Dennis Gartman is an internationally acclaimed expert on markets of all kinds. His daily newsletter comments on things financial and political. He recently did some calculations regarding Barack Obama’s proposals for tax increases.
First, Obama has proclaimed the “Bush” tax cuts “toast.”
The highest marginal tax rate will go from 35% to 39.6%.
The estate tax, which is entirely eliminated in 2010, will revert back to 45% under Obama.
The tax on dividends and capital gains, now 15% will rise to 25%.
Social security (FICA) tax increases will hit well-to-do people the hardest. Presently, FICA taxes are paid on incomes up to $102,000. Self employed people pay 12.4%. If you are employed, this amount is split between the employee and the employer. Obama wants to remove the cap.
So, for residents of my state, Virginia, people who are self employed and earn more than $200,000 will pay a tax of:
- 39.6% (income)
- + 5.75% (state)
- +12.4% (FICA)
- = 57.75%!
And don’t forget property taxes, car taxes, sales taxes, X taxes, Y taxes, Z taxes.
And keep in mind that Virginia is a relatively low tax state. It will be much worse in places like New York or California.
All those taxes and being hell bent on losing the war. I marvel at the people who plan to vote for this freak of nature.
UPDATE: I have been reminded that we forgot to add Medicare taxes. The self-employed pay something called the SECA (Self-Employment Contributions Act) tax. That consists of 12.4% FICA and 2.9% Medicare. So, take that total Obama tax grab up over 60%.
4 comments:
I believe that the 39% rate is the marginal rate. The amount the taxpayer would pay on the last of those $200,000. The average would probably be closer ot 20%-25%. Still, the total tax bill is outrageous and Obama doesn't care.
Virginia taxes are high already. We are taxed on utilities, groceries, cars, real property, income, and so on.... Obama is a control freak, with a big ego. We are taxed every time the money moves, thus, tax breaks work. Government does better when money moves! Over taxing will stop spending, and investing, causing the economy to be worse than it is now!
Firstly, the amount paid to the state is tax deductible against the federal income. Second, you forgot the requirement for paying 2.9% Medicare tax, but also neglected to account for the 7.65% exclusion. Also, income between 102k and 200k would not be subject to either Social Security or the Medicare Tax. Bottom line, a $200k earner would pay $14k in SS and Medicare Tax. You also neglected to acknowledge that the 39.9% bracket is something that a $200k a year earner would never reach. A married joint filer would not even reach the proposed 36% bracket. A married joint filer would pay: $11.5k State (5.75%), $41.5 Federal (20.75%), $14.5 Social Seciruty and Medicade (7.25%). This would bring the total tax to 33.75%, still an outrageous sum, especially considering that is does not account for tax on transactions such as sales tax and all those fees added to things like phone bills.
To all who quibble with these figures; they are what they are. For the nit pickers, notice I said that people who earn MORE than $200 thousand a year.
When financial analysts discuss tax rates they discuss marginal rates. Marginal rates are the amount of tax paid on the next dollar you earn. This determines the deterrent effect of working to earn that next dollar. If the school bully takes your milk money every day, pretty soon you stop bringing it. If the government takes too much of the next dollar you earn, pretty soon you decide not to put in the effort.
People who earn large salaries – in excess of $200 thousand a year, typically work very hard for that money, putting in long hours; some spend a large part of their lives away from their families … on travel or in the work place. At some point they will ask, why do this?
The psychological effect of government confiscation of your labor is for you to labor less. And that has a large effect on the total wealth of the country.
Dennis Gartman, who wrote the piece I quoted, tells of a trip to China. He was in a car that had a fender bender in the country. While waiting for another car to arrive, he noticed that the field on one side of the road had a well tended crop of grain while the field on the other side had the same crop but was in poor shape. He saw the farmer in the well tended field and, through an interpreter, asked him about this. The farmer told him that he farmed both fields, but that he owned the well tended field while the government owned the poorly tended one. Then he went on to say that “next year I’ll own both fields.”
Gartman had a sudden insight. He frequently speaks to groups of analysts. At the next analyst meeting he predicted that China’s need to import grain in the coming years would be LESS than anticipated. Why? Because the Chinese government would allow farmers like the one he spoke to to own more of the land and that would result in greater production, reducing the need for imported grain. He proved to be right.
The bottom line is this: higher tax rates do not necessarily generate more government revenue because people are not dumb. They will do a great many things to avoid paying confiscatory taxes, including not working long hours. The result is an inefficient and stagnant economy in which class warfare becomes the main occupation of opinion shapers and decision makers while the average family suffers as they try to get their share of an ever smaller pie.
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