LETTER TO THE EDITOR: Here's a way to assess fair income tax rates for all

Friday, April 4, 2014 | 5:27 p.m. CDT

There are several reasons why most people believe that billionaires and multimillionaires should pay more income taxes.

For those who believe in fairness, it isn’t acceptable for the rich who have the same income to pay income taxes at a rate of 39.6 percent if they work for a salary but only 20 percent if they sell their stocks.

At present, the people with capital gains pay at the lower rate, but it would be no less unfair if the people who worked for their money paid at the lower rate.

Either way, the ones who pay at the lower rate will have extra money to invest, but billionaires and multimillionaires don’t tend to invest in small businesses. The extra money needs to be in the hands of small business owners and consumers in order to create new jobs.

It would be fairer if both types of income were taxed at the same rate (e.g., 30 percent).

For those who derive their moral principles from the Bible, they should recall the following saying of Jesus (Mark 10:25): “It is easier for a camel to go through the eye of a needle than a rich man to enter the kingdom of heaven.”

This might motivate some rich people and their enablers to support higher taxes.

For those who believe that the stability of our government is not guaranteed, there are some ominous conditions that should be noted.

The total wealth possessed by the richest 1 percent of the population is estimated to be between 33 percent and 40 percent. In the last three decades the percentage has increased by a factor of three or four.

In the foreseeable future this may exceed 50 percent and the richest 3 percent may possess much more than 50 percent. Under such conditions, the government might be destabilized by a large increase in unemployment and inflation. The inflation rate was 50 percent in Iran at the beginning of its revolution.

For those who fear that in the near future the government will be unable to provide the needed services, please note the following: As the national debt increases, the interest that must be paid also increases.

There is reason to believe that when the interest becomes a large fraction of the national budget, it will be impossible for the government to continue to provide the essential services.

I believe that the majority will support the following changes for at least one of the above reasons:

The capital gains tax should be increased to 30 percent for incomes over $1 million  (Warren Buffett’s plan), eliminated for those below $200 thousand (Mitt Romney’s plan) and kept at 20 percent for the rest.

Joseph E. Willett is a professor emeritus of physics at MU.

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Ellis Smith April 5, 2014 | 8:58 a.m.

Income taxes based on graduated rates may still be the most "fair" means of taxation. Obviously, the rates are often a bone of contention, and doutless always will be.

Fixed rate sales taxes can correctly be described as "regressive," regardless of nominal rate. Further, if food, purchased for home use, is taxed, this is very bad for persons with little or no income.

As a person who used to post regularly here endlessly but correctly pointed out, under present rules there are a surprising number of Americans who pay no income tax at all - and we are NOT just discussing the rich and privileged.

Some "poor" aren't paying any income tax, because they're exempted, and the very rich can take advantage of built in (but legal) tax breaks.

Where does that leave the "guy in the middle," who would like to take advantage of some of those breaks but whose income situation (amount of income and types of income) doesn't allow him to do so?

There is something about taxation we too seldom discuss: many of the vast numbers of perks or penalties associated with taxation are there for the purpose of either getting us to do what someone thinks we should do OR to penalize us if we don't do what they think we should do. A crowning example is the deduction involving interest paid on a mortgage for a primary residence. Is home ownership a good thing? I'd say so, but this is still a case of enticing folks to do something.

It doesn't seem to be understood that some of these "awful" perks given to substantial private investors are another way of structuring taxes to ENCOURAGE private investment: your government WANTS you to invest.

Let's take one more case. If you and I have capital to invest, we can invest some of it in municipal bond funds. These funds have been paying as much as 4 times certificates of deposit. The feds do NOT tax these earnings, and if the fund is composed of Missouri munis, then Missouri doesn't tax earnings either. YOU GET TO KEEP EVERYTHING YOU EARN. But what about "safety"? Well that's certainly a consideration, isn't it? These funds are not federally insured, but they are structured as a very diverse array of individual bond issues, such that should one or a few of those issues have problems, it will have minor efffect on the fund's overall performance.

This is another form of rewarding us for doing something the government wants us to do. It also gives us the knowlwdge that we have invested money in needed projects involving municipalities, school districts, and yes, University of of Missouri System too. How bad is that?

This businees of painting everything with a very wide brush, rather than making a more careful analysis, really should stop.

(Report Comment)
Michael Williams April 5, 2014 | 10:28 a.m.

Ellis: That's an excellent analysis, containing many elements the good physics professor ignored.

You're right....our government has the stated policy of encouraging investment. The capital gains tax is one of the chosen ways.

But, your comments on munis rang loudly to me. Take away the tax advantages of munis and you utterly remove my incentive to purchase them. The good physics professor has a choice to make if those tax incentives are eliminated: Either quit floating bonds and raise the money via direct and local taxation, or raise the interest rate this community is willing to pay, thereby making it worth my while to invest.

Of course, there is a third option.....take all our money and make bonds superfluous.

(Report Comment)
Corey Parks April 5, 2014 | 3:15 p.m.

"it will be impossible for the government to continue to provide the essential services."

What would you or do you include in essential services. I currently see billions a year going towards no essential services such as 47million on SNAP and other assistant programs. We see millions going towards university grants to research useless endeavors. We have Billions a year going towards other countries to "help" them. We also currently maintain 187 different bases around the world allowing the host counties to not contribute nearly as much for protection.

Before we go hiking taxes on those that already pay for the majority of the federal budget we should first think about downsizing and cutting the fat/fraud and waste.

(Report Comment)
Ellis Smith April 5, 2014 | 3:47 p.m.

My previous post was getting long, so I deliberately left out two other features concerning muni bond funds.

[I'm not peddling muni bonds or any other specific investments - this is strictly by way of ILLUSTRATION.]

Bond issues, muni or corporate, are usually initially sold in large blocks. If you were buying the bonds directly from the issurer you'd be committed to spending a large amount of money to buy a block, more than "the average guy" has to invest and even more than the "rich guy" may wish to invest as a single shot. Bond funds, however, may be entered at a pretty low cash level*, and you can continue adding to them in moderate amounts if you wish. If you should have to "bail," chances are you won't have a problem (but the exact share value at any time can vary, just as with equities (stocks), but with munis the variances are usually less.

So, I bought and added to a Missouri bond fund, but find I'm moving to another state. The federal tax exclusion still applies. What about the state exclusion? IF the bond fund purveyor has a bond fund for that state, you can simply roll your shares over (with them) and pick up that states' exclusion.

Here is what I find fascinating: IF you put the money in federal bonds, the feds TAX you on those earnings.

In this country, no one is FORCED to invest any money in anything.

In National SOCIALIST Germany, citizens were enticed to join a plan where they made regular monthly contributions over several years, after which they were PROMISED they'd receive a brand new VW auto. How many received VWs? Where did that money go?

*- Doubtless some folks presently have more money tied up in CDs that it would take to enter a muni bond fund.

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