mlsoft and others here discussing progressive and regressive taxes. When Bill Gates' marginal tax rate is half or less that of my wife's tax rate, it is regressive. Gates' marginal tax rate is between 10% to 20%, my wife's marginal tax rate is above 50%. How come? A great majority of Gates' income is Capital Gains and "Super Capital Gains" taxed at between 10% to 20%, since his taxable and "earned" income are well above the Social Security threshold he does not pay the "payroll" taxes on most of his income (15.5% for most mortals with up to about $75,000 annual income or so). Take the "normal" marginal rate of 36% add to that payroll taxes (all independents pay both parts, employer and employee) and you get that most "Middle America" in the annual range of $60k to $100 K have much higher marginal rates than Bill Gates. That is regressive.
A major problem with current taxation is the gap between corporate taxes (35%) and the "ultra rich" (above $1,000,000 annually) rate at 39.6%. To avoid paying this extra 5% or so, a full class of people are forced to incorporate (chapter C) to pay the lower rate. That creates unnecessary waste (legal fees and accounting fees, which are, of course tax deductible). You want to repair the system, one of the things that need be done is to remove the incentive of creating artificial corporations. I have not looked yet at the marginal taxes on LLC, maybe someone could enlighten us on that. One needs to make the differential in tax rate much smaller. As part of the elimination of double taxation on dividends, that could be done. Make the dividends tax deductible (just as interest is) to corporation, and to make that change "revenue neutral", raise the marginal tax rate of corporations by about 1% or 2% and reduce the marginal tax rate on individuals to bring both to about the same level (my guess is that a gap of 1% to 1.5% will not suffice to get individuals to create artificial corporations). You achieve few important things with that:
The binge of corporations buying their own stocks at multiples of book value, a simple scheme to pay tax free dividends to stockholders, will be reduced (corporations would limit their buying of their own stock when it is really under valued, or under book value).
Corporation's will move to a better balance between equity and debt since there will be no tax advantage for interest paid on debt.
Double taxation on dividend will be eliminated.
Interest and dividends received will have the same tax treatment. The current proposal of making dividends non taxable will create a disaster when investors forget the difference between debt and equity, and will be moving to overweight equity (high risk) with its return (dividends) non taxable, but debt's (safer than equity) returns (interest) still taxable.
Finally, by making the dividend tax deductible to corporations but taxable to recipients, we will avoid a catastrophic break down of the "tax free" debt market, just at a time when many tax free authorities need good and low cost access to the debt markets.
Beware of the law of unintended consequences....
Zeev
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