This post is another one of those rants about first world problems, and I'm sure I'll get lots of hate comments and email about it. But I'm going to discuss a concept that I think needs to be brought out into the open. Our federal income tax system is progressive, meaning that those who have more income not only pay more, but actually pay a higher percentage of that income. The tax brackets themselves are progressive, but when you add in the effects of the phaseouts of various credits and deductions, the system is far more progressive than you might at first imagine. However, our tax system is far from the only financial system in our lives that is progressive. Before we get into the details, let's talk about a couple of caveats on the topic.
I'm Not Talking About Benefits For the Poor
The government provides a safety net for all of us. The very poor are entitled to benefits such as food stamps, housing assistance, and Medicaid. While those benefits are clearly progressive, that's not really what I'm talking about in this post. What I'm talking about is financial progressiveness throughout the range of income.
Charity Goes Both Ways
In some ways, contributions to charity are progressive, but in other ways are actually regressive. For example, consider someone who gives a set percentage of income to a charity, such as a Christian who pays tithing. If he pays 10% of his gross pay, that's actually a higher percentage of his net pay than a lower earner. But even if he is paying on his net pay, that's still more money, even if it is the same percentage. But once you apply the effect of the phaseout on itemized deductions, charitable contributions become even more progressive.
However, they are also regressive in certain ways. For example, if you're in the 33% bracket and give $1000 to charity, it really only costs you $670. If you're in the 15% bracket, that will cost you $850. In addition, low earners may not be able to deduct charitable contributions at all, since the total of their itemized deductions is less than the standard deduction, or perhaps only a small amount more. So we'll call charity a wash. Now, let's get into 7 topics that are anything but a wash.
Social Security Benefits
The Social Security system is very interesting when you really examine it. It functions both as a safety net and as a retirement savings plan. That was probably necessary to get the votes to pass it in the first place. But the effect of that combination results in a fairly progressive system. If you are a low earner, comparing your Social Security contributions to your eventual benefits shows those contributions to be an excellent investment. If you're making larger contributions, your benefit does go up, but not by nearly as much. If a doctor calculates out his rate of return on his Social Security contributions, it will make the investment performance of a whole life policy look pretty good by comparison. To make matters worse, higher earners pay more tax on their Social Security benefits, making the system even more progressive.
Health Care Costs
There are several ways in which your health care costs are progressive. Not only are Medicare taxes higher for higher earners (thanks to the special Obamacare taxes) but your Medicare premiums are also means-tested if you make more than $85,000 ($170,000 married.) Even Medicare Part D (the prescription drug benefit) is means-tested. However, that is relatively small compared to the effects of the Obamacare Subsidy. This subsidy gradually decreases as you move from 138% of the poverty line to 400% of the poverty line. In my state, 400% of poverty line for a family of six is $130,280. That's the 97% percentile as far as incomes go. So for basically everyone, health care is now priced quite progressively. Not to mention, of course, that while higher earners get more Social Security benefits for their higher SS tax burden, high earners pay higher Medicare taxes to get the same benefit as everyone else.
Higher Educational Costs
This is a big one. The difference between the sticker price and the actual price at many colleges, especially private colleges, in the country is highly dependent not just the student's income, but also the family's income. For example, at Amherst College (the most progressively priced in the nation, by the way) the highest income tier students have an actual cost of $40,000. The lowest tier? Just $2,000. At Stanford, tuition is free if your parents make less than $125,000. If they make less than $65,000, you get room and board too. If you're going to give it away free to 95% of people, why discriminate against the other 5%? Just make it free for everyone like Berea College. You certainly have the endowment to do it.
Taxes
Another big one, that most people are very familiar with, is the tax code. I mentioned earlier the effect of the progressive federal tax brackets as well as the phaseouts. But it gets even better. Many states have progressive income tax systems. In California, it starts at 1% and goes as high as 13.30%. The federal and many state estate tax systems are also generally quite progressive. For instance, at the federal level, the exemption is $5.45 Million ($10.9 Million married.) Above that, you're looking at brackets that start at 18% and rapidly climb to 40%. And don't forget the capital gains tax system. If you're in the 15% federal income tax bracket or below, your capital gains rate is 0%. If you're in the 25% to 35% brackets, you pay 15% on capital gains. If you're in the highest (39.6%) bracket, your capital gains rate is 20%. The Obamacare taxes are stacked on top of these. So if you make more than $200,000 ($250,000 married) you pay an extra 3.6% on your investment income and an additional 0.9% on your earned income.
Licensing Fees
How about your licensing fees? Most of you have heard about Utah's Medicaid Expansion Plan where the legislature wanted to increase the physician license fee to $5,000. But even before looking at that outrageous idea, license fees were quite progressive. In Utah, a physician license, not including the DEA license and multi-state licensing agency fees (which total over $1,000) is $200. A dietitian? $60. And don't think the price is lower because practicing medicine is more complex than being a dietitian. There are other people who practice medicine, PAs are $180 and NPs/CRNAs are $140. There is definitely a progressive component there above and beyond the costs of running the program.
The Doctor Price
If you've never been asked to pay a higher price “because you can afford it” either directly or indirectly, you're just not paying attention. It has gotten to the point where I'm ready to take the diploma off the wall when contractors come over. When people ask what I do for a living, I'm a blogger or a writer. Sounds like I make a lot less money, right? They don't need to know that I make about as much writing and blogging as practicing medicine. Guess what? It gets me cheaper prices.
Family Expectations
Many doctors, especially those who come from relatively poor backgrounds have experienced this. It isn't so much of a deal for us because we both come from middle class backgrounds and our siblings generally have pretty good incomes. But for many docs, there is an expectation that since you've “made it big” that you will be providing more cash support for parents, providing loans to siblings, or simply chipping in more for family functions. In some families, that support is quite explicit. I have had some doctors tell me about how their father demanded to see their W-2 so he could calculate how much he should get from it. In other families, the expectations are unsaid, but still remain. Family dynamics are different across cultures and even individual families within a culture, but much of the time there is a progressive nature to them.
What To Do About Progressive Financial Systems
When you add up all of these effects, it is easy to see why many physicians and other high income professionals don't really feel very rich. At first glance, progressiveness seems like a good idea- those who have more should pay more. But you have to be careful about unintended consequences. Imagine someone in California with marginal tax rates of 39.6% (federal), 3.8% (payroll), and 13.3% (state) who also pays 10% of his gross income to his church but is phased out of the deduction for it. He only gets to spend 1/3 of his next dollar. I don't know about you, but I'm not willing to do a whole lot of extra work for 1/3 the pay, especially when I already have “enough.” I'm much more likely to go canyoneering instead. Meanwhile, you get to see fewer blog posts and society has to wait longer to get emergency care. Unintended consequences. In a perfectly progressive system, there is no incentive to work at all. Luckily, even with all of these progressive financial systems in our society, it is still not perfectly progressive. But it is probably far more progressive than most people think.
So, now that you're aware of these systems, what can you do about them? As you can see, there are huge incentives to make less money. So if additional money isn't making you any happier, work less and make less. Not only will you pay less in taxes, but your kid's college education will be cheaper and your health care will be cheaper. You are also incentivized to get less of your income from work, and more from more passive activities. Even better if that income occurs in retirement accounts- since that doesn't show up on your tax return at all- so be sure to max those out. It will lower the effect of progressive tax systems this year and for years into the future.
Perhaps most importantly, you can learn the rules of the game. For example, if your kid is really interested in Stanford, perhaps it is time to go part-time this year instead of next. Or perhaps you'll liquidate your taxable account despite the taxes instead of withdrawing from an IRA, since taxable assets count more against you in the Expected Family Contribution calculation. Maybe you'll move from California to Nevada or Texas. Or take your diploma off the wall and not put that “School of Medicine” sticker on the back of the car. Or choose to give up your medical license at retirement rather than keep it in order to do some charitable medical work. Perhaps most importantly, you can decide to be happy with less, a la Mr. Money Mustache. If you can be happy spending $50K or even $100K a year, you can avoid a lot of these effects and spend a heck of a lot less time in your life working for pay. By paying off your student loans and mortgage relatively early in your career, you can free yourself up to simply earn less and take advantage of these progressive systems without feeling deprived financially.
Another First World Problem- Getting all that mud and sand out of my wetsuit after these trips
Now, of course all this is a “first world” problem, just like “burnout” and “work-life balance.” My detractors will surely accuse me of being a “rich whiner.” But who are we trying to kid? This entire website is filled with solutions to first world problems. That's all I ever write about. Obviously, I prefer a higher income to a lower one, despite the additional costs. There is only so much I'm willing to do to reduce the progressiveness of my financial life. But it is good to be aware of this sort of thing because it should have an impact on the decisions you make about how much to work, how much to spend, and how much to save. Find the balance that is right for you.
What do you think? Are there any other areas in life where the price you pay is progressive? What changes have you made in your financial life as a result of the progressiveness of the tax system, the health care system, the college system, or your family? Comment below!
Getting ready to graduate residency in 6 months and looking forward to complaining about all these things… It is a bit daunting to look at the marginal rates when deciding to try on that extra shift every month. Although I disagree with some of the lifestyle choices of the FIRE crowd, MMM, etc., I can understand them wanting to get out of the rat race and avoid many of these first world problems. Now that you have essentially reached financial independence, how has your own perspective on this changed as compared to when you were in college, med school and on active duty?
What was funny is I thought I paid taxes back when I was in college, med school, and on active duty. Little did I realize back then that 68% of federal income taxes are paid by the top 10% of earners.
I wouldn’t call myself financially independent yet, but I am independent of medicine thanks to the success of this site, and that’s a pretty close second.
I hit FI last year and it has made me reevaluate my motivation for the long days and nights, missing family dinners and activities. I didn’t know about FIRE or MMM until about a year ago, but I definitely understand the perspective.
I still enjoy my job most of the time. The plan of the day is to keep working until I am 2 x FI, i.e. have 50 x expenses and a decent DAF, then take stock of how I feel about work and life. I’m on track to be there in my mid-to-late forties.
Marriage is taxed progressively also. Two high income earners are far better off being single as compared to married.
As for me, I realized that cutting a shift or two did not decrease my income so drastically thanks to the 39.6% tax bracket and the ObamaCare surtax of 3.8%. My happiness has increased by a far greater value. I will admit that our progressive tax code disincentivises me to work more.
Unfortunately there are plenty of people who believe it is not enough, pushing to tax us “high income earners” even more. This social rhetoric is very worrisome to me. I hope for my kids sake and future grandkids sake this trajectory stall or reversed itself.
I LOVE the progressive tax system & celebrate April 15th as a day when our community pitches in to pay for goods and services we all need. It is an HONOR & a HUGE PRIVILEGE to be rich enough to give more than others while still being quite financially comfortable enough to provide for the family.
As for Mr. Dahle, perhaps society simply doesn’t value your medical work as much as you think it ought to?
And a not-so-subtle reminder: for each ED shift you choose to forgo (whether for “first world” reasons or other) there will be younger, hungrier, more competitive professionals clamoring to fill it.
Because you risk sounding misleading, you should remind readers that high tax bracket individuals still take home more money, of course, because they only pay the extra tax on the money greater than the maximum amount in the lower tax bracket.
To argue that nutritionists & physicians deserve to pay the same (rather than physicians paying almost the same, like they do in your state) is foolish. Physician license allows them to generate far greater income. Physicians could cover the lisence fee difference in 15 minutes!
Also, unbelievable that Mr. Dahle would cherry pick two private universities’ tuition progression as something to complain about…these places can charge what they wish basically – if you don’t want to pay it, go to the wonderful University of Utah for nearly nothing.
Not to be insulting, but I agree with you, Mr. Dahle, about two points: you do make more money than most people & you are whining in this post.
Actually there are not enough physicians in the US and most hospitals in this country are understaffed. Having docs work less would put a huge stress on the system.
St. Patrick, I’m glad you feel it a privilege and an honor to pay extra. I think we would all appreciate if this year you paid an extra percent or two as an added privilege bonus. I’m sure a guy like you would feel honored to contribute even more than they have to.
Based on your comments you are very unlikely a physician. I doubt you even pay that much in taxes to begin with.
Our taxes don’t just pay for our infrastructure, our safety, and the education of our young. Our taxes pay for beurocracy, waste, and inefficiency. The question shouldn’t be about how to tax the rich more. The question should be how to make our government more efficient. Instead our government builds increased complexity in every aspect they touch. Complexity leads to confusion, increased cost, and waste. A great example is the department of education. This department has been dumbing down our kids for years and doing it at an ever increasing cost. So sad.
I agree with Alex. What is your marginal tax rate St Patrick?
Google’d “Marginal Tax Rate Calculator” – looks like it’s 25%.
Sorry to take so long to respond, had my last two patients in this morning’s clinic no-show due to the driving conditions (0/1 Alex, sorry to disappoint you #sorrynotsorry).
If you all are “not motivated” to work with a higher tax bracket in our progressive system, fine, just go home then, go fishing. The rest of us will gladly take the extra responsibility.
You all do understand that only the income above the last tax bracket is taxed at a higher rate, right? I don’t think WCI made that elementary in this post.
Did you see the details of Bernie Sanders’ healthcare plan?
http://money.cnn.com/2016/01/25/news/economy/sanders-health-care-plan/index.html?iid=hp-stack-dom
Will you be ok to take a 10.7% pay cut while paying 8.4% more in taxes? If so, then how about just making it a 20% pay cut and pay 20% more in taxes? I mean, if your marginal tax rate is 25%, I imagine your *effective* tax rate is somewhere in the 10-15% range, so you have plenty of room to give more money to the government. (BTW, I suspect that most of the people reading/commenting on this blog know their effective tax rate to a few decimal points off the top of their heads–no need to google their tax bracket.)
I think you are still mistaken. Did you include state tax? Social security tax? Medicare tax? Property tax?
Still doubt you are a physician if you think most docs can earn $800 bucks in 15 minutes and that there are plenty of docs to fill in the empty slots.
When can we expect you extra IRS payments to come through?
Yep, I think we all understand how the marginal tax bracket system works–didn’t even need to google it :-). If you’re in the 25% tax bracket, then I’m sure your effective tax rate is quite low and I can see why you’re happy to pay taxes because you’re not paying a whole lot of it. That’s one of the main points of WCI, just because the tax system looks like it is a progressive tax system with only small incremental increases in tax rates with income, there are so many deductions for those in the 25% marginal tax bracket or below that their effective tax rate is essentially nothing. The higher tax bracket citizens pay multiple times as much in their EFFECTIVE TAX RATE even though the marginal tax bracket system makes it appear that their rate is only increasing slightly. The tax bracket percentages are very misleading. If you were to look at it from an effective tax rate, 50% of people don’t even pay any federal income taxes. I’m not saying it shouldn’t be progressive, but it is not nearly as gradual of an increase at most people think that it is.
I’m very surprised to be learning so much about myself from you, Bob. After you’re done with the assumptions you are making about people you don’t know anything about, please continue to explain that you’d advocate for a more gradual progressive taxation system. That’s an interesting idea. How would you structure it, precisely?
St. Patrick, it’s hard to tell if you’re trolling or serious. I’m fairly poor right now, and benefit from all the progressive systems around. But I hate most those systems! They’re stupid and unfair. You’re wrong to think WCI and others like him should feel good about having their money ripped from their families and given to the wasteful government behemoth, which passes along a little bit to people like me.
I don’t think I ever discussed in the post my feelings about a progressive tax system. (Could be wrong, of course.) I’m simply pointing out how it works, no value assigned.
I apologize if you feel I am making assumptions about you. I’m not assuming anything about your tax situation. You said you are in the 25% tax bracket. The tax system is what it is. If you are in the 25% tax bracket, you are not paying much in taxes, it’s just how it is. It’s nothing against you. I guess the only thing I’m assuming is that you don’t pay more in taxes than the government requires. So if you do pay more than the government requires, good for you. Thanks for your donation. I think effective tax rate is hard for many people to understand, especially those in lower tax brackets. They see the tax brackets and think the higher income individuals are only paying the stepped up tax rate, but there is much more to it than that.
The assumption in this post is that everyone understands that.
It’s misleading – and I would argue misleadingly so – to write as if your entire income is taxed at a higher rate when in reality, only the portion above the next lower tax bracket is.
I am saying: it is sleight of hand & misleading. What would you say to that?
He didn’t mislead anyone. I’m a millennial and low-income, and I understood completely.
I think I’ve discussed tax brackets and marginal tax rates on this blog enough that any regular reader is well aware of the difference between effective and marginal rates. I don’t feel a need to put an asterisk explaining the terms any time I mention one of the terms.
I would say you misunderstand the word progressive. It was explicit within and throughout the post. At this stage of your life where you read financial blogs, when you see progressive and taxes together, these two things should immediately make sense without further explanation.
Youre searching for a reason to be offended, and you found it.
St Patrick, I don’t mean to be snippitt, but I t’s quite apparent that you don’t understand how the tax system works with regards to the tax brackets, effective tax rates, and common tax deductions. If you were to run a tax return for various income levels with common deductions, I think you’d better understand it. In fact, WCI may have a previous post on it to illustrate how much someone actually pays in income tax at various income levels with common allowable deductions. If not, it may be worth a post to show actual examples.
That would be an interesting post. I could probably do it using my own tax returns since I’ve been in almost all the brackets at some point in my life.
A-a-a-a-men! Sounds like sour grapes to me, too.
I am decidedly not at all worried about the “young and hungry”, it sounds typically generational but there was a huge shift in how much residents planned and outrightly said they would work, there is a paucity of hunger in the millenial side of things as they think much more about work/life balance.
Being just in front of them in time, and older in working mindset this attribute to younger residents actually makes me feel pretty comfortable. Not only does it not bother me to get after it to make more, I have done it before and know how to handle it. Things get tougher as we age and gain more comfort, Im all for knocking it out.
I’m glad to hear there are more competitive professionals clamoring to cover my shifts. Know any who can start before July?
Yes, they are readily found through various professional society job listing boards & residency programs, locums and full-time recruiting services.
You’re a clever guy, arise from the canyon & send an email or two to get it done.
Hilarious. Like my group is going to let me bring in some locums guy to work my shifts before the permanent help gets here this summer.
Easy assertion to make. Impossible to prove.
Might be hard to prove to you, but not to me. Let me ask the guy sitting next to me….nope, he’s not okay with me bringing in some yeahoo to work my shifts.
This guy (StPatrick) or gal or he/she or them or it (seems sensitive if I assume anything) has figured out how easy it is to find Physicians. An email or two *mwah ha ha ha*, that’s it Mr. Dahle. Mr. Dahle! He didn’t go to Medical school to be called Mr. Dahle. But who cares? Just shoot an email or two and Doctors will line up. Because StPatrick thinks so.
“To argue that nutritionists & physicians deserve to pay the same (rather than physicians paying almost the same, like they do in your state) is foolish. Physician license allows them to generate far greater income. Physicians could cover the license fee difference in 15 minutes!”
The question is does it take more time and effort to issue a Physician license vs. one for a Nutritionist? If not then we are simply being targeted to pay more.
Agreed. I’m personally fed up with the notion that I should pay more for something just because I “can afford it”.
I like how he says a physician license “allows” you to make more money. Like someone handed over a license to us to print money. Spoken like someone who didn’t have to put their life on hold for a decade or work for 36 hour shifts or jump through all the hoops we have to now to keep that money making license. I enjoy what I do and I chose to do what I did to get where I am but don’t make it sound like someone just handed me the keys to the money making machine.
Just looking through old posts and found this gem and the responses of St. Patrick. Hilarious. The tax code and the many other things in society that are “progressive” noted in the post are are counterproductive at some point as they reduce the incentive to work, especially working more that full time (which I have for over a decade).
I just read a post by an anesthesiologist who cut back to 0.6 time and felt it was a good trade off as his work above 0.6 FTE was so much more highly taxed it was just not worth his while. That is where I am now. Cutting back to half-time as soon as possible partly due to the progressive nature of the tax code, college costs, licensing fees, board certification tests, etc. This year I spent about $4000 on licenses, board prep and tests, state licensing fees and my federal DEA number.
I can’t wait to make less money. My moonlighting income from weekends and holidays is taxed at the marginal rate of 36%+ self employment tax 15.3% + state tax 4.6% + Obamacare tax 0.9% = 56.8%
I am downsizing and dropping my wages and expenses partly and can’t wait to pay less tax and qualify for more stuff for the “middle class” which is where feel like I am anyway due to all the taxes I pay.
The idea that “someone else will be happy to step in” is not true in psychiatry. There is a shortage.
As a country build on Christian principles I guess the principle here is to whom much is given much is required 🙂
It is one thing to give willingly. It is another to have it taken away by force. In our case under the penalty of prison.
This country was founded on the principals of stopping overtaxation by the British. Today we are overtaxed by our government.
“Render to Caesar the things that are Caesar’s, and to God the things that are God’s.”
Yes, we are taxed alot but can I argue it’s a privilege to be able to give a more to the poor, downtrodden, widowed, and contribute more collectively to our society?
And your right, it is taken away by force lol but, would you rather a voluntary tax system? And how low do taxes have to be to make folks happy? Would this ceased folks from complaining? Probably not.
What should the tax be is good question that I don’t know the exact answer to. For one, I believe it should be a consumption tax with basic necessities excluded. Such as food, and healthcare. The poor pay little to none unless they can afford to purchase things like TVs and smartphones as those get taxed. The rich will clearly pay more as they consume more goods.
Government needs to be cut dramatically. It’s the biggest reason to such high taxes.
Tax code needs to be simplified removing all the crazy deductions for everyone. And decrease corporate taxes so that jobs can come back to the US.
To answer your question the best I could, after making those changes and then taxing based on what the government will need. I believe it will be a 10-20% consumption tax.
All good points. First problem, however, is determining what are “bare necessities”. How about cosmetic surgery for those who just want to improve their appearance? Quibbling aside, however, we need to include most services in such a consumption tax (often administered as a Value Added Tax) , not just tangible goods. Would churches pay it? I personally like the idea, having observed how it works in most European countries, but there are always interests that will try to manipulate it from self interest.
Cutting government expense sounds good, until you look at the federal budget. The only way to achieve meaningful cuts is to cut the defense budget. Hard to do when our out-of-control military establishment throws money away on boondoggles like the F-35. Also hard to justify in the present world situation.
As I recall, the government spends about 18% of GDP, which implies an 18% flat or average tax rate, unless drastic cuts can be made. Mitt Romney admitted to a 13% overall rate, which is similar to mine. (BTW, I don’t quite have his wealth.)
I hope you let your congressman know how you feel. If enough of us do, and the uber-wealthy cannot continue to buy Congress, we might get somewhere.
How is cutting the defense budget hard to do (in theory, obviously nearly impossible to do)? Your example of the f35, as well as a litany of other projects that are outdated and are kickbacks to certain constituents and backers are perfect for whats wrong with it. Also, very little of what we currently spend our defense budget on makes any sense within the current context and is outdated. This is all before the fact that we have more in this budget than something like the next 10 countries combined and most are allies.
There is definitely excess and waste there, in reality it wont be touched as its currently a sacred cow.
I agree that we get a lot more bang for our buck out of an A-10 than an F-35. I was glad to see that program continued.
There are two other big areas of the budget besides defense where we can cut expenses- entitlement programs and interest on the national debt. But you’re right, any serious discussion of the budget shouldn’t spend time on National Parks- it should be all about defense and entitlements.
Yeah, the A-10 is a useful little plane. But it doesn’t do much for the egotists in the military, so they tried to kill it. A small example of Congress doing the right thing in saving it. You can build a stack of Warthogs for the cost of one impractical F-35. There’s plenty of waste in the military, but politics gets in the way of doing something about it.
These ideas always sound great until you think about how it would be regressive in reality (as poorer people pay almost every last dollar, but could be mitigated with smart policy…lol!) and the unintended consequences that would occur. Usually this is where I remind folks that the economy is based upon consumption to something like 68-70% and this would directly put a giant hit on the economy in general. As this would then strongly disincentivize consumption and all kinds of secondary/grey markets to try and avoid the tax (depends on whether first or every purchase, etc..). This strongly disincentivizes demand and then innovation, supply, etc…and a lightly dystopian future.
It would also greatly increase the wealth inequality since people like us would simply shut down all unnecessary consumption, invest everything and live off the proceeds in a wholly tax free manner as possible, as soon as reasonable. Further downward cycle.
This kind of tax would have to be expertly crafted, and still there would be loads of work arounds and loop holes that communities like ours would exploit to our great benefit.
AKA the “fair” tax. I like it. It taxes you for consuming, not earning or saving.
There is a place for taxes and a place for charity. I feel much better giving to charity than I do paying taxes, even if the amounts aren’t all that different. Although the last few years, the amounts have been much more different than they used to be. It wasn’t that long ago that I gave more to charity than to the tax man.
Ok then, just say it: What percent of your income or total dollar amount would you pay willingly in tax?
How about 25%. I would be OK with that. I still would prefer a consumption tax.
Of course anyone who makes more than is needed to cover the daily expenses of living supports a consumption tax, as we’d end up with a whole lot of money that isnt subjected to taxes a whole lot faster. For 90% of other people its extremely burdensome, depending of course on how things are categorized, etc…which could get very messy with corporations obviously lobbying for their categories to be tax free, etc…
I just see a whole slew of obvious negative outcomes (having read up the ideas and their implementation, ive no crystal ball) with that idea. Yes, it sounds simple, fair and effective. But you have to ask what would really happen in reality. I mean how good is keeping 75% of your check if the economy starts to contract, corporations start to generate less revenue and profits (aka your investments start returning less or worse), less overall demand leads to less supply and innovation, less jobs, otherwise known as a vicious cycle. Not good for anyone.
Taxes, whether you realize them are not are set up to encourage certain things, and yes some of these things are outdated and punish the very things the country could use, like two high end earners, education, etc…its gotten complicated and corrupted a bit but the push for earning and consumption, and investing, etc…is there, all things that further the economy in general. At least that is the goal, and periodically updates need to be made.
There will always be disagreements on what the government encourages via the tax code. For example, you think punishing two high earning members of a couple shouldn’t be punished. Others think having a stay at home parent should be encouraged for the societal benefits. Lots of politics there.
You’re right about unforeseen consequences. Whatever the rules are, people will learn them and use them to their advantage as much as possible.
I dont necessarily think its politics per se (mine at least), just that at this time the gdp of the country and productivity in general wouldnt hurt to have less disincentive to get all able and willing participants out there.
On the other hand I am glad since we fit the perfect description where it makes it easy to have my wife stay at home, being an rn it isnt hard to make 80k, but its certainly not worth it when you do the math and consider what you’re giving up.
I agree no one person will agree with all that is incentivized, and that most cant look beyond their personal circumstances to what may be a greater overall benefit to the country. Thats okay, its too much for the average person and more than they need to think about. While I try to make distinctions between things that are good for me personally, things I agree with, and those I dont, i realize its hard in practice and worthwhile to acknowledge such.
WCI, you didn’t mention that wealthier people send their kids to private grade schools when the local public school is covered by property taxes. It is their choice, but it still is paying twice for the same service.
I got an excellent education in the public schools of my hometown — better than some friends got at the expensive local private school. If you don’t want to pay twice, lobby for better schools for ALL kids. Public education is a tradition that goes back nearly to the founding of our nation. It is, in large part, the reason Americans are better educated, and therefore more prosperous, than most people on the planet. Face it — in many areas, the public schools, and especially the public colleges, are being starved. I don’t know a teacher or professor who makes much as my docs, despite the fact that many have advanced degrees.
I was making a point at what amounts to double cost for a good. I went to public school and fully support it, but thought WCI should have included things like this in his analysis.
I’m a big fan of public education. Although my wife and I went to a private college, we otherwise went to public schools- K-12 and grad/medical school. Our kids are also in public schools.
There are reasons teachers don’t make as much as docs. We can start with their hours and minimal if any liability.
“Public” education is actually a relatively novel idea. Most of the founding fathers were home educated with little or no government education. And I would say they were far better educatded on the subjects that mattered than most of us! They would be blasting our current government for most of the things they do least of which is paying for education. They knew and believed the best way to subvert a nation as by ‘educating’ their children. As a product of government schools, I managed to come out fairly well, but am not willing to subject my children to the lies, poor teaching, and inability to think for themselves that is so promoted at the government schools today. So as the previous commenter noted, I am subjected to the progressive tax of educating my children and paying for it twice!
In my private life, I have been a vigorous critic of some local public schools. This did not endear me to teachers. But I have met rather few lazy teachers, but rather lots of teachers who are trapped in an ineffective system. Too many parents demanding that we stuff students’ heads full of facts (which often become obsolete in a few years), instead of teaching them reason and innovation. I saw this as a professor, where parents saw the college degree as a mere union card, instead of expansion and improvement of the mind itself by means of liberal studies. In toto, however, your statement, with which I partly agree, makes a good case for school vouchers, which give parents of all means the ability to choose what they want for their children. As for the founding fathers, their class-oriented view was soon replaced by the concept of public education, supported in the Northwest Ordinance, which set aside land in every new township for the support of the schools. Also, the churches, especially the Presbyterians, strong supported education for all, and backed it up by establishing academies.
Even if your children attend public schools (mine do), if you live in a nicer home than most, you will be paying a higher property tax than the average parent. Your are paying more to send your child to public schools by virtue of living in a home that is appraised at a higher value. As Flo would say, “That’s progressive”.
That’s certainly true, and I pay a higher rate to live in a relatively nice suburb. Property taxes, however, even in a state where there is no state income tax, are small compared to the federal income tax for most of us. If yours are too high — move! It would also help a lot if the churches paid their fair share. But if we in the middle class supported our educational system better, we might see, in the next generation, fewer poorly educated people who don’t pay much. As a college professor in a state-supported (not well supported) institution, I saw many students from relatively limited backgrounds break out and use their potential. If more got pre-school education, it could get much better.
Good point, but again like the private school thing, a choice.
That one’s their choice. Hard to call it progressive.
I suppose that’s true. When you earn enough to pay the AMT and lose the deduction for property tax paid is when it becomes progressive.
I’m also a big fan of public education, having benefitted from 21 years of it from Kg to M.D. I give a little back to our State U every year, in addition to the contribution from my high state income taxes.
Keep a low profile as a hi earner. My kids laughed when I told the car salesman I am a postal worker
Got dressed shabbily as well
Without doubt if others know you are wealthy, you might be paying much more
Had a photographer come to my house to present for an affair
HE WAS DRIVING A MRCEDES-NO WAY he was being hired
Wow, way to many assumptions made about that photographer. He could have borrowed way to much to get a dream car, you never know.
Instead of being jealous of a photographer (which I don’t believe you actually are) why don’t you just go be a photographer if you think they make so much more money? Or do it on the side.
The point is this – your kids were right to laugh at you, you go to foolish lengths to deceive a car salesman. You’re the one who has to live with yourself for acting the way you did. I wouldn’t say it invokes pride, would you?
Whenever someone asks me what I’m doing after residency, I tell them “hospitality” *wink*. Maybe it’ll work for non-medical people asking that same question.
I like to think I’m the first person to come up with this joke.
How, sad — a high earning doc complaining about the costs of medical care! Beautiful irony. Yes, our income tax has always been progressive, by design. Our Social Security has always been designed to return more to the less affluent. However, I can recall when, as a member of a couple earning decidedly middle class salaries, I paid a marginal rate of 42%. And thought we were living well. As for college costs, check the figures on the back-breaking student loan debt many new grads are carrying. Yes, you docs have high loans, but you know you future earnings will enable you to pay it off. My ex-wife and I paid all the expenses of our daughter at a pricy eastern college. Didn’t even ask for financial aid. It was money well spent. And this is the guy who has been tutoring his fellows in how to take advantage of the “backdoor Roth” tax avoidance scheme that Congress never intended (and finally closed). If you want lower rates, go out and press for a complete rewriting of the tax code, beginning with the elimination of ALL loopholes and deductions. Start with eliminating that 10% for tithing. I am tired, as a taxpayer who does not take such a deduction, of paying for the maintenance of YOUR religion. If ALL of these loopholes were closed, we could ALL have lower marginal income tax rates. Grow up. Especially the doc who misrepresented himself to the auto salesman, seeking pity. He deserves pity, no doubt, but for his mean-spirited deviousness, not his means. I hope his kids grow up with real ethics.
oh no! Is it true that the backdoor Roth IRA is no more as of 2016?
It would be such a bummer!
I’m no tax expert, and never had the opportunity to take advantage of the backdoor Roth, but I think it was eliminated in the recent budget bill, along with several other tax breaks that helped primarily the affluent. ‘Bout time. As anther commenter has noted, we should get those hedge fund guys, too.
I think you’re wrong about the backdoor Roth and right about the carried interest deduction.
Yes, I was going by my imperfect memory on the backdoor Roth. It definitely was on the table, and as Michael Kitces noted, it probably will be again. Yes, it’s available to anyone who has the spare cash. When I was working, I was lucky I could make the normal $5,000+ contribution yearly, much less more through a backdoor. I’m not complaining, it worked well for me, and gradually, I paid taxes on small transfers from my tax-deferred accounts, to make the Roth grow and shrink my RMD. But a lot of people who really need a retirement kitty cannot do that.
You can’t do both a $5500 Roth IRA contribution and a $5500 traditional IRA contribution, no matter how much or how little you make.
True. After the Roth was created, I made too much to qualify for the traditional IRA. I still think it’s a good deal, but the same limit should apply to everyone, like speed limits. I probably could have contributed more through my retirement plan as well, but means did not permit, so I contributed just enough to earn the employer match.
The same limit does apply to everyone for traditional IRA contributions, but not Roth IRA contributions. Thus, the “Backdoor Roth IRA” is best eliminated by simply opening the front door to everyone. The hoops people have to jump through to avoid the pro-rata rule (and for some the step transaction rule) are ridiculous. I spend way too much time teaching them to doctors.
Yes. Although it employs the use of logic, a simple way to reduce tax headaches is to realize if it can be done going through a series of steps that do not add value nor deter people that were supposedly outside some limits, those steps should be eliminated as well as limits that turn out to be artificial.
Probably loads of areas where this could be done in the tax law. There are always so many unnecessary steps.
Not that I know of, and I try to stay on top of stuff like that.
Wasn’t closing the door on the back door Roth IRA merely proposed in the 2016 budget but not yet passed? Too bad no one seems willing to tackle the carried interest tax loophole fund managers utilize to pay capitol gains rates their income.
Edit. Didn’t realize it was already passed with the change in there.
Not surprised to hear from you Hugh after this post. I’m quite aware of how you feel about people who earn more than you do.
I also remember paying a marginal rate of well over 40% on my moonlighting income when I was only making something like $70K in the military. It is brutal to be self-employed sometimes. I think I was paying 25% federal, 12.4% SS, 3.8% Medicare, and 6% state.
I disagree that Congress never intended the Backdoor Roth. It looks to me like that is exactly what was intended-more conversions to boost the government coffers in the short term. I expect it will get fixed some day, but not sure whether the fix will be to disallow conversions for high earners again, or whether it will be to allow everyone to contribute directly. I have no idea what you’re referring to about the backdoor Roth being closed this year. Got a link?
You’re welcome to start your own religion if you don’t like mine.
I am fine with my high taxes, all I want is people who make more than me, to at least pay the same percent of taxes as I do. For eg Apple should pay 40% too, another example cruise lines taxes are in single digits. To me if I am paying 40% I want Mitt Romney to pay 40% too.
I also dont want taxes higher than what they are currently
Mitt Romney pays a high rate on his earned income. I disagree that capital gains rates ought to equal earned income rates. The whole hedge fund manager carried interest loophole, however, needs to go. Give me a break. That’s earned income. Surprised it has lasted this long with so many politicians of both parties being against it.
Agree – carried interest is around because of lobbyist.
So you want your capital gains taxed at your marginal tax rate? Think carefully before you answer…are you really sure that’s what you want?
Next, why are capital gains not taxed as earned income? Or said differently, would taxing savings the same as income increase or decrease people’s willingness to save? (Correct answer – decrease)
Next, are people currently saving enough to retire in the “pension-less” world we live in today? (Correct answer – overwhelmingly no. Average 401k balance of people age 50-67 = $126K….uh oh!. Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income. Given the median household income is roughly $52,000 – uh oh again!)
What are the societal outcomes if we have huge waves of people reaching age 70 with no savings? (Correct answer – a huge number people living longer than ever despite increasing chronic diseases with no human capital and no financial capital, uh oh!)
I don’t think we want to put up any barriers when it comes to people investing in the businesses of America and/or self funding their future retirement. The tax system needs to be radically changed and their are parts of that tax code that favor the wealthy but the “Mitt Romney should pay what I pay” argument is not well thought out nor is it part of the solution.
The economic theory behind lower cap. gains rate is to encourage productive investment. Right now, at least, there is far more cash floating around than we need, because of, or result of (depends on your point of view() low, low interest rates. So all the cash is going into leveraged buyouts, mergers, stock market speculation, etc., all of which does very little good for the economy. Yet the banks are sitting on their money and not encouraging business expansion. Clearly, the theory isn’t working.
So since it’s not working in the current climate of low interest rates we should create an indefinite disincentive for the “average Joe” to save for retirement?
Doesn’t sound like that would help anything.
What’s not good for the economy is Tens of Millions of people reaching retirement age with grossly inadequate retirement savings to live on. That impending reality is a far greater risk to our economic future than any/all of these mergers and buyouts you mention.
The tax code has in large part been influenced (aka purchased) by the wealthy, no question. #FeeltheBern
However, as I previously outlined, treating capital gains as earned income is neither a well thought out idea or an economic solution. #NotFeelingtheBern
A counter argument to this that I rarely hear is the simple fact that the poor and middle class have zero need to save in a taxable account.
There are some alternative hypotheses as to why banks would sit on cash. One is the requirement that they sit on more cash than they used to.
That is undoubtedly part of it. Banks now need more reserves to help prevent another disaster like 2008. However, from what I read in the financial press (I’m not in the banking business), banks are reluctant to lend money for productive purposes (which could expand the economy). Low returns are part of the problem as well (thanks, Federal Reserve). I personally think the big banks should be broken up and Glass-Steagall restored, as it helped keep them solvent. However, I don’t think we want to start a long debate on that subject in this thread.
when businesses know you are a wealthy individual, you will probably pay more than the guy in the poorer next down
IT HAPPENS-speak to others
That’s why it pays to be humble and quiet about your wealth
Those that speak about their wealth, probably are not
Have you thought about using your services more?
I live in a mid-size city and pay an additional municipal flat income tax of 2.2%. I also use the free library, the trash and recycling pick up is free, and when sewage overflowed into my bathtub, I called the city and they paid for a plumber to check it out. On top of that, our city has one of the best municipal park systems in the country. Within 3 miles of the city center there is 20+ miles of mountain biking and other parks for all kinds of recreation including 6 public golf courses, riverfront concert venues, and more.
Aren’t you canyoneering in national parks and state parks? Those are all maintained by the government. There’s legislation trying to be passed to sell all that land to oil companies. So feel free to let all that canyoneering land go to the oil companies and see your taxes reduced.
Nobody is talking about selling Zion National Park to oil companies. They’re talking about developing some much less impressive areas versus declaring them NEW national parks. And you may not have noticed, but there are significant fees associated with recreating in both national and state parks. I think it’s $40 to launch my boat at Lake Powell now. $25 to drive into Zion, plus a $5 reservation fee per canyon, then a $10-20 fee to get the permit.
And you know as well as I do that hardly any of our tax money is going to the National Parks system. Give me a break. That’s a rounding error on our national budget.
So from my simple research here’s a breakdown of total government spending:
Total: 3.8 trillion
33% Social security/unemployment
27% Medicare/health
15% military
6% interest on debt
4% veteran’s benefits
3% food and agriculture
2% education
1% housing
1% Energy environment
<1% science
(I dropped all the decimals and tried to use the most unbiased website I could find). Any ideas on what we should be spending money on to decrease the amount of taxes collected?
And the bill for selling off National forests was S.Amdt.838 — 114th Congress (2015-2016). My bad it was national forests, not parks. So I guess you can't really canyoneer in national forests, I'll take back my comment on that.
I know lots of National Forests in which you can canyoneer.
If you want to reduce taxes, you’ve got to spend less on SS/unemployment, Medicare/health, military, and debt interest, no?
Half of this country is on some type of government assistance. Admittedly a lot of them truly need it and truly deserve it. But a lot of others are simply disincentivized to work hard, make sacrifices, when they can easily take it away from the “rich guys” by using violence (aka mandatory taxes). “Loopholes” exist on the other end of the spectrum and are freely used to a much greater degree than the tax loopholes criticized earlier.
I will say there are some perks the high paid professionals get that are inaccessible to the low paid, albeit they pale in comparison to the big bite of progressive taxation. For example most companies provide free smart phones and data plans to higher titled employees, as well as high percentage matching contributions to the 401K plans (which calculated on a high base of pay to begin with is a sizable amount), additional retirement contributions to make up for the 118K SS ceiling, free or discounted services. Another example of small advantages available to highly paid are credit card and travel points (available to all, but certainly maximized by those that spend more and pay off timely).
I really don’t know why people get so nasty and angry about you simply pointing out issues with our current system. (Yes you Fullerton and Patrick). They apparently wish people to be penalized for pursuing an education and working hard.
Thank you as always WCI for teaching me more about the intricacies of money in our ever convoluted tax system.
I have, in the past, commended WCI for insightful and helpful comments on personal finance. However, some of the comments in this particular thread reveal how SOME docs think they are entitled to much higher rewards than us “common” people. By the way, I am common enough to have four degrees, including a PhD, so it must be said I truly “pursued” an education. Before retiring, I literally paid Social Security taxes for more than half a century. I worked past normal retirement age, but that was because I enjoyed what I did, not financial pressure. You’ll also note that I suggest some fixes for the “issues in our current system”, as well as bringing up some issues not previously mentioned. Much of the convolution in the tax system is related to loopholes and breaks available primarily to those who are well off. I use a tax preparer by choice, but no one, even the most ignorant in our society, should be unable to prepare his/her tax return. If you’re not part of the solution, you’re probably part of the problem.
Wow….Just Wow on some of these comments.
Interesting info and all pretty true. I don’t know how observations translate to “whining”.
Thanks,
Hmm, I knew WCI would take a beating here, and so did he!
As a largely financially secure mid-career physician, I do not worry so much about the progressive system as it has largely allowed me to achieve the modest success that I have. Am I super-motivated to work the extra shift or would I rather let the younger, hungry colleague have it? It depends on when you ask.
I am occasionally concerned that mega-high earners, like the hedge fund managers and private equity guys, get special tax treatment, but perhaps it’s just whining and me being envious. I am equally concerned that WCI is able to draw a physician’s income from this educational outreach, but, again, that’s just me being jealous.
Cheers to all!
I don’t think you are complaining about the private equity folks’ reduced tax rate. They are able to avoid the whole tax bracket system with “carried interest” which allows them to claim their income as capital gains instead of earned income. I think there is a legitimate concern about someone making millions per year and avoiding the taxation system that everyone else is subject to.
The NY Times had a piece about a week ago about how the really rich write the tax policy so they can avoid it. Not a lot of specifics in it. About the same time, Bloomberg did a story that essentially was a case study of that tactic in action. Really scary what they get away with.
And yes, the device of taking your earned income as capital gains is another sham that should be eliminated. One solution — get rid of special tax rates on capital gains. Economists say it has no effect on investment for productive purposes. It would be just as logical for those of us with advanced degrees to claim our earnings are a return on our investments, or even a return of capital. Makes the people who maximize deductions look like pikers. One more reason to simplify the tax code by getting of ALL such devices.
Thick skin is a useful asset for a blogger.
Sometimes I think you enjoy testing your flame retardant outerwear. 😉
Good point on charitable giving being much more advantageous for the high earner than the middle class. One of many oddities in the tax code. I plan on taking advantage of that fact by superfunding a donor advised fund while I am a practicing physician. I’d like to build it up to about 10% of my nest egg. In early retirement, I can give generously from the fund indefinitely, without worrying about the tax consequences, since I will have taken the deduction when it saved me the most on my income taxes.
I think it’s unfair to be angry at Dr. Dahle for taking a deduction on his 10% tithe. Those are the rules set forth by our government. Hate the game, not the player.
I’m not angry because Dr. Dahle tithes. He is perfectly welcome to support his church any way he chooses, like my neighbors. But every dollar in taxes he saves that way means higher taxes for the rest of us. Same with property taxes that churches generally are exempt from. You’re right — we need to change the game. That is largely what this thread is about. After all, the government is us. As Pogo Possum said, “We has met the enemy and they are us.”
Were you expecting to support everything the government does? I disagree with lots of what the government does. We all have our pet deductions/federal programs that we think are good and those we disagree with.
If you don’t want to give to a church, pick a charity of your choice.
Put my religion back in the public schools or get the grubby government paws off of my tithe and my church’s property. It is one way or the other. When it comes down to deciding between my faith and my government beaurocracy, the choice is easy.
Public schools are no place for religion, except the impartial teaching about all religions. You did not mention whether you were Baptist, Mormon, Methodist , Jewish or Muslim. Besides, our country has long paid lip service to the separation of religion and government. Do you only treat patents of your faith? You have plenty of opportunity to teach your kids your religious views outside of the five hours a ay, five days a week, they spend in school. Your tithe and church property are your business, as well as your congregations’. That does not mean they should not be subject to the taxes that apply to the rest of our lives. That is a double standard. I don’t get 10% of my income exempt from taxes, because I do not choose to devote it to religion. That makes no sense.
What you are missing is the good that religious charities such as churches do in the community and the world. I understand you probably believe they do more harm than good, or perhaps no good at all. However, many of your fellow citizens disagree with you and have essentially outvoted you on this matter. That is why the tax break exists.
You misread my argument, and should not speculate about my beliefs. No, I will readily agree that churches do a great deal of good, and occasionally great harm (think Kool-aid). I know many individuals who are sustained by their religious faith. My argument is solely that a) in the U.S., we draw a clear line between the secular and the religious; and b) Outvoted or not, non-believer taxpayers should not be obligated to support religious institutions they do not believe in, through exemption from taxes. I have to mention that my views are affected by what I see in my own Bible Belt area: Churches sitting on large tracts of property they don’t even need, and building huge tax-free parking lots they use a few hours a week. In the more cramped, older suburban area where I grew up, most churches occupied lots not much larger than the typical house, and one did not see new tax-exempt “plants” taking advantage of the situation. Being outvoted is not a convincing argument. I voted for Goldwater, long before most people in this thread could vote (or were even born?). That does not prevent me from voting in every election, even knowing my candidate might lose.
The counterargument is
a) No we don’t. Read the constitution: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” There is no state religion. And all religions are alllowed to practice. There is no obligation to “draw a clear line between the secular and the religious.” That “obligation” is only in the minds of those who think like you do, not in any law. If religious organizations do charitable work, donations to them qualify as a charitable deduction.
b) When you get outvoted by the majority who wants more defense spending, you are obligated to support more defense spending. When you get outvoted by the majority that wants religious institutions to qualify as charities, you are obligated to support that as well. If you wish to change the tax laws, call your Congressman. If there are enough people who feel the way you do, the laws will change. Being outvoted is an extremely convincing argument, and nobody cares who you voted for in 1964. Barring protection from the constitution, you are obligated to support with your tax dollars what the majority wants.
I am quite familiar with the constitution, and I also know that many sections of it (like the 2nd amendment) can be interpreted in multiple ways. But I suggest that, by exempting religious institutions from taxes, government has, in effect, made all religious institutions part of the government and therefore state religions, because that increases the tax burden on the rest of us, including non=believers. Yes, I pay my taxes, knowing that some of that money will be used in ways that I don’t prefer. That does not mean it cannot be changed. Do you always agree with the majority? Again and again in this thread, participants are arguing for changes, especially in taxation. I respect their right (and often agree) to seek change, even though the present system has apparently been created (or at least tolerated) by the majority. If your argument is sound, you have to argue against ALL change because it is anti-majority. Continuing with your reasoning about the support of charitable activities by religious institutions, would you support exemptions for THAT PORTION of their activities that are truly charitable in nature, and taxation of purely religious activities? The fact that it is impractical is not a logical argument. Nothing I have said restricts anyone from practicing his/her own religion, any more than gas taxes are a restriction on your right to operate your power boat or drive to the mountains to hike. BTW, I own a boat (albeit with a sail) and in my younger days enjoyed hiking. I suspect we have more in common than in differences.
I’m in full agreement with not taxing churches in their chartitable contributions.
But the act of practicing faith is not a charitable act and therefor should be taxed like everything else.
Regious institutions are huge, rich entities. There is way to much money to be made tax free in the name of God.
How about I start a religion and make it tax free also? Nope, it must first be approved by the government and more then likely I will be thrown in jail by the IRS.
Unfortunately we do not have separation of church and state.
It is exceedingly easy to start a religion, and the government will grant it as there is obviously no way to test a religion. John Oliver did that for fun this year on HBO, it was pretty hilarious, started a bona fide religion and showed just how easy and ridiculous bad actors could be using those tools.
Bad actors exist in all pursuits of course. Religion just gives some of them lots of tools and willing followers, but I dont think its any more/less per se than any other field, a percentage of people will just always try to game or take advantage of others given ample opportunity.
Calling your opponent’s argument illogical does not make it so. You don’t believe “primarily religious” activities are charitable. I do. I doubt we’ll ever agree on that point, so might as well agree to disagree and move on.
Wow, we’ve got politics and religion going all at once here. What a practical discussion! Unfortunately, I’ve got to get to work on some other stuff.
Let’s not confuse a tax deduction with not having to pay taxes. The only reason a charitable donation is “less adventitious” to a low income individual is because they are paying less taxes at a lower rate to begin with. Also, let’s not forget that a donation still costs the donor a whole lot more than the benefit of the tax deduction.
Who is John Galt?
You said it.
Wow the salty tears in this comment section. Good for you WCI for giving your opinions and analysis.
I don’t want to get dragged into the argument, but can someone expand on the the line by H. Fullerton ” And this is the guy who has been tutoring his fellows in how to take advantage of the “backdoor Roth” tax avoidance scheme that Congress never intended (and finally closed).” Is the backdoor roth “closed”?
See the WCI website, “Backdoor Roth Tutorial” Perfectly legal (for a short while longer). But it’s a device that is not feasible for most taxpayers.
Not true. The backdoor Roth is available to ALL taxpayers with earned income. And I see no plans to change it anytime soon despite your repeated assertions to that effect without a source.
Well, if the individual’s income is low enough, then they’re not really backdooring it. They’re just doing a straight Roth (or a straight traditional if it makes more sense for them to do so).
I suppose you’re right in that lower income folks, can go through the unnecessary exercise of backdooring if they wanted to for some reason.
Exactly.
I think some changes for Roth IRAs will come in what is allowed to be invested. Some of the Silicon Valley types are using founder’s shares to create massive ROTHs.
Both links should be open access.
“In the first example, an entrepreneur contributed $5,000 of “founders’ shares” in a business to a Roth IRA in 2008. The original value of the shares was $0.00125 each. The company went public in 2012 at $25 a share. The account grew to $196 million by 2014.”
http://blogs.wsj.com/totalreturn/2014/11/19/how-a-5000-ira-can-grow-to-196-million-in-six-years-gao/
Another one from Forbes
How A Serial Entrepreneur Built A $95 Million Tax Free Roth IRA
http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/#61092beb65f6
No wonder those guys make the big bucks. Brilliant move, of course. But I wouldn’t be surprised either to see that opportunity disappear in the future.
The other thing some venture capitalists and start ups are doing are putting their shares into their Roths at like .001 par value and if they happen to do well they are in the money. Interesting scenario for sure.
The Forbes article notes it is only Tax Free if taken out at 59 1/2. Aren’t there controls on how soon after an IPO owners of the pre-IPO stock can sell? So hindsight shows those were bets that paid off, but the pendulum could have just as easily swung the other way, wiping out the value of their shares.
And the strategy is open to everyone, not everyone decides to take such risks with their investable funds.
I think the “tax free after 59 1/2” doesn’t refer to any kind of a special rule with using IPO stock. I think that’s just the usual penalty prior to 59 1/2 unless you use the exceptions such as the SEPP rule.
I don’t think pre-IPO owners have to wait very long at all. If so, that time period is typically measured in days or weeks, not years and I think it is set by the company, not by regulators.
I was wondering the same thing. There has been some recent discussion on this over at bogleheads: https://www.bogleheads.org/forum/viewtopic.php?t=180903
It looks like closing the backdoor roth option was not part of the final budget documents. Even though some call the backdoor roth a tax “loophole”, it is just a way for people that earn over an arbitrary amount to have access to the same retirement savings option that is already available to those below the cutoff. Doesn’t seem so egregious to me.
Might be referring to someone’s proposal (perhaps the last Obama budget,) but not actual law.
http://blogs.wsj.com/experts/2016/01/11/you-can-still-do-a-backdoor-roth-ira-conversion-for-now/
It’s interesting how the two people who are arguing for these high taxes also pay less taxes than physicians.
It is so easy to make someone else pay more isn’t it?
Don’t be a troll, guy. You have no idea whether or not I’m a physician.
It’s a distracting assertion anyway. Stay on topic. If you’d like to improve the system, then advocate for that. Others may share your opinion based on their own judgement & the merit of your suggestions. Others may not, that’s debate.
Your baseless assertion about who is or isn’t a physician shows the quality (or lack thereof) of the evidence you choose to use to make that specific argument. With little imagination, one may assume that you use similarly poor logic & unfounded claims about other opinions you advocate for, namely the ones you’ve typed about today. Don’t do that. Don’t use poor logic/reasoning or false/baseless assertions. It makes the rest of your points look to be worth the same…zero. The weak evidence base strengthens the case of your debate opponents.
In short, by acting like a troll, people will treat you as one. Don’t be a troll, guy.
I’m happy the roads are there as are the National Parks and all the rest of it. I’m happy to pay taxes to support it. I’m happy to support all the good things the taxes help pay for. I’d love to be more efficient with the money. There are good, smart people working everyday in order to make that a reality. If you appreciate the position of a particular candidate or council member, vote for them. Just know you’ll be entering an arena where other reasonable people (including physicians like me) will be using their knowledge & logic to inform their opinions too. These may not always look like your opinions and that’s ok. Ad hominen is low class in such scenarios.
St Patrick,
I never called you any names, just pointed to you possibly not being a physician and reasons why. I still have my opinions and that is fine. Largely because you think there are enough physicians in the US to pick up the slack. Every physician knows there is a massive shortage of doctors except maybe you. I will agree talking about you directly regarding your tax bracket or profession is not necessary in this discussion and for that I apologize and will refrain from doing it from this point forward.
But since you are such a well paid physician and feel privileged to pay the increased taxes I still think you should be extra privileged to pay a few thousand more this year.
I would also prefer that you don’t force your views and privileges on to me and my family especially under the pressure of a gun and imprisonment.
In our country unfortunately there are way to many people and corporations that benefit from the government handout. They vote democrat and republican alike.
There is a famous quote attributed to way too many people so I am not sure it’s origin:
“When the people find they can vote themselves money, that will herald the end of the republic. …”
Although I vote for those siding with my views, I fear it is too late. Both sides of the isle like big government. It’s only a matter of time before this country’s debt will outgrow its ability to print money. Increasing taxes and stifling productivity is not the answer.
The debt levels have nothing to do with the ability to print money.
The ability to print money does provide a way to decrease the real debt level.
Yup, it’s called inflation. Paul Krugman actually advocates it as a way to get rid of our debt! But some of us remember the double digit inflation and double digit unemployment of the late 1970s. No one won in that debacle. I suspect most people reading this thread were still in three-corner pants at the time (or maybe just a gleam in dad’s eye). Those who ignore history are doomed to repeat it.
There are definitely consequences, but no one will deny it is a good way to deal with a high amount of nominal debt.
Yes, and that’s what I fear will be the saving grace of medicare. Ramp up inflation, keep reimbursements flat and viola, health care/medicare is no longer as big of a burdensome government expense. Inflation your way out of the problem! However, as physicians, our incomes will shrink dramatically on an after-inflation basis. All the more reason to front load retirement now so at least your investments can ride the inflation tsunami to come (not trying to be a doomsdayer, just trying to be prepared). If you don’t have a good chunk of retirement investments to catch the wave, you will be left with a lower inflation adjusted income with higher costs and trying to come up with lower valued dollars to save. Now is the time to save! 🙂
Good strategy, Bob. I was lucky enough to be in a tax-deferred plan during the 1980s and 1990s, when markets were doing well. If I had not started until 2000, I might not be retired now. Inflation may not kick in for several years, but in the meantime, you’re accumulating capital to benefit by it. You must think in terms of decades, not years.
True, but is the opposite of the intended point. We could literally eliminate our debt with a couple keystrokes. People constantly conflate and confuse micro and macroeconomics and generally have a poor understanding of modern monetary theory. Its a bit different and not intuitive, and lots of the suggestions that make good sound bites and are simple to understand are totally backwards and would make the situation much worse.
I’m not suggesting the government intentionally devalue the dollar with inflation, I’m just saying that if history repeats itself as it didin the 80’s there are some real consequences to having virtually no control of increasing your reimbursement rates to keep up with sky rocketing inflation. I’m sure the government did not intend to let inflation take off in the 80’s as it did.
You mean the 70s?
+1!
“…..From each according to his ability, to each according to his needs…” is the boiled down theme of the progressive tax system. Why not? It has worked out so well in some countries…NOT.
High earners are feeling nickel and dimed. It’s not necessarily the progressiveness that gets you, if that’s the only thing. It’s like getting small cuts left and right. It would feel much better if everything is rolled into just one, the tax rate. Also, the rate itself looks high when not all income is subject to that rate. With so many deductions and deferral into retirement accounts, the actual effective tax rate isn’t that high, as WCI wrote in previous posts.
Harry,
I completely agree it is all those hidden nickle and dimes that really get to you. Although adding in federal tax, state tax, property tax, sales tax, Medicare, social security, obamacare surtax, licensing fees, and whatever else I have missed. This stuff comes out to $100K+. It sure feels like a lot of money. Especially for those coming out of school with $400K in debt.
Absolutely. Totally agree with that. Just roll it all into the tax rate and it is what it is.
Donating to any non-profit is tax deductible why should churches be targeted and treated differently? Most churches do quite a bit of good in their communities and some have the means to do good beyond. If you don’t like churches give to some other local relief agency or other non-profit. You’ll get the deduction, too.
We all enjoy the infrastructure that our taxes have paid for. We enjoy public safety, some enjoy public education, most have enjoyed national and state parks. What we don’t enjoy is the great inefficiencies and the number of people who not only don’t pay their fair share, but may not pay a share at all.
I do believe a Flat tax system would be the fairest. Everyone pays the same percentage. I also wouldn’t mind some sort of National sales tax because this would capture taxes from those who are part of cash based system. Maybe the the two could somehow be tied together. If you also pay Federal taxes through the Flat Tax a portion of your National sales tax would be deductible.
Jim clearly identified this as a first world problem and even knew he would take flak for the post, but discussions have to start somewhere. Our country started its grand experiment of empowering the people and the people have poured back into the system. Other countries are free to do the same. None of asked to be born here, so all we can do is work to make it fair for the pursuit of, not the promise of happiness.
Your first paragraph is the perfect argument for a point I made early in this thread, that ALL deductions and loopholes should be eliminated. Thank you. The IRS (not my favorite agency, by far) has had difficulty many times in determining which organizations are genuine charities (or churches) and which should not qualify. Recently, there has been a rash of groups masquerading as “educational” that in truth are just political, and therefore should not qualify. Answer: close the door completely.
I fully agree with your second paragraph, and I think you are on the right track with the third. As to the last one, no, I didn’t ask my parents to live in the U.S. so I could be born here. However, both parents could trace their lineage here back to well before the Revolution, and both families had veterans in that war, and most wars since. I firmly believe our system is still the best that has been developed, but like all systems, it can be improved. Certainly a good place to start would be the tax system, if we could free it of all the special interests, including religion.
I must also point out that “fair” is very subjective. It is the eyes of the beholder, so it is not a very helpful standard. What Thomas Piketty thinks is fair is much different from that of Mitt Romney. Both make good cases for their positions.
A flat tax without some kind of progressive tilt is very very regressive. It sounds good, but isnt in the end. You’d have to have some sort of cutoff before it kicking in, which is basically a progressive system anyway.
I would personally love a flat tax as it benefits me so much more than the average person, but that doesnt make it right.
Our system is not so terrible, its just riddled with a lot of loopholes that allow some to really take advantage of their corporate attorney/lobbying groups while also benefiting from all it gives, infrastructure, safety net, social services, etc…
Via email:
Interesting.
Please don’t use my name on this one but there is certainly pressure from some ladies that I have dated to spend big on dates when we go out. Of course, if I had not been a high income Dr they might not have gone out with me.
glad I married a girl I’ve been with since high school and never had to deal with that!
You could just represent yourself as a postal worker and dress shabbily, like one other commenter did . . .
I dress shabbily anyway. I mean, I wear pajamas to work, right?
I think you missed the point of the postal worker comment. If you’ve never been charged the “doctor price” it would be hard to understand. It’s the same reason I tell certain people I’m a blogger when they ask what I do for a living. See, you can tell people you’re a retired professor all day and get nothing but respect with no other assumptions. If a resident tells someone they’re a doctor, it is assumed they have money coming out of their ears, even if they have a net worth of -$400K. That gets old very quickly.
It is completely true. Even when meeting new people at a bar or restaurant, telling them your a doctor makes the mood different. My wife and I rarely tell people what I do. Usually I say I work in a hospital in public relations if I must say something. It is kinda true.
Even my wife hates telling people what I do at work. People treat her differently. She once got a comment from a co-worker “must be nice to have a husband buy you everything.” Her response was. “Bitch, if that was the case, why am I working here?” Well, she said everything except the bitch part.
Dating is a whole other animal. On the one hand you want to tell a girl you are a physician since she may find you more appealing. On the other hand, once you do, and she likes you, you are deamed a good catch and a one night stand is practically out of the question.
I’m glad I am married to an awesome woman and don’t have to worry about such things.
I found this site when I realized that not only our income, but our health insurance (company sponsored progressive linked to pay), property taxes, college tuition, AMT loss of tax deduction, 250k medicare tax, donating to family causes, and the fact that service people think we have tons of money is starting to get on my nerves. The latest news is that our state is reducing educational subsidies to all but 15% of the cities – the areas where the poor reside. Another progressive tax! I didn’t mind when my health insurance deductible wasn’t so high, and my kids weren’t in college, but it seems that we are not only punished, but the object of disdain. When I pay the taxes, how about a little appreciation?
No, neither of us are physicians, but I was (yes, really) a postal worker in my early years, and I did work 60 hour weeks of physical labor. It was honest and hard work, so I will try not to be offended by the comments!
If we make any extra money, it’s a guaranteed 33% give-away.
correction -” I realized that not only our income is progressively attacked, but the fact that we are dinged with higher health insurance (company sponsored linked to pay), higher property taxes, fully billed college tuition, the AMT loss of tax deduction, and a 250k medicare tax is starting to get on my nerves.”
Could be worse. I’m at a 46% marginal tax rate. But I can understand your frustration. Wrote a post about it once:
https://www.whitecoatinvestor.com/its-not-just-our-tax-system-that-is-progressive/
But don’t expect appreciation or pity from the general population. You won’t get any, and in reality, you’d rather deal with this than a low income, which is always an option for you. First world problem for sure.
Most of these comments are predictable–good job trolling everyone with the #firstworldproblems post, WCI.
I do take issue with the healthcare costs point, at least partly. White collar jobs are much more likely than most to have health insurance premium subsidies. At my employer that’s something north of $1200+/month pretax. I pay a grand total of $19/month, also pre-tax, + my HSA contribution that I can keep if I don’t spend it.
Hmmmm…interesting. I haven’t seen that. I pay every dime of my health care premiums, HSA contributions, and actual health care expenses. At any rate, in effect those high earners have traded a lower salary for more benefits. I assure you it’s all the same to the employer (I say that as the employer.)
I’m glad we have a progressive tax system and I don’t mind paying taxes. We just did them this weekend and we paid 25% of our income in taxes (that includes federal, SS, medicare, 5% state tax). We pay more now in taxes than we earned in 2005 (first year of residency)-never thought I’d see the day! I’d much rather be in the position of paying higher taxes than being in the position where I needed some of the programs that taxes help fund. I just feel grateful to be in my current position.
How much more are you willing to pay? Are you willing to pay an extra $5K or another $10K in taxes? Looks like lately increased taxation is government’s answer to its financial problems. A few years ago my taxes increased by over $10K a year thanks to the 39.6% tax bracket, the Obamacare Surtax, the capital gains tax increasing from 15% to 23.8%, the Pease exemption and the itemized deduction phase out. Today’s rhetoric is about increasing those taxes even further while at the same time cutting physician reimbursement. How much more are you wiling to take?
I’d love to only pay $5-10K more a year. However, the progressive nature of our tax code combined with a markedly higher income means a 6 figure increase in my taxes this year. First world problem I’m grateful to have.
I just can’t get fired up about paying taxes. I’d easily pay another 5-10k/year without even being sad about it. Paying taxes is just an annoyance at this point because we make enough to cover everything that needs to be covered and still have plenty to save and play. If we have another kid next year and I’m able to cut back even further to just 0.25FTE, I will again be thankful for a progressive tax system, because we will pay less in taxes and that will make the transition even easier to manage. And if I someday decide to go full time and make more money and pay more taxes, I also will not care.
Of course, as I said in the post it’s a first world problem.