Top Wealth Holders
I’ve heard that many of the wealthiest americans only pay 15% income taxes … should the rich pay more?
Should the wealthy pay more taxes and a lots of it. By wealthy, I refer to the top 1 or 2% of wealth holders in the country. They not only control maybe 70-80% of wealth in this country, the entire policy of the current administration is set to ensure they become even more wealthy.
They live in a country that fosters and encourages wealth. If someone rises above the fray, they should reap the rewards … But, should the rich expect that entire governement policy be created to support their increased wealth, while the same policy tramples down the poor and middle classes?
The Republicans will always bang their drums loudly on how this would affect small business owners. … but it not the small business owners they are protecting … small business is not the main political contributors of the Republican party, while big business is a huge political contributor. The Republicans are about big business and the very wealthiest in this country .. hence the huge tax loopholes
It all depends upon where the income is derived. Long-term capital gains (gains on investments held for more than one-year) are taxed at 15%. Some people may have all their income come from these types of gains.
Will the fair tax fix this? Nope and I’ll tell you why. The fair tax proposes to do away with long-term capital gains taxes and only tax spendings. In other words, a national sales tax. The problem with the long-term capital gains scenario is that not all gains are spent. For example, let’s say a wealthy investor makes $600,000 in capital gains from stock sales. If he only uses $200,000 to buy things for himself, then he’ll only get taxed on the $200,000. The other $400,000 he’ll reinvest and won’t get taxed on that at all. At least under current tax rules, the wealthy are taxed on what they earn and not just on what they spend.
Now, if a wealthy person does earn a paycheck or is a successful short-term trader, then they’ll pay higher taxes on those earnings. Short-term capital gains are typically taxed at the highest tax rate of the earner. For the top earning 5% or so, that would be 35%.
Whoever said that the rich don’t pay taxes, don’t know what they are talking about. The top earning 1% in the U.S. pay approximately 36% of all income taxes collected. The top earning 25% pay 84.5% of all income taxes collected. The top earning 50% pay about 97% of all income taxes collected.
In reality, the Buffet quote wasn’t at a luncheon, it was actually in a meeting with Ben Stein. Ben Stein wrote the major points of the conversation in an article in the NY Times. There are some important facts to consider. First, when Warren Buffet asked his employees to tabulate their taxes, he asked them to tabulate all federal taxes. That means Social Security and Medicare in addition to income taxes. While Medicare taxes are taken against all earnings, Social Security taxes are only against approximately the first $90,000 of income. This makes a big difference when comparing a $90,000 salary versus a $40 million income. The $5,580 in Social Security taxes paid by the $90,000 earner is 6.2% of their income. The $5,580 paid by the $40 million earner is only 0.014% of their income. That’s the biggest difference. A $90,000 a year worker, assuming a family of four and married filing jointly pays approximately $10,123 in federal income taxes, $5,580 in Social Security taxes and $1,305 in Medicare. That comes to $17,008 in federal taxes, which is 18.9% of their total income. Remove Social Security from the equation and the tax burden drops to 12.7%. So, as you can see, the Social Security contribution is the real difference. BTW, in the Ben Stein article, they never mentioned the actual percentages of what worker’s paid. As far as I know, any percentages you may see on the net attributed to this interview are probably wrong.
Should the rich pay more in taxes? Yes, I definitely agree with that premise. The wealthy are more able to afford higher taxes. However, it is probably not as bad as some people make it out to be.
Free Special Report: Top Wealth Holders
It is not at all uncommon for those in retirement and near retirement to be concerned about the amount of cash distributions their investment portfolio is paying. Often, their objective is to be able to live off this cash and, thereby, keep their initial capital intact.
Typically, such investors understand they need to be concerned about the long term safety of their portfolio. But, at the same time they require some scope for capital growth to avoid the possibility that they will run out of money.
Therefore, they tend to go towards a balanced/growth type portfolio, allocating 40-50% to what they consider “defensive” assets and 50-60% to “growth” assets. Provided their asset allocation has been determined appropriately (see “The Asset Allocation Decision”), this sounds eminently sensible.
However, their focus on cash heavily influences the types of “defensive” and “growth” assets they choose. These choices may, in fact, totally undermine their asset allocation decision.
When selecting “defensive” assets, they are attracted to higher yielding alternatives than offered by government and high credit quality private issuers. They consider such investments as mortgage funds, hedge funds and various types of hybrids. These are designed to look like fixed interest investments but with varying doses of equity risk thrown in. More potential cash is the lure.
For their growth assets, they are attracted to high yielding, fully franked Australian shares – particularly, bank shares. And, at least until 2008, high yielding listed property trusts appeared to offer both high cash distributions and some prospect of capital growth.
Many financial planners, particularly those with links to stockbrokers, are only too happy to help their clients build these apparently “conservative”, cash rich portfolios.
More risk than meets the eye …
We believe that such portfolios are fundamentally flawed. They result in significantly more risk being taken than may be necessary or understood by their holders.
For a detailed view regarding of approach to investment, see “Foundations of Financial Economics”. However, in summary, the shortcomings include:
1. Maximisation of cash distributions is never likely to be an optimal objective for an investment portfolio. In most cases, the goal should be to maximise after-tax returns for the risk taken.
An investor should not care how returns come (i.e. as income or capital). In many cases, it may be preferable to sell assets (and even pay capital gains tax) to generate cash to live on, rather than hold inappropriate, high yielding assets;
2. We think the purpose of defensive assets is to reduce risk and portfolio volatility, rather than to enhance return. Defensive assets should be as safe as practically possible, implying very high credit quality and short maturity.
High yielding fixed interest products always mean higher risk, although it may not be apparent. They are most likely to let you down when markets are under stress. Just the time when you are relying on the defensive component of your portfolio to do its job;
3. If you need higher total returns, you should look for the growth component of your portfolio to provide them. Research has shown there is a structured way to take this “growth” risk (see “Risk and Return are related”).
A concentrated portfolio of bank shares and/or listed property trusts would not be expected to provide adequate return for the risk taken; and
4. A focus on cash returns is inconsistent with our view that you should diversify as broadly as possible to maximise after-tax returns for a given level of risk (see “Diversification is key”).
For example, it will bias share selection to high yielding, fully franked Australian bank shares in preference to, say, lower dividend paying resources stocks or international shares. The resulting bias adds to your portfolio risk (it is called concentration risk), but has no expected return.
Total return for risk is what counts …
An objective of maximising cash distributions from investments is an example of what we consider to be a breach of the decision making principle of “It’s about ends, not means” (see “Foundations of Decision Making”).
Usually, the appropriate aim is to ensure that there are sufficient financial returns to enable you to live the life you want. It really does not matter how the returns come i.e. as income (cash distributions) or capital growth.
What you need to be more concerned about is that the returns are adequate for the risk taken, the costs incurred and the taxes paid.
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Article Source: ArticlesBase.com – Should cash distributions drive investment decisions?
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