Tuesday, March 27, 2012

Why Super Rich People Pay Less Taxes Than Poor People

I think I've touched on this previously, but I just had an epiphany as to why rich people pay a lower tax rate than poor or middle class people. I was wondering as to why they could just simply donate, shell their wealth into these companies and use every single deduction in the book to pay less taxes and finally it all makes sense.

When people get to a point of wealth where it is almost absurd you have to question the ethics of the system put in place. So why is it that they can pay at only a 8 or 9% tax rate while poor people have to pay a 15% tax rate? To say that they pay 8 or 9% off the bat is rather dubious. In fact there are people doubting Warren Buffet who has mingled with millionaires and billionaires on a daily basis.

On paper the percentages of upper class people vary per state, but these people ranges from 3% to  6%. Those high income people on paper would normally pay 33% to 35% of their income if they happen to be in either a salary or a hourly position. But hold on; it is not what it seems on paper now is it?  So how does 33% to 35% turn to that 8% or 9%? The short answer in a complicated process is financial wizardry. The United States has a system put in place where rich people are the benefactors of hidden fringe benefits. One such benefit is tax deductions.

Let's take a 35% tax rate for example: we can simply knock it down with deductions. If you are married you get a small deduction hence our system is biased towards married couples. If you have a child, you get another deduction. Not a big deal right? Well let's add another. I hear that Octomom had big tax breaks just from her kids, but obviously that would just be a ridiculous point and would probably cause a diseconomy of scale within the nuclear family. You can get huge breaks if your paying for their meals, tuition, camps, medical and dental bills. Kids are expensive, but really in the grand scheme of things: adults are more expensive.

Then we have the fact that the 35% can do these same deductions for themselves. They can also tally up their food and hotel costs too and write them off as business trips. On top of this there are tax haven investment shells like a Roth IRA, limited liability companies, and business expenses. Guess what? If they are self employed they can deduct a plethora of things from how much interest they pay on a loan to how much commission they have to pay and they get a fixed percent for tax payment. They can write off gifts, too.

It gets even better when you have employees and an actual business because the deductions skys the limit. Really it does.   You can easily whittle the costs of making extra money down to a mere 8% or 9%. Warren Buffett, without taking any deductions was able to get away with 15% while his secretary wounded up paying more. But the ultimate question that I think many people forget to ask is why does this happen? While I did analyze the upper class bracket, the super upper class, that 1% also falls under the same umbrella.

Financial wizardry only accounts for one half of the solution. The other half is because they can. They have amassed so much wealth that their bargaining power has only become stronger and stronger. If they do not like the rates they are being taxed at, they can simply leave. Their wealth is beyond a point where they are bound by citizenship. They can easily vacate if they feel they are overtaxed. That being said, you should take a look at these companies that change teams. Some of them you might find shocking.  After all when your rich, does the concept of being loyal to a country mean anything or is it just a mere notion to entertain the masses?

Of course not all of the super rich fall under this category. There is still a portion of the super rich that pay their fair share and do not abuse the system. There are still some that do not over deduct themselves to the point of absurdity. Let's face it. Taxes are necessary for the functioning of public goods and services and it keeps government and public sector employees paid.

It is not too late to still get this:

With hard work and determination you can have both of these. This is still a possibility in America.

The fact remains that the rich will always be taxed at a less rate than poor people. They have the power and clout to leave. They can also cut jobs if they feel they are overtaxed. It is futile to complain against a deaf entity. Your cries will go unheard. The best thing to do is work within the system and break away from it. Since I have became middle class, I have been less stressed and I have been able to focus on things that actually matter outside of saving like my health. More times than not, these entities have a high amount of debt to go with their wealth. It is arbitrary for them, (not for us) to control their spending. I would say, do not spend the time hating these individuals even though it is the easiest course of action. I would rather say you should try to not fall victim to their umbrella, by straight boycotting their products and their services. A lot of the super wealthy became so via financial institutions and companies. If they are not going to be good neighbors and pay their fair share or if you think they are not doing their part, do not invest nor contribute to their wealth. It is as simple as that.

Gosh with all this percent battles and political intrigue, I wonder what he would say about the 1%?  He would probably consider them a necessary evil.