An Unhealthy Tax Dependence By Lewis J. Walker, CFP(R)

Despite verbal assaults on the billionaire class in some political circles, it’s clear that the U.S. government increasingly is dependent on upper echelons of earners for the bulk of tax revenues. Would you throttle a goose while at the same time trying to coax the production of more eggs?

Bernie Sanders harps, “Almost all new income and wealth is going to the top 1 percent.” Not so, according to a Manhattan Institute report, MI Issues 2016: Are All the Economic Gains Going to the Top 1 Percent? Since the 2008-2009 recession and stock market swoon, the U.S. has been in recovery mode, albeit tepid. But, says the MI report, “an accurate accounting of who is gaining and losing in the U.S. economy requires a broad view across an entire business cycle. While the richest households tend to gain the most during eco­nomic expansions, this is partly because they also lose the most during recessions. Between 1982 and 2007, the top 1% of households received 30%–48% of income growth during expansions and 49%–59% of income declines during contractions.” Politicians love to cherry pick data to underscore whatever point they are pushing, whether entirely accurate or not.

Who makes up the Top 1%? At what household income level do you cross the threshold into the top 1% of earners? Quick. Stop reading. Close your eyes and guess.

What was your guess? $5 million? A billion? Nope. Based on 2014 tax data from CNN Money, with annual household income of $450,000 you are a member of the 1% Club. At $101,000, you are in the top 23% of earners; at $155,000, the top 3%! Are you really going to pay for free college by taxing the 1% and Wall Street harder? The reality is that there are not enough fat cats to skin to feed the “free stuff” kitty.

And who is Wall Street? One can castigate hedge fund managers but if you add layers of transaction taxes to securities trades, those who will pay by and large are ordinary citizens building equity in stocks and mutual funds, IRAs, 401(K) plans, 529 College Savings Plans. Proposals to hike capital gains taxes will hit ordinary investors in mutual funds in the pocketbook.

In 2014 the top 1% paid almost half of all individual income taxes (45.7%) while earning 17% of expanded cash income. (Figures vary depending on the definition of income). The bottom line, it is the “rich” who pay the bulk of the individual taxes. Year 2014 data from Pew Research Center indicated, based on Adjusted Gross Income (AGI), those making less than $50,000 paid 5.6% of individual taxes; from $50,000 to $99,999, 14.9%. Those making from $100,000 to $199,999, 21.9%; $200,000 to $249,999, 5.9%. But note: those making $250,000 and above filed only 2.7% of individual returns, but paid 51.6% of the taxes!

U.S income tax collections are growing in dependence on the wealthy and those whose incomes depend on the health of the stock market and of countless small business owners and professionals who pay taxes via pass-through entities like sole proprietorships, partnerships, LLCs, and S corporations. Here the owners are directly taxed individually on the income based on a share in profits and losses. Publically traded corporations pay taxes at the corporate level and then declare dividends which are taxed to the individual recipient.

Easy money policies from the Federal Reserve Bank have helped prop up the recovery and certain asset prices like stocks and real estate. Those who owned such assets in the last recession took it in the chops. Does it not make sense that the owners of assets would benefit in the recovery versus those who do not invest in nor own financial and business assets? Some of the rhetoric coming from candidates reminds me of a little boy bad mouthing his parents while asking for more allowance!

According to the Tax Foundation, Americans currently will pay almost $5 trillion in federal, state, and local taxes, 31% of the nation’s income. We don’t have a taxing problem. We have a spending problem. Bread and circuses. Shades of ancient Rome!

Meantime, the 2016 tax year is already a third gone. Have you started tax planning for this year? Remember, in the eyes of the tax man, you are the goose!

Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC.

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