The tax man’s taken all my dough …
And left me in my stately home.” — “Sunny Afternoon” by Ray Davies and The Kinks
Growing up on
Want to really get depressed about taxes? Make a lot of money.
The perception that highly compensated wage earners utilize multiple loopholes to avoid paying their fair share is largely inaccurate, especially this year. Now, sometimes large, profitable
But for highly compensated wage earners? Their tax rate just went up, from 35 percent to 39.6 percent. There were also new restrictions on itemized deductions. And even investment income was taxed at a higher rate.
If your AGI is above $300,000, you can’t deduct any charitable contributions on Form 1040, Schedule A. If a man making $75,000 a year wants to tithe (give 10 percent or $7,500) to his church, he can deduct the donation and lower his taxes. But if someone who earned $400,000 last year wants to tithe (give $40,000) and has an AGI above $300,000, he can still give the money, but he can’t deduct the contribution.
A proposal is also being considered limiting what high income earners can contribute to qualified retirement accounts. One problem with this is that not all high earners have been salting away money in a retirement plan for years. Some are 30-year overnight successes, who have traditionally plowed any profits back into their businesses and who need to make up for lost time in building up retirement accounts.
Folks with significant incomes are obvious targets in the goal to increase tax revenues. But we may be rapidly approaching a point of diminishing returns by increasing taxes on the highly compensated. More taxes may mean that these same folks have less money to expand their businesses and hire new employees. And this hinders economic growth.
Continuing to increase taxes on top earners may also actually create a wave of outsourcing, as business owners faced with a growing tax liability consider relocating in more tax friendly climates like The Caymans.