Reducing income to avoid taxes; some people are silly.

[SirNitram]

Link

President Barack Obama's tax proposal which promises to increase taxes for those families with incomes of $250,000 or more -- has some Americans brainstorming ways to decrease their pay, even if it's just by a dollar.

A 63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.

So far, Obama's tax plan is being looked at skeptically by both Democrats and Republicans and therefore may not pass at all.

"We are going to try to figure out how to make our income $249,999.00," she said.

"We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama's tax plan," she added. "Why kill yourself working if you're going to give it all away to people who aren't working as hard?"

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The attorney says that in order to decrease her income she'll have to let go of clients, some of whom she's been counseling for more than a decade.

"This means I'll have to tell some of my clients we can't help them and being more selective in general about who we help," she said. "I hate to do it."

Obama's budget proposal calls for $989 billion in new taxes over the next 10 years, most of which will be earned from increased taxes on individuals who make more than $200,000 and from families who make more than $250,000.

The expiration of the Bush administration's tax cuts at the end of 2010 would garner an estimated $338 billion, $179 billion would come from the elimination of some itemized deductions for higher-income taxpayers and $118 billion would be brought in from a hike in the capital gains tax. The remaining $353 billion would come from taxes on businesses.

VOTE: Is it fair to reduce high salaries to sidestep President Obama's tax proposal? Share your opinion with ABCNews.com.

Dr. Sharon Poczatek, who runs her own dental practice in Boulder, Colo., said that she too is trying to figure out ways to get out of paying the taxes proposed in Obama's plan.

"I've put thought into how to get under $250,000," said Poczatek. "It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off."

"Generally it means being less productive," she said.

"The motivation for a lot of people like me dentists, entrepreneurs, lawyers is that the more you work the more money you make," said Poczatek. "But if I'm going to be working just to give it back to the government -- it's de-motivating and demoralizing."

Can Obama's Tax Plan Be Gamed?

Gary Schatsky, a financial adviser and the president of N.Y.-based Objectiveadvice.com, said that it is possible to successfully remove yourself from the bracket Obama plans to target in his new plan.

"It's very possible that there are plenty of things you can do with general tax planning techniques attempting to recognizes loses, pushing gains to years when your income is lower and increasing retirement plan contributions to come below $250,000," said Schatsky.

"But Obama's proposal has yet to be hammered out and the devil is in the details," he added.

Because we have a marginal tax system, said Schatsky, what Obama's plan means is that the amount of tax you pay on each incremental dollar is higher only when your income is pushed into a higher tax bracket.

"But to focus keeping your income below a quarter million dollars is not going to have any spectacular magic for individual tax payers," said Schatsky. "The difference between $249,999 and $251,000 will probably have zero tax impact."

Schatsky said that the incentive to get under $250,000 may be more so if the tax plan outlines that an individual who goes over a prescribed limit would face a reduced value of their itemized deductions.

"If the value of all your itemized deductions goes from a 33 percent level to a 28 percent level than there would be a reason for people to do dramatic things to reduce their incomes," said Schatsky.

Peter Morici, a professor of business at The Robert H. Smith School of Business at the University of Maryland, agrees that while it may be possible to sneak around the taxes, it won't be as simple as some may think.

"You have to be pretty close to $250,000 in terms of your income to get underneath it," said Morici.

Does Obama Tax Plan Promote Class Warfare?

Morici says that he believes Obama's tax proposal could spark a kind of class war.

"What Obama is doing is pitting the poor against the upper middle class," said Morici. "He'll tax the rich for the health benefits everyone else wants."

Obama has said the new taxes on those making over $250,000 would go toward a fund that would support a gradual move to universal health care coverage.

Supporters of Obama's budget plans say that those who are at the top and complaining need to look at the bigger picture.

"Those who are going to be taxed more are obviously going to complain but I think they may miss the point," said Lisa Rotenstein, the chair of the Harvard Healthcare Policy Group at the Institute of Politics.

"This could have broader implications for the American economy as a whole improved health care means a healthier workforce that is more productive," said Rotenstein.

But Colorado dentist Poczatek says those who support the increase in taxes misunderstand what it means for those who will end up paying more.

"I'd like these people to know that we pay a lot of taxes, and have been paying a lot of taxes through the past administration," said Pcozatek.

"We make a lot of money, it's true, but we also already pay a lot of taxes," she said.

"So maybe we got a little bit successful but we worked very hard," she said. "It's taken us over 30 years and it didn't happen overnight. Every day is a lot of work.

"We're working for it and we're still overtaxed."

Wow. QUICK! GET OUR INCOME TO 249K! Seriously folks, a professional making 249K can easily have a taxable income higher than a family with 251K. You'd think people successfully enough for quarter-mill a year incomes could grasp this stuff.

The Class Warfare stuff is outright ridiculous. If Obama's tax cuts are class warfare, then wouldn't all the prior tax cuts and creation of deductions primarily for higher income folks be a much longer running offensive of class war?

These people need accountants to sit them down and explain deductions, tax brackets, and so forth, if they're seriously in need of this money. But ABC, earning the Our Idiot Media for the day, instead highlights the silly and probably counterproductive efforts and allows 'Class War' thrown around.

[General Havoc]

ABC needs to learn that "Six stupid people doing a stupid thing" is not news, and does not represent a "wave" of anything.

This is the "I'm moving to Canada" crock all over again.

[LadyTevar]

Why... yes! We are going to TAX THE RICH. Why? Because you have MONEY! And because moving that money around is what made the 1950s such a great decade.

Go suck a lemon, jackasses.

[SirNitram]

ABC needs to learn that "Six stupid people doing a stupid thing" is not news, and does not represent a "wave" of anything.

This is the "I'm moving to Canada" crock all over again.

Hey, if they're gonna waste space and time on small groups, this generates more laughs than the gut-wrenchingly bad 'Tea party' protests.

[Destructionator XV]

I always thought people would try to do this, so when making the tax plan for my fictional sci-fi nation, I had the tax rate be a continuous curve rather than using brackets. The math is fairly elegant, if I do say so myself .

Anyway, though even with the way it works in the real world, it isn't that big of a difference - the brackets never caused a giant OMG MUST BE A DOLLAR UNDER it problem in the past that I'm aware of. (I know some people do it with deductions at tax time, but it isn't a big problem; the system works.) The window above a new bracket where you take home less than you would right above it is very small anyway.


And of course, class warfare. Give me a break. The image that phrase brings up in my mind is that of the angry masses of the proletariat hanging the last of the bourgeoisie with the entrails of the last aristocrat. Or at least breaking out the guillotine. Tax changes, even if they were extreme tax changes, don't even come close.

[The Cleric]

Why... yes! We are going to TAX THE RICH. Why? Because you have MONEY! And because moving that money around is what made the 1950s such a great decade.

Go suck a lemon, jackasses.

Yes, god forbid they keep what they earn. It's much better to distribute from the successful to the not!

[Dark Silver]

No one is saying you take the money of the wealthy and divide it amoungst everyone else Cleric, but rather the Rich should be shoulder their FAIR share of the Tax burden, instead of it being disproportionately placed upon those with less disposable income and less well to do.


This is hardly class warfare of wealth redistribution.

[Cynical Cat]

Yes, god forbid they keep what they earn. It's much better to distribute from the successful to the not!

Nice strawman.

The idea that those who benefit the most from society, the social system that has allowed them to become rich and keeps them rich, should pay more money to keep that system operating than those who have less money isn't unreasonable.

[General Havoc]

We are returning the taxes on people making large amounts of money to the level they were at in 1994. 1994 was not exactly a time of woe and socialism for wealthy people in this country.

It is not Class fucking Warfare to adjust the tax rate periodically.

[SirNitram]

39% tax rate, 1990s: Class war and redistribution!
35% tax rate, 2000s: CAPITALIST PARADISE.
39% tax rate, 2009->: Class war and redistribution!

91% tax rate, 1950s->60s: Down The Memory Hole.

[General Havoc]

Nitram, while I agree with you, I have to ask, what is this 91% tax rate you've mentioned several times. I've never heard of the US tax rate sitting at that level at any point ever (outside the war years perhaps). Is that creative accounting? An average? How is it we went to 91%?

Because I have to say, 91% IS Class Warfare and redistribution.

[Cynical Cat]

Nitram, while I agree with you, I have to ask, what is this 91% tax rate you've mentioned several times. I've never heard of the US tax rate sitting at that level at any point ever (outside the war years perhaps). Is that creative accounting? An average? How is it we went to 91%?

Because I have to say, 91% IS Class Warfare and redistribution.

In the 1950s, the highest tax rate was 91%. Now you had to be making huge amounts of money before you hit that rate and only the amount that was over the mark got taxed at that rate, but that's not the whole story. No one actually paid this amount because of the massive loopholes that were intentionally put in to encourage people to invest that money and fuel the economy. The rich stayed rich and the 50s had a lot of economic growth.

Ronald Reagan used to brag about being in the 90% club, back when he was a big movie star back in the day.

[SirNitram]

The loopholes, combined with tight regulation, and the obvious incentive, were really a masterwork of fiscal policy, frankly. Of course, incentive for investment without regulation goes very bad ways. Please see the real estate bubble, the S&L problem... The Tech bubble is a rare bubble that didn't rely on shoddy rules, just the blind silliness of Wall Street.

[Derek Thunder]

A brief lesson on how marginal income taxes operate for those who might not know.

Let's say an individual earns $10,000 a year and the tax rate is something like this:

$0-5,000: 10%
$5-10,000: 15%

In a marginal system, the entire 10k is not taxed at 15%. Instead, the first 5k of that amount is taxed at 10%, and the remainder is taxed at 15%. Indeed, no matter what the tax rate is above $250,000, by dropping to $249,999, you are guaranteed to make less money. So these individuals are not only displaying a nihilistic sort of selfishness, they're also demonstrating they don't understand the tax system at all.

It makes you wonder about claims on the part of objectivists, libertarians, and some conservatives that the wealthy are automatically of greater intellect and moral character.

Nitram, while I agree with you, I have to ask, what is this 91% tax rate you've mentioned several times. I've never heard of the US tax rate sitting at that level at any point ever (outside the war years perhaps). Is that creative accounting? An average? How is it we went to 91%?

Google dredged up this PDF from Stanford's server on marginal tax brackets and rates from 1950 to 1980.

http://www.stanford.edu/class/polisci12 ... ackets.pdf

It is true at least that in 1960 that the marginal tax rate on earnings above $400,000 was 91% (not inflation adjusted, sorry).

[The Minx]

Isn't that just wages and not income in general, such as capital gains?

[Derek Thunder]

From what I understand capital gains are taxed at a flat rate of 15%, which would increase to 20% under Obama. Income taxes are only assessed on wages and salaries I think.

[General Havoc]

Capital Gains taxes could use some overhaul (not necessarily cutting, just overhaul in terms of how they're applied). They are hardly communism however.

It makes you wonder about claims on the part of objectivists, libertarians, and some conservatives that the wealthy are automatically of greater intellect and moral character.

Now hold on, be fair here. As we said before, there's a TINY handful of people doing this. Just because five idiots with more money than sense have decided to screw themselves does not make "the wealthy" stupid. Moreover I've never heard anyone claim that the wealthy are possessed of great moral character, not even hardcore Objectivists.

[Derek Thunder]

Moreover I've never heard anyone claim that the wealthy are possessed of great moral character, not even hardcore Objectivists.

I know that the Social Darwinists in the early 20th century claimed that wealth was a sign of great morality, and the Calvinists before that. The character of Horatio Alger certainly comes to mind. The villains of objectivist literature seem to conjure an image of weak character, and appeals to mythical "welfare queens" suggest something similar.

More generally, it's the belief that wealthy people are wealthy because of intelligence and hard work regardless of other conditions that may have contributed, like advantages in health and education that may come from growing up affluent.

[The Cleric]

More generally, it's the belief that wealthy people are wealthy because of intelligence and hard work regardless of other conditions that may have contributed, like advantages in health and education that may come from growing up affluent.

I would argue that intelligence and hard work are larger contributing factors than advantages in health and education. Having opportunities DOES help, but given the best starting circumstances a lack drive and ability will not result in success. Acting as if everyone would be wealthy if they were just given the chance is blindly naive.

[The Minx]

From what I understand capital gains are taxed at a flat rate of 15%, which would increase to 20% under Obama. Income taxes are only assessed on wages and salaries I think.

I doubt that the "golden age" could have been such if the 91% rate had applied to capital gains too, that would have killed the economy.

The problem with a great disparity between capital gains tax and income tax is then that people who have that option will simply reduce their own wages and earn more from capital gains. I guess they cut back from a 91% marginal tax rate for a reason: people could simply avoid the huge taxes by shifting their income from one type to another. Also, this would explain the great increase in wages after these high marginal tax rates were reduced; there was less incentive to play tricks like that.

So, IMHO, the 91% marginal tax rate back then doesn't stand as an argument under closer scrutiny (note that I'm not objecting to 39% taxes). Perhaps it would be better if there were the same rates regardless of type of income, since that would eliminate loopholes and not distort people's behavior.

[Cynical Cat]

So, IMHO, the 91% marginal tax rate back then doesn't stand as an argument under closer scrutiny (note that I'm not objecting to 39% taxes). Perhaps it would be better if there were the same rates regardless of type of income, since that would eliminate loopholes and not distort people's behavior.

The whole point of the 91% was to get people to invest their income so and thus provide plenty of cash flow and investors for American businesses. While I'm not advocating going back that high, you can't call the policy a failure because it got people to using the loopholes it was intended to make them use.

[SirNitram]

More generally, it's the belief that wealthy people are wealthy because of intelligence and hard work regardless of other conditions that may have contributed, like advantages in health and education that may come from growing up affluent.

I would argue that intelligence and hard work are larger contributing factors than advantages in health and education. Having opportunities DOES help, but given the best starting circumstances a lack drive and ability will not result in success. Acting as if everyone would be wealthy if they were just given the chance is blindly naive.

Have you read Outliers: Stories Of Success, by any chance? It really does a lovely job of breaking down what helped get the successful where they are.

[General Havoc]

There is no such thing as "the successful". I know a man who today is worth two and a half billion (with a B) dollars, who was born the youngest of 14 children in the Hills of Tennessee, who got "rented out" to other families as a child because his family couldn't afford to feed him, and attended the Seminary because it was the only school he or his family could afford.

On the other side of the coin, we have Paris Hilton.

You cannot set tax policies based on blanket statements about the "worth" of entire classes of individuals, for better or worse. You cannot lower taxes because the Rich are intelligent and superior beings who work hard for their money and are being forced to support the indigent of society. You cannot raise taxes because the Rich are idiotic bumbling beneficiaries of racism and elitist hiring practices, who make their living off of the sweat and blood of the oppressed poor. The "Rich" insofar as there exists such a thing, are BOTH of the above. All individuals are unique.

The rich pay more taxes because the rich can afford to do so without starving to death, because higher tax rates for the wealthy have a generally lesser impact on their standards of living than they do on lower income classes. Taxes hurt. The idea is to spread the pain as fairly as you can. Asking wealthy people to pay the taxes of 1994 on income above the level where middle class families live is not socialist, it is not class warfare, and it is not at all unreasonable.

Whether or not the Rich are good or smart or worthy people has nothing to do with the matter.

[The Cleric]

[Have you read Outliers: Stories Of Success, by any chance? It really does a lovely job of breaking down what helped get the successful where they are.

Nope. But I'm also not referring to the 7 figure a year people. I'm more talking towards the $250,000 ish crowd who DO work full time jobs and actually do notice a 5-10% difference in their taxes.

[SirNitram]

[Have you read Outliers: Stories Of Success, by any chance? It really does a lovely job of breaking down what helped get the successful where they are.

Nope. But I'm also not referring to the 7 figure a year people. I'm more talking towards the $250,000 ish crowd who DO work full time jobs and actually do notice a 5-10% difference in their taxes.

Did you miss the marginal tax rate bit? IIRC, the first 8k is at 10%, first 32k is 15%, up to 78k at 25%, 28% 78k-164k, 33% to 250k, and the proposed 39%(Which is not 5-10) only on 250k. You will not pay 39% on all 250k of your income.