in case of emergency.

 

[VacationForever]

I understand and don't try to carry debt myself. Just my opinion though....every financially responsible person should have a HELOC out on their house for easy access to quick funds in an emergency. I carry maximum HELOC on my house at all times. It cost me $50 per year in an annual fee, but worth it. It never gets used, but I know it is there in case of an emergency.

We hold one year's expense worth of money in our checking account and one year's in our savings account. If needed I can email my wealth manager to get a line of credit against my investments which will get completed within a couple of days. If we have unexpected spending, he will sell some of our investments.

 

[rickandcindy23]

I never thought about a HELOC as a way to get money quickly. I know that taking money out of our retirement account is very expensive for us. We took a large amount for our son's rehab last year, and it meant a huge tax bill mid-April. Wish I had thought of a HELOC instead. We could have paid 1/3 of it off with the income tax liability on that money.