Relationship between taxes and wealth retention

Moneyguy1 · 06-11-2004, 07:47 PM

The following is an exerpt from an interview with Jim Trippon, a Huston based CPA and can be found in its entirety in the June 2004 issue of Investment Advisor. It is submitted without editorial comment by me.

Minimizing tax liability is, of course, one of the key factors for maintroll and who work for a living, maintaining a successful retirement and in building wealth. I probably have a little bit different perspective on taxes than a number of your readers, being a CPA as well as investment advisor.
The way I look at it, there are really two systems of taxation in this country. There's one tax system for people who are on a payroll and who work for a living, and there's another for people who live off investment assets.
For people in the first group, typically the tax rate is somewhere between 30% and 35%, whereas people who live off invested capital will typically have a tax burden of anywhere from zero to 15%.
You might ask why someone who works behind the counter in a coffee shop would be in a higher tax bracket than a millionaire. Typically they are, which shouldn't be surprising if you consider the background and wealth of who typically goes into politics and who writes the tax codes and where their interests lie.
In the past year we've had the biggest tax cut for millionaires in years, when we cut the dividend tax rate 60%. The typical working person behind the counter in a coffee shop, or in an executive position with a corporation, didn't get a 60% tax cut last year.

Enjoy

Bob S.
Registered Financial Consultant

on-ramp · 06-11-2004, 07:52 PM

from what i see, this country is made up of 2 different kinds of people:

the "wealthy" people.

and the "stupid" people.

which category do you fall in ?

campbellcj · 06-11-2004, 08:26 PM

Well...IMHO there are actually at least THREE types.

The third being the greedy, slimy, crooks!

Moneyguy1 · 06-11-2004, 08:40 PM

Interesting observation. In the same journal, there is an extensive article about the new controls on broker dealers, the following is a few lines from said article:

"Amid the whining, let's not forget why there's more regulation. People in the business were cheating others. People were lying. People were giving preferential treatment to, surprise, other companies that promised a quid quo pro for that special treatment."

BTW...I am fee only and do not control client's assets; advice/counsel only....and proudly semi retired...lovin' it....

turbo6bar · 06-12-2004, 05:47 AM

I serously doubt a person working at a coffee shop is in the 30-35% tax bracket, unless they deal in Columibia's finest. In that case, however, they will be in the 0% tax bracket.

Also, I don't feel actual wealth should have a bearing on the taxes you pay. Your taxes should be based upon your INCOME, and with Roth IRAs being peddled, that INCOME will decrease.
jurgen

turbocarrera · 06-12-2004, 10:14 AM

The wealthiest people I know all have families that love them. Tax that!

Moneyguy1 · 06-12-2004, 11:17 AM

Turbo..

Right on...

There is FAR more to happiness than the accumulation of money and possessions.

But try to tell people that....

Superman · 06-12-2004, 05:29 PM

I feel like Turbo's post is a perfect setup, intended or jno. First, I'd agree that a waitress would not be in the 30% - 35% tax brackets. But on the other hand, that same waitress would not know, or need to know, what a Roth IRA is.

Moneyguy1 · 06-12-2004, 07:46 PM

Remember; the "tax bracket" would not only include federal, but state income and local if necessary (ala NYC for example).

Two years ago, I bet a guy who should have known better, that he was paying out more than 50% of his salary in taxes. He was. Where the tax bracket cited by the CPA is only income taxes, when one adds in sales tax, value added tax, the taxes included in pricing paid by the manufacturer and shipper and distributor, it is a wonder that you get ten cents on the dollar.

Point being, the old song from the 30s is correct

"The rich get richer while the poor get poorer"

Supe..I do not agree. That waitress should also be planning for her eventual future. A so-called menial job does not mean the person is incapable of amassing wealth. If that were the case.....Well, we will not get into politics!!

Superman · 06-12-2004, 08:04 PM

Point well taken, but I'm sticking to my observation that waitresses do not have the exopendible income for retirement planning. At $7 per hour, which is roughly minimum wage, monthly earnings average $1143.1 per month. I stand corrected, definitely, on the tax rate thing. When "payroll" taxes are added, 30% - 35% is achieved. So, after a 35% reduction you're at about $800. Even in the least expensive part of the nation, this is not a living wage. Sure, waitresses get tipped, but tips are actually property of the restaurant. At least in Washington.

Washington is a "tip credit" state. meaning that the state requires restaurants to pay an actual wage, not less than minimum wage, separate from tips. Other states give employers credit for tips, so as long as tips are greater than minimum wage, they pay no wages.

And many waitresses are mothers. Two jobs is necessary to make ends meet. This way the children get the stuff they need. Clothes. Food. School supplies. Maybe an inexpensive country rec program like swimming or dancing. Just not Mom. She's at work, or beat tired.

And yeah, we can certainly applaud Mr. Bush's lowering of taxes for non-wage (investment) income. This way, Mom can shoulder more of the tax burden. That'll happen in a number of ways particularly now that a nitrous system AND a turbocharger have been put on the governments' spending, particularly awards of contracts to defense contractors.

So you see, if you're not a wage earner at all, but make your money solely on investments, you're really liking our "president."

campbellcj · 06-12-2004, 09:55 PM

Superman, perhaps you should consider that Ms. Waitress might not HAVE a job were it not for the rich bastards (i.e. small businesspeople) for whom she works, and whose investment dollars are made more effective by less-oppressive personal and corporate tax rates, and investment/CG rates, thus helping to enable job creation.

I for one would FAR rather build my own small business, or invest directly or indirectly in others, as opposed to "creating jobs" in Big Government.

Superman · 06-13-2004, 08:03 AM

Chris, I wonder if you have any understanding of how that sounds to someone like Techweenie or myself. Ms. Waitress should be grateful and she and everyone else in America should become owners. Well, there goes the "corporation" then if we're a nation of sole proprietors and no wage earners. And I guess machines will fry your eggs the way you like them. Unless of course, corporations can be entirely employee-owned, in which case it's a little like a "collective" which smacks of socialism. No, your beloved economic system requires a foundation of tennis-shoed wage earners. And the suggestion that they should all earn a living wage is frightful. That endangers profits.

Sorry, I don't really like to be overtly critical, but your response is both nonsensical and mean-spirited. I mean, it's like when Marie Antoinet (I think) said "Let them eat cake."

350HP930 · 06-13-2004, 01:21 PM

Quote:

Originally posted by Superman
. . . . it's like when Marie Antoinet (I think) said "Let them eat cake."

I think its modern equivalent is 'let them earn their dividends' that is chanted by the corporate worshiping stock and bond croud.

Why shouldn't overworked and underpaid waitresses thank big business for her gainful employment? Its not like food servers ever existed before corporate entities did.

lendaddy · 01:51 PM

The fact that we do not tax wealth but rather income is indeed a sticking point with me(don't read too much into that). You can thank congress for that, very few of them "need" their income and most have already amassed wealth. You do the math. On the otherhand I do not want to discourage investment either. I think this just simply points out how flawed the current tax code is, it's just asinine. That being said, most people who live off investment income are retirement age and their collective asses have already been reamed by the tax man (John Kerry excluded

) It just shouldn't be this complex.

Another point on this is that you have these people with great liquid assets and because of the horrid taxation level they don't use those assets to start new businesses since it is "cheaper" to sit back and make money the cheaper way (investment). The US tax code should encourage new entrepreneurism, instead it discourages it.

Yes I realize you could say investments do/can create new business, however it is certainly not as efficient in this regard.

350HP930 · 06-13-2004, 02:23 PM

I think this nation needs a sales tax with a VERY limited set of exemptions instead of an income tax.

Unfortunately since it only benefits the common man and not the richest 1% and corporate entities its unlikely to happen any time soon.

Moneyguy1 · 06-13-2004, 04:07 PM

Chris:

The "rich bastard" who owns the resturant is deriving his or her income the same as the waitress; earning it and not from already amassed wealth. Therefore, the "rich bastard" is technically in the same boat as the waitress; taxed to death. The REAL "rich bastards" the article talks about are those who can afford to play polo every day, winter in the South of France and spend weekends jetting off to the Alps. In other words, THOSE WHO DO NOT HAVE TO WORK AT ALL!!!!!

A national sales tax or a Value Added tax, properly employed, would hit the wealthy where it hurts at least as much as it does the "poor". Nothing would be exempt from the tax, but there could even be "exemptions" for the first (you name the figure) for those with low incomes. Look up the law that Mississippi just enacted re: Medicare to see "compassionate conservatism" at work. Just another oxymoron......

lendaddy · 06-13-2004, 04:27 PM

"A national sales tax or a Value Added tax, properly employed, would hit the wealthy where it hurts at least as much as it does the "poor"."

Get real, the "poor" are not taxed at the national level period. Though I agree a tax system change is in order I must still point out such glarring misinformation. The states are the ones taxing these people (me

). The Federal government doesn't get jack from the poor and they never will. The language "hurt the rich" implies alot of animosity no? We need to come up with a system that does not punish improvement, regardless of your starting point.

Moneyguy1 · 06-13-2004, 04:47 PM

Len:

Certainly did not mean to offend you.

When I said "Hurts" I was careful to say "as much as it does the poor". Perhaps, had I opened my Theasarus, I could have found a more appropriate word.

However, it does not change the facts of the matter. Taken in toto, taxes, federal, state, local income, take a larger portion of the earnings of a relatively poor individual than a relatively well heeled one. If a system could be derived that would balance the effect, that would be a great step forward.

Consider the fact that a true capitalist will invest in anything that will, in his or her opinion, result in a profit. Not all investments have huge profit margins; case in point grocery stores and most retail goods outlets. Since the tax on the wealthy (if one were derived), would be essentially confined to what they spent, I see no problem there. The invested funds have alreadyhad taxes paid on them; consider them an "after tax" contribution like a Roth IRA.

Also, the "wealthy" individual can, for example, construct a home with the amassed funds, and escape the onus of having a mortgage. If all purchases were taxed, this house would have a "value added" component based on the cost of the house. The average individual, purchasing a far more modest abode, would pay the same percentage, but obviously would pay less. Hence, some of the "amassed wealth" that might not reach circulation can now be used for the public good, whatever that might be (road maintenance, hospitals, you name it). AS for the "mortgage", (a necessary evil for the majority), the interest paid is only recoverable to the extent of the individual's tax bracket. For example, a person paying $10 k in interest, in the 35% bracket gets back the equivalent of 35% of the 10k. If the individual had no mortgage, he or she would have $6,500 in additional spendable income. Those with mortgages get screwed not once, not twice, but three times.

In attempting to level out the playing field, one soon discovers that it is not a simple task. However, to leave things the same as they are will only act to further divide and stratify an already divisive society.

pwd72s · 05:09 PM

Quote:

Originally posted by Superman
I feel like Turbo's post is a perfect setup, intended or jno. First, I'd agree that a waitress would not be in the 30% - 35% tax brackets. But on the other hand, that same waitress would not know, or need to know, what a Roth IRA is.

You and I disagree there, Super..."They" write the rules...there is absolutely no reason the working stiff can't follow them as well as the rich man. If that waitress were to open a ROTH IRA at a young enough age, investing even a small amount each year in a good no load index fund? She wouldn't end up starving on a tiny Social Security stipend when age 65 rolls around. The old ant and grasshopper fable is true. Call me one of the ants...IMHO, those who rely on government to take care of them are foolish...

lendaddy · 06-13-2004, 05:03 PM

Bob, I was not offended. I don't know what the definition of poor is anymore but I'm sure I'm close right now. LOL. Anyway, what are you trying to accomplish? More money for the government or some kind of equitible fairness? I think we would like to see the same thing, less obsticles to success for everyone. I don't care how much in taxes the guy in the big house down the street pays, I care how many jobs he creates with his business(s). We really are shooting the golden goose.