What If The Tax Donkeys Rebel?

Authored by Charles Hugh Smith via OfTwoMinds blog,

I would hazard a guess that an increasing number of tax donkeys are considering dropping out as a means of increasing their happiness and satisfaction with life.

Since federal income taxes are in the spotlight, let's ask a question that rarely (if ever) makes it into the public discussion: what if the tax donkeys who pay most of the tax rebel? There are several likely reasons why this question rarely arises.

1. Most commentators may not realize that the vast majority of income taxes are paid by the top 10%--and that roughly 60% are paid by the top 4% of households. (A nice example of the Pareto Distribution, i.e. the 80/20 rule, which can be extended to the 64/4 rule.)

As David Stockman noted in Trump's 1,500-word Airball, "Among the 148 million income tax filers, the bottom 53 million owed zero taxes in the most recent year (2014), and the bottom half (74 million) paid an aggregate total of just $45 billion. So let me be very clear. There was still $4 trillion left in the collective pockets of these 122 million taxpayers — even after the IRS had its way with them!

By contrast, the top 4% or 6.2 million filers paid $802 billion in Federal income taxes. That amounted to nearly 58% of total Federal income tax payments."

2. Few commentators draw a distinction between earned income (wages and salaries) and unearned income (dividends, interest, and more broadly, rentier income streams from the ownership of productive assets.

Here are a few examples to clarify the difference. Let's say a couple earn $300,000 a year--a nice chunk of change, to be sure, but since this is earned income, it's exposed to higher tax rates: 33% and up.

The primary tax breaks available to wage earners are mortgage interest and tax-deferred retirement contributions (IRAs and 401Ks). But there's only so much income that can be sheltered with these deductions. The household earning $300,000 may not own much in the way of wealth, and might even devote much of that income to servicing student loans, paying private school tuition, supporting elderly parents, etc.

If this household is typical, its primary wealth/assets are home equity and retirement funds. A house doesn't generate income, and any income generated by retirement funds is unavailable until retirement age, unless the owners are willing to pay steep penalties.

Now compare the hard-working folks earning $300,000 with a couple who don't work at all, but live off a rentier/investment income of $300,000 annually. Long-time readers know I often distinguish between assets that don't generate income (the family home, etc.) and assets that produce income, i.e. productive assets such as family businesses, stocks, bonds, commercial real estate, etc.

If these wealthy folks are typical, much of their income is taxed as capital gains at 15%, not 35%, and they also avoid the Social Security/Medicare payroll taxes paid by wage earners and the self-employed.

If we separate out these sources of income and types of wealth, we can distinguish two separate classes of high-income taxpayers: those who earn a lot of money and pay a lot of taxes, but who don't get much income from productive assets/wealth. Furthermore, any increases in the value of their primary assets (the family home and retirement funds) are not available in the same way as gains registered in stocks, bonds, and other income-yielding assets.

These high-earners are tax donkeys--they pay much of the nation's income tax but have to work hard for that privilege. While they typically have considerably more wealth than lower income households, their wealth is either inaccessible or unproductive, i.e. doesn't generate income.

The top 9.5% of households are tax donkeys to some degree, while the top .5% are typically rentiers who live very well off the income streams flowing from productive wealth (apartment buildings, ownership of businesses, stocks, bonds, etc.)

At some point, tax donkeys may decide that it's no longer worth it to work so hard, and so they downsize, retire, sell the business, etc.--get out while the getting's good. The average wage earner may reckon that those making the big bucks and paying the big taxes would never stop slaving away because their net income would drop--and who would voluntarily let their income decline?

I would hazard a guess that an increasing number of tax donkeys are considering dropping out as a means of increasing their happiness and satisfaction with life. When the often overworked tax donkeys start bailing out, there may be no substitute source of taxes.

Those who reckon some new tax donkey will quickly take the place of the retiring tax donkey overlook the fact that many are entrepreneurs and/or highly experienced professionals who can't be replaced as easily as a typical salaried person.

Courtesy of my esteemed colleague Lance Roberts, here are some charts that illuminate the widening disparities of income and wealth that differentiate those who pay little income tax, the tax donkeys and those who pay lower rates of taxes on unearned income: (Fed Admits The Failure Of Prosperity For The Bottom 90%):

Family income:

Family financial assets:

Business equity:


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Comments

kwaremont Five Star Tue, 10/03/2017 - 09:13 Permalink

well, well... exactly... and these 100-200% GDP minidebts are just a drop in the ocean of DEBTS OF "SOCIAL SYSTEMS" - or rather promises of political snake oil sellers to the sheeple

these are estimated only for the US to be at least 15x GDP, that is 1500% - and nobody even dares to calculate it for Europe where the generational fraud ponzi scheme called PAY AS YOU GO pension system is much more cancerously spread... can be 2x, 3x worse

so now you understand why the ruling establishment is so nonchalant in generating another 10-20-50% of GDP of new debt... why not, if you add to the monster pile yet another bit to surive few political years and extract few more billions from the system...

of course, it's absolutely unpredictable when and why it crashes since any tiny butterfly effect can be a starter, but once the madness goes exponentially up, it's clear there's not much time left

In reply to by Five Star

NumNutt kwaremont Tue, 10/03/2017 - 10:22 Permalink

Funny thing is I came to this very solution like a month ago while sitting in bumper to bumper traffic, it went something like this.."What the fuck am I doing? and why?".So I am currently in the process of disconnecting, well actually have been for years, but this time the end goal is very near. This tax ass is getting ready to wonder out to the pasture.....Good luck all you innercity Obamacare, EBT card carrying, obama phone talking leaches!!! Get some other sucker to pay for that crap!

In reply to by kwaremont

Manthong NumNutt Tue, 10/03/2017 - 11:16 Permalink

 
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When a country is locked into debasing its currency by creating trillions of government bank debt through currency creation, taxes are not needed at all… just create (“print”) more debt out of nothing.

In reply to by NumNutt

Lumberjack Tue, 10/03/2017 - 08:22 Permalink

Accused in Mass. RMV identity theft plot, 5 agree to plead guilty in effort that netted up to $500 per ID

https://www.google.com/amp/s/articles.masslive.com/news/index.ssf/2017/…

Five people accused of taking part in an identify theft scheme at the Massachusetts Registry of Motor Vehicles (RMV) are agreeing to guilty pleas, federal prosecutors said Monday.
The case started after the Massachusetts State Police received an anonymous letter in October 2015 alleging a RMV employee was handing out state IDs and drivers’ licenses, and an investigation showed several employees gave undocumented immigrants the IDs in exchange for cash.

J J Pettigrew Tue, 10/03/2017 - 08:25 Permalink

Our form of government as crafted by the Founders was forever altered with the Federal Income Tax.A system in which WE send money to a centralized point, people there take their cut (Washington DC area always in economic upswing), then we elect (hire) people to go beg for it to return to our localities.The anti federalists warned of the ability of the federal govt to tax like this within the states.  Withheld tax dollars to coerce the states to the tune of federal wants is the result.John Marshall said "the ability to tax is the ability to destroy" in McCulloch v Maryland.  That case involved the State taxing federal paper....last time that phrase was ever used....I guess that door of logic only swings one way 

Simeon ben Gam… J J Pettigrew Tue, 10/03/2017 - 11:15 Permalink

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The solution is all income no matter how received is taxed at 10% or whatever number decided up with NO deductions or exemptions of ANY kind period. If you receive a welfare check 10% tax. Once the tax rate is set it can't be raised unless each house of congress votes 85% to do so and then a national referendum requiring an 85% for vote is required to increase the tax. In addition require the federal budget to be balanced and do not allow any off balance sheet expenditures. forbid the FED from increasing the money supply without express approval of congress, again 85% vote required.

In reply to by J J Pettigrew

Bemused Observer Simeon ben Gam… Tue, 10/03/2017 - 14:46 Permalink

Now why on Earth would you tax a welfare check? It's coming from the same government...all you're doing is creating bureaucratic requirements that end up COSTING you far more than you'd ever collect...from YOURSELF!Stupidity like that form a much larger part of our budget than most would believe...a sort of financial masturbation that produces nothing but feels real good. I think it's because a lot of people are so intent on 'seeing everybody pay' that they don't recognize the stupidity of the suggestion. A lot would take the position that those poor should have SOME skin in the game...but forget that they are poor and so skinless. So, after giving them some 'skin' to live, then you can turn around and retake it so they are 'invested' in the process... Any idea how incredibly stupid this is? Those poor are no more 'invested' in the process than they were before...YOU are the one 'invested', it was your money they got in the first place to be able to afford their 'investment'...dummies! And after all that, those poor are STILL poor, and won't bepaying anything (that you don't give them first) and now you've got a whole new bureaucracy to collect that money that you now have to support. Now what was it you were trying to teach all those poor folks again? Because I think they're confused. Maybe people ought to stop trying to 'teach others a lesson' and just fix the fucking problems we have...never mind trying to make sure everything adheres to your preconcieved notions of what constitutes morality. Just STFU and FIX the broken shit and leave the moral judgements to God. He is much better at fixing them than you.

In reply to by Simeon ben Gam…

Bemused Observer Moving and Grooving Wed, 10/04/2017 - 13:50 Permalink

Yes I do...(and I'm grateful I found a place to post my rants unmolested) but am I wrong here? As an 'observer', I often see stuff that those too involved can't see. And what I see too often is people deliberately making their lives much more complex and difficult than they need be. All too often it is out of a stubborn insistence on 'correcting' all those we disagree with. Or on exacting some 'punishment' from them for their many 'sins'...whatever.Those people seem so intent on their mission that they'd actually punish THEMSELVES to make it happen. And they do...you get stupidity like drug-testing welfare recipients, even though the cost of the testing exceeds any savings realized, making the program MORE expensive, not LESS. And you get a bunch of people screaming "No!" to any kind of student loan forgiveness, even though they will expect those very same students to turn around and purchase their houses when they downsize...they will even demand that government HELP those kids buy, so as to preserve their equity, rather than lower their price...but forgive that student debt? No way...  The problem isn't money, or work ethic, it's that too many people are just TOO concerned with what someone ELSE might be getting, and with whether they 'deserve it' or not. Even if it doesn't take a THING away from them, they just can't stop obsessing over that one undeserved (in their mind) thing that the guy next to them got. This is the curse of human existence...and why God told us to mind our own business, and tend to our OWN sins, repeatedly. Never mind the mote in your neighbors eye, tend to the log in your own first, yadda, yadda, yadda... If mankind were offered entry to Paradise, there'd be some bunch at the front of the line, blocking everyone from getting by, just so some guy in the back who they deem 'undeserving', can't slip by. And they'd claim the high moral ground for doing so.

In reply to by Moving and Grooving

ArkansasAngie Tue, 10/03/2017 - 08:26 Permalink

All recent growth has gone to the wealthiest. IMO ... that transfer of wealth needs to not only be stopped, it needs to be reversed. Any tax reform which does not actuall facilitate a redistibution from those whose wealth has been trickled up is a non-starter.  

ArkansasAngie autofixer Tue, 10/03/2017 - 08:51 Permalink

Nope.Not at all.This isn't a capitalism vs socialism issue.It isn't free markets which facilitated  the wealth transfer which has taken place.  It's a thumb on the dad gum scale that did.  It's the bailouts.  It's ZIRP.  It's taxing employment ... work ... at a higher rate than passive income.I ... for one ... don't want a tax which puts one more dollar in Buffett's or Soros' or Zuckerman's pocket.  TBTF ... my ass   

In reply to by autofixer

Kayman ArkansasAngie Tue, 10/03/2017 - 10:56 Permalink

Exactly right Ang.Wealth is stolen via the Financial Mob facilitated by the Political Mob.My main gripe with being a Tax donkey was collecting money for the government.  It has taken six years but I have down sized to 1 employee- me.  And the business I was in, there are no people left with the skills. Fuck the government, of every stripe. 

In reply to by ArkansasAngie

Jack McGriff ArkansasAngie Tue, 10/03/2017 - 10:23 Permalink

Yep, that's because the wealthy do not have incomes subect to the progressive tax rate, which really only exists to prevent people like you and me from ever becomming financially independent!  And it is working quite well, especially considering the fact that so many people are brainwashed and tarded to the point that they get irrationally pissed off when there is ANY talk about lowering the highest income tax rate for the wage donkeys!  To their own demise, these fools ensure they will NEVER get rich and will continue to be burdened by a barrier otherwise known as the progressive income tax rates!

In reply to by ArkansasAngie

MisterMousePotato Jack McGriff Tue, 10/03/2017 - 16:52 Permalink

Indeed and in fact, the current bandied about tax reform plan actually increases the lowest tax rate from 10% to 12% (IIRC).Now, if you stop and do some rough, simple arithmatic in your head, you'll see that that change really doesn't amount to very much (or any) money at all unless and until one's income begins to significantly exceed medians and averages and such, but, still ...It simply sucks as a matter of principal even if the money were being used for things such bottom tier taxpayers actually support and/or benefit from, but the fact is that I doubt very many low income working stiffs agree with taking money from them and their families and, for example, giving it to Muslim immigrants whose stated purpose is to steal from them, live off them in perpetuity, rape their women, enslave their children, kill them, and destroy and replace their nation with a 9th-century theocracy where they are a permanent underclass. Or giving the money to public employees who are already paid multiples of what they earn for less work. Or, or ... what?What does the federal government actually do that any sane, thinking person can agree with?The only things that I can think of that have worked out well (and, even then, both had real rough patches at first) are low flush toilets (finally, they actually make the do-do disappear satisfactorily) and EPA Phase II woodstoves (which produce twice as much heat with half as much wood as my ancient coal-burning contraption built by dwarves during the Middle Ages. The fact that the EPA's motives were not pure in mandating these things does not change the fact that they forced very positive changes).Otherwise, I am hard pressed to think of anything that is not wrong or evil or, at best, counterproductive.

In reply to by Jack McGriff

trueFacts Tue, 10/03/2017 - 08:28 Permalink

a more important loss is that when the tax donkeys bail out, there is no substitute to replace the real-world work that is being done ...seems a much more important issue than there being no substitute to pay the taxes of the bailing tax donkeys. ...maybe that is the real reason congress is setting up to allow infinite immigration

MisterMousePotato Kayman Tue, 10/03/2017 - 17:07 Permalink

Actually, even there, you are wrong; there are no entrepeneurial skills.When the federal government imports a Pakistani Muslim whose stated purpose is to steal from us, live off us in perpetuity, rape our women, enslave our children, kill us, and destroy and replace our nation with a 9th-century theocracy wherein we will all be second-class citizens, the federal government gives them, inter alia, a large sum of cash that they use to buy a 7-Eleven. They are also exempted from paying taxes for five years.To say that this gives them a bit of an (unfair) advantage over native-born Americans is, I think, an understatement.And, in five years, they and the federal government import their cousin, to whom they sell the business, and the process repeats.Entrepeneurial skills, my ass. Sounds more like invasion and genocide orchestrated by our government and a nation of clueless voters.The fact that they go around and shoot up Christian churches now and again is just icing on the cake.

In reply to by Kayman

iveshrugged Tue, 10/03/2017 - 08:41 Permalink

Trust me, I think about shrugging every day.  I often dream of just dropping out, doing all transactions in cash, off the grid, and not pay a f*(king dime in taxes any longer.  Just watching all the lazy dependent entitled losers, who all hate our country by the way, enjoying their pathetic lives on my back.Rand had it right though, the statist leftist parasites know that they can pile more taxes, more rules, more government on our backs, and we'll just get up everyday and trudge off to work.  It's in our genes.  We need to create, we need to do somthing, anything, to feel real, to make a difference.  And those parasites laugh, as they rape us of our liberty, our property, our freedom, because they have the power (govt), and they know we'll never stop.Makes me sick to think about it.

Dumpster Elite Tue, 10/03/2017 - 08:35 Permalink

"...tax donkeys are considering dropping out as a means of increasing their happiness and satisfaction with life."

Ahem, excuse me??? Did you see the new Mercedes that the Jones' just bought??? And the kids want a new inground pool, and it BETTER look nicer than the McMansion pool across the street! Now ask your boss if there's any way you can put in for more overtime. You can have "happiness and satisfaction with life" when we throw dirt over your casket!

Lt. Frank Drebin Tue, 10/03/2017 - 08:43 Permalink

This tax donkey is in process of "rebel". In due time, I'll be leaving this sullen place, sailing the world searching for moral redemption. We have fallen so low that I caould probably find moral redemption at a whore house, but the important thing is the journey I suppose.