When George (thanks for the correction, orthotox!) wrote ‘Tax Man’, their marginal tax rate was 95% (1 for you, 19 for me). For every dollar they earned, they got to keep a nickle. (Not going to do the whole pound/pence thing).
Here’s another clue for you all: if you or I get taxed excessively, there’s nothing much we can do about it – the taxes come out of our paychecks, and, besides toying with the deductions and dependents, we’re pretty much stuck with it. BUT – if you’re George or John or Paul, guess what? You can move to America or some other country where they’ll let you keep more of your money. Which is what they did.
The moral of this story: Taxpayers will do things, sometimes extreme things like moving to another continent, to avoid taxes. The better off – in this case, the concepts apply to both the truly wealthy and the highly compensated – the more motivated and able you are to mitigate your tax burden. Keep this in mind as we revisit the concepts outlined in the last post.
So, in the last post I posited that the rich – the truly rich, meaning people who do not rely on taxable income to pay the bills – do not pay taxes. To be more precise: for the truly rich, income taxes are at most an annoyance, one they can easily avoid it it starts to bug them. So, for example, maybe Bill Gates decides to pay himself $10M a year, and, in a bout of unconscious civic feeling, decides he’ll go ahead and pay the income taxes (as opposed to having his people figure a way for him to realize the benefits of that money without having to recognize it as taxable income). So, at, let’s say 40%, he pays $4M in federal income taxes.
Wow, we little people really stuck it to him, didn’t we?
Let’s also say that his holdings in Microsoft appreciated an historically modest 10% that same year, from $40B to $44B. OK, so Bill’s net worth has increased by $4B. He paid taxes of $4M.
His tax rate, figured as a percentage of his increase in wealth, is 0.1%. If he wanted to take $100M salary and pay taxes on it, he’d be paying 1%.
Meanwhile, let’s say I’m doing really well, making $150K/yr, and I pay at the full federal income tax rate – $60K (keeping it simple, here). My equity in my house (ha! I slay me!) increased $20Kand I added another $20K to my retirement account and savings.
My total net worth increased by $40K. My tax rate, figured as a percentage of my increase in net worth, is 150%.
Final case: I have no net worth. Plenty of people out there making $100K or more do, in fact, have no net worth, not to mention the millions who make a more typical amount of $50-$60K who have a small, zero or even negative net worth. No savings, no equity in a house, no retirement fund – or, the total of those things is less than their credit card debt. For people like that, the tax rate figured as a percentage of wealth is infinite, or nearly so in effect.
So, rich people, in comparison to their wealth, effectively pay no income taxes – they’re not losing any sleep worrying about an increase in income tax rate. The people losing sleep are families with good but not amazing incomes – say, $100k to $300k. Those people (and, disclosure time – I’m one of them) really are looking at real money. Sure, If you make $300K, you can certainly ride it out without much pain, but, on the low end, assume you have a kid or two in college – you make too much to get much aide, and might be forking over $50K+/yr in tuition – increasing the marginal tax rate has real effects. Not that anyone working a minimum wage job should feel sorry for them (us), but rather recognize that the situation of the well compensated wage earner is different in kind from the situation of the truly wealthy.
Now, Get Back. The Beatles were in the process of becoming fabulously wealthy when they ran into the English IRS-equivalent. So, they moved. Similarly, rich people, when faced with taxes that might materially affect their wealth, take prudent steps to minimize their losses and risks. These run every where from setting up trust funds and foundations to parking money off shore to simply buying up enough senators and representatives to ensure that nothing untoward happens to their wealth.
(I sometimes amuse myself imagining wealth in terms of what level of elected official that money could realistically buy off. Millionaires can buy off local guys. Multimillionaires can ‘influence’ state officials. Well before you get to $100M, you can start working federal. Billionaires are multinationals in and of themselves. Bill Gates can get face time with anyone south of God Almighty. But I digress.)
The rich think in terms of net worth. We working stiffs think in terms of annual earnings. We pay taxes that are a meaningful percentage of our income, and a meaningful percentage of our net worth (if any). The rich do not.
Finally, here’s another key difference between people who live off their paycheck (no matter how well compensated) and people who live off their wealth: We wage earners cannot do much of anything about the taxes we pay. We can try to elect people who we think will cut or at least not raise our taxes, or (more commonly) elect people who promise to ‘soak the rich’, by which they mean ‘increase taxes on other wage earners who make a bit more than we do’.
But for the truly rich, that fraction of a percent of the population that own something like 35% of all privately owned property in this country (and exert control over most of the rest – that’s a topic for another post) they can do something about taxes. They have already done something about taxes. They don’t pay them.