Tuesday, October 19, 2010

The Marginal Tax

There is a lot of hoop la going on in the US right now about taxing rich people. So I decided to do a little research. Let's start with Wikipedia's slim but informative description of tax rate. Basically it says that you are taxed one rate up to a certain income and a different rate on the remaining (marginal) income. What this means in the US now is that up to a certain level (I believe it's 373k for a married couple, a single person, and the head of a household) your income is taxed at one rate and above that it is taxed at another, generally higher rate. Now in the US tax is charged a different rate on different incomes. That is to say the first $8,375 is at 10% then from $8,375 to 34,000 for single people is charged at 15%. For example, if I made 30k in this year my effective tax rate would be ($3243.75 + $837.50 = $4081.25) 13.6%. Which is to say it is still advantageous to make more money and get into the next tax bracket, you will not be set back by a higher tax rate.

The very highest rate is referred to as the marginal tax rate. Now the proposed non-renewing of former tax rate cuts I believe will be affecting the "lower" tax rates down to $250,000 as well. Throughout US history it is has varied from 92% to a lowly 7%. At 92% that means that only 8% of the money earned above a certain level is actually kept by the person who earned it. Sounds pretty terrible right? Well, imagine a theoretical titan of industry in the last century. This particular individual owned a company worth tens of millions. He had the capability to give himself a huge bloated salary. However, instead of "losing" hundreds of thousands of dollars every year through taxes he simply reinvested it in his business. That entails spending more on his business. More equipment, more people. So a person could become a multimillionaire or even a billionaire while still having a salary of only a few hundred thousand dollars per year because of what he or she owned, such as a business. At the end of the day does it matter if your corporation owns the private jet and you are the only one that uses it or if you own it?

So this means that for rich business owners their investments are limited by their ability to run the business. Instead of investing in foreign corporations and commodities they must essentially invest in their company or companies. If they continue to give themselves huge salaries they will be giving much more to the government. Which is really not a bad thing is it?

So who is hurt by raising the marginal tax? It would in part be those titans of industry and business. Instead of tens of millions of dollars in income and bonuses that they are then able to invest as they please they would have much smaller incomes and that money would be reinvested in their company. Which means a whole lot less investing in foreign organizations from personal investors. They would be forced, from an investing point of view, to invest in themselves. Who else would the marginal tax increase hurt? People who do not own a large part of the company that pays them. This would probably apply to management people who make lots of money in large corporations yet do not own much of the corporation. One option is to reduce their salaries to avoid paying taxes. In that case these skilled managers would likely strike out on their own into a smaller company where they could own a significant share of the company. By being high up in a company the benefits (jets, company luxury cars, lodging, travel, boats) that they previously enjoyed from their personal salary would still be available to them simply owned by the corporation. On the other hand salaries could remain the same and they would simply play more taxes and take less money home. To be honest, that is taking a huge financial hit in many cases. For someone that is smart enough, or hires the right financial planners and advisors, maybe even career advisors, I am sure that his or her quality of life will not decrease because of a marginal tax increase.

Taking a tangent, an interesting lesson that many wealthy or powerful or political should not forget is the history of revolutions. A few examples of notable revolutions are the French Revolution. Another example is the Russian Revolution of 1917. A nice Thomas Jefferson quote states,

"The purpose of government is to enable the people of a nation to live in safety and happiness. Government exists for the interests of the governed, not for the governors."

Let us take a closer look at that. "The purpose of government is...", pretty self explanatory, then "... to enable..." that is not to give, or grant free of charge but to provide the opportunity. To me that means governments will tax the people. The quote follows, "...the people of a nation..." not the just people that have wealth. It follows, "...to live in safety and happiness." note that safety is mentioned first and I submit than happiness is the opposite of fear, whatever that fear may be. The second sentence is quite simple as well. A person can live without a government, although it may be difficult at times, but a government can not exist without people.

 In other, very harsh and direct words, the government exists because we want it to exist. Our government does what we think are in our best interests. We may not always agree what is in our best interests. For example, why do people speed when they are driving? The point being that at the end of the day, or year, or career, we agree with the decisions that our government is making. If they are not making decisions for our well being what is their purpose? 

I submit that a high marginal tax is a very good idea. By the world's standards living on more than $10 a day puts you in the top 20%. That's $3650 a year. So limiting the amount that a person can take home over $373,000 is not very limiting in the world context. If the marginal tax is going to put a cramp in people's style they might want to consider how they manage their finances. 

Expedition Behavior rule #3: Do Not Complain. About anything. Ever. Notice that people who complain about money or a change in money either have some money or once had some money. People who are really in need complain about food and water. Thus I say, if I have something to tax, tax me!


  1. I am a little confused, especially by the statement that "we agree with the decisions that our government is making". As far as I can tell, this is true for roughly 50% of the population. I can see that your point is good in theory, but because government isn't a machine constructed by the people to do their bidding, but rather made up of individual people who have their own agendas (not necessarily the good of all), your point breaks down a little there.

    I also disagree that higher marginal taxes are a good thing. Thomas Jefferson once said "I would rather be exposed to the inconveniences attending too much liberty, than those attending too small a degree of it." I take this to mean that he (and I, for that matter) prefer to have more freedom to do what we please as long as it doesn't harm others, regardless of the consequences (negative or otherwise) to ourselves. Having the government take our money, simply because we have a lot of it, as you point out, restricts our ability to choose where to invest it. This limits our freedom.

    In regards to your last sentence, you are allowed to pay more in taxes, if you desire. I suggest you take this approach instead of asking that everyone else pay more as well. Not all of us support the government's aims as closely as you do, nor believe that just because we are fortunate, we should shovel our money into the hole we call our government.

  2. When I said "...we agree with the decisions that our government is making." I mean that we are not in the middle of a revolution, massive riots, a civil war, or some other form of somewhat destructive protest. For example, when most people get speeding tickets they pay it, or perhaps go to court and try to fight it, but how many people try to pass a bill to change the speed limit on that particular road or try to pass a law that prohibits speeding tickets or go around stealing speed limit signs so that drivers have no posted reference?

    In regards to the Thomas Jefferson quote, that is a valid risk and valid point of view. Although, how is harm to others defined? For example, Kohler is a privately family owned company just three miles from my house. Herbert Kohler Jr. is a multibillionaire. The remaining 1,900 blue collar factory workers at Kohler, after thousands of previous layoff the last few years, are in union negotiations with Kohler management about reduced wages and increased healthcare costs. The risk is that if an agreement can not be reached the jobs will likely be moved to Mexico or China. It seems to me that the first offer that Kohler offered was about 17,000 dollars effectively that every new employee would "lose" in terms of increased costs and reduced wages per year. For current employees the increased healthcare costs and five year wage freeze are dramatic but not as dramatic as those for future new employees.

    I understand that a business has to make a profit. Which is to say, employees may have to take a reduction in pay if the company is not doing so well. In fact, I think that earning based on commission or amount of quality work finished is a great system. It is an incentive to see the business do well. That being said, at Kohler the total amount that will be saved by the company, if they get their demands, will be something like 30-45 million dollars a year. Whatever the outcome Kohler is trying to insure their profits for the next five years. In other words, Kohler management is trying to insure their own freedom. The cost of this might possibly be the laying-off of over 1,900 people in this country while a similar number would likely be hired at a much lower rate in a different country.

  3. What does that example have to do with taxing rich people? Well, as a 1998 legal case wrote, "In recessionary times, Kohler’s policy was to continue paying dividends even if it meant not reinvesting the 90 percent." Assuming sales of 4 billion dollars a year, profits of 2% (80 million), reinvestment of 90% (72 million), that leaves 8 million dollars of dividends for shareholders. For a person that owns 5% of the company that is 400,000 a year. If profits were 7% on the same sales a 5% share of the company would be 1.4 million dollars. A 1% share in that case would be $280,000. Many of the people who own part of the company also work at the company and have corresponding salaries to their positions. To insure Kohler profits over the next five years, more than 1,900 people will endure some sort of financial loss. Herbert Kohler Jr. and his sister Ruth DeYoung Kohler owned roughly 75% of the company in 1998.

    Yes, I think people should be able to profit from their work. I think that people should be able to profit a whole lot from their work. However, and feel free to disagree with me since I am just one very fallible person, I feel it is morally responsible for the more fortunate to help the less fortunate. I feel one way that is accomplished is through taxes.

    As far as supporting the governments aims, yes I do overall. If I truly chose not to support the government's aims I would not pay taxes and I would permanently leave the country and join another more welcoming country. Considering the little I know about the world, I would prefer to stay in the US. That being said I have applied to work in many foreign countries from the United Kingdom to Afghanistan. The US is a great country, that does not seem to really want a person like me. Would I change the way the government spends taxes, of course! Wouldn't most people like to change the way governments spends money?

    Kohler References: http://www.sheboyganpress.com/article/20101016/SHE0101/10160502/Kohler-union-contract-talks-to-resume-Monday





  4. I think one of your last points is where I both agree with you and diverge in opinion; where you say that it's the responsibility of the "fortunate to help the less fortunate". I think this is the realm of charity, churches, and other community-based organizations, much as it was in the past, before big, huge governments.

    I firmly believe that the government is stepping outside of its bounds basically forcing people to be charitable. Governments exist to protect peoples' rights, not to give them everything they want/need.


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