The fact that there are people making 10,000 times as much as the highest bracket in a single year suggests whoever is proposing these tax laws does not actually want to solve the problem. There should be brackets going up to a billion dollars, adjusted every time someone makes an order of magnitude more than the highest bracket.
Also, making 400K does not make you rich. In California, you are actually bringing home around 200K with high cost of living in areas where an engineer might make that much, whereas the top 1% (measured by household wealth instead of income) still has a net worth of ~$10M.
Are you serious? 400K definitely makes you rich. As if you do that for 10 years you have 4M dollars, 20 years? $8M I get that COL lowers that, but if you are making 400K you're not renting.
If you are making $400k in California, in places where you are likely to make that much, quite a lot of that is going to taxes and expenses. Sure, you might be able to save $2M over a decade, which makes you well off for sure, but "rich" is a bit of a stretch when all it affords you is paying a mortgage on a mid-century formerly middle-class house vaguely within commuting distance.
Calling that lifestyle "rich" just serves to muddy the water. This is soundly in the category of upper-middle class and decades away from being financially independent.
This is a staggering lack of perspective. The average American takes around ten years to make that amount of money.
Tell them at the end of the year you’re going to give them the next nine years of paychecks as a Christmas bonus and then ask them if they feel financially independent.
This is a bizarre take. The average American is more likely to live in the equivalent of Flyover, Kansas than Sunnyvale, California. I've lived in both, more the former than the latter. I'm sure the person living in Sunnyvale would love to pay $55k for a nice brick two-story house (current price for one I grew up in) but that doesn't seem to be an option in Sunnyvale.
Tell that hypothetical average American to buy a mediocre house in Sunnyvale and see what reaction you get.
Nobody cares what lifestyle $400k can buy in Mississippi because very few people are making that much in a locale that cheap.
> The average American is more likely to live in the equivalent of Flyover, Kansas than Sunnyvale, California.
Or, 90 minutes from Sunnyvale, an amount of time they are keenly aware of as they commute there every day to clean the clothes, cook the food, and maintain the real estate of the “not rich” people you are describing.
> Tell that hypothetical average American to buy a mediocre house in Sunnyvale and see what reaction you get.
They would say I’m sorry I can’t, because the prices of those houses have been bid up by the rich people who currently live there and make $400k a year.
> Nobody cares what lifestyle $400k can buy in Mississippi
People in Mississippi do. They also get a say in setting tax policy for the U.S. which is the topic of current discussion.
You're ignoring the people who make nowhere near 400k who also work in California, but have to do things like living in a trailer park, or winning a FAANG lottery for teachers in the local school district to have subsidised housing, or commute dozens of miles.
It's all relative. But no, making 400K after 10 years does not result in $4M. If you make that 400K as an engineer in a coastal tech hub and put all the savings in the bank after taxes and expenses, you have 1M after 10 years. Not much more than the median price of a home in LA county, and far below the median in SF.
In other words, you have accumulated 1/10000 the wealth of your FAANG employer.
This is the problem. Income and cost-of-living is a spectrum and varies wildly from place to place. And everyone wants to put some kind of hard line on tax rates, etc. To me, this just underscores that income tax, as a concept, is completely fucked. You can offshore your earning and shelter them if you're savvy enough. If you earn your income from capital gains, you're paying lower rates regardless, from whatever percentage of those gains happen to fall in your particular jurisdiction.
A federal sales tax with exemptions for basic necessities (food, rent, school supplies, etc.) would make so much more sense, as already exists in 7 states at the state level.
In this way you don't have to worry about whether income was earned offshore or onshore, if you're buying stuff or services here or importing stuff, you get taxed on it.
Sales taxes are completely regressive, because the rich do not spend much of their income.
Even with the exemption for basic necessities, a person who earns 100x what you do will probably spend on the order of 5-10x more than you, thus making the tax very regressive.
Not at all, especially if you exempt basic necessities. Poor would still pay low to zero tax because those costs are a greater percentage of their income. And you could even subsidize the taxes with a universal monthly payout.
Such a scheme doesn't change things for the poor (defined by those who don't earn enough to pay any taxes). But it does change the effective tax rate ratio between the middle class and truly rich. The middle class will pay a higher effective tax rate than the truly rich, because the middle class spend more of their income.
> As if you do that for 10 years you have 4M dollars, 20 years?
If you're making 400k post-tax, sure. If that's pre-tax income, however, you're not making 4M after 10 years.
After federal taxes you're making closer to $286k, roughly. This is just for the privilege of being a US citizen - even if you don't necessarily spend the majority of your time in the country.
Assuming this is a CA software engineer, it's closer to $250k. This is just for the privilege of having a tax basis in CA.
Assuming you actually do live in the Bay Area as a single bachelor and would like the privilege of having your own apartment that you don't have to share with others (remember, you're "rich") a nice unit to yourself will run you roughly $3k/m -> $24k/y. So we're much closer to $225k/y.
Even assuming this person has no car, no social life, and no metabolism we're still running at roughly half of your projections. Which is still a fair chunk, to be sure. But it's still half of their money going towards the privilege of obtaining money.
EDIT: just saw this bit
> I get that COL lowers that, but if you are making 400K you're not renting
This depends, as buying is not always superior to renting, especially when you're talking a house. A house is a pretty big investment - so much so that a lot of financial circles still spend a lot of time between "get a home, what isn't equity is a tax write off" and "just rent, no surprise expenses, remain more liquid, invest the difference between your rent and a typical mortgage in the market".
The last time I was looking in the South Bay area, average prices for a 2 bedroom home in a suburb were ~$1.2m. This is a $240k down payment and ~$7.3k monthly (15 year conventional, down to ~$4.7 for 30 year but we're outside of the "10/20 years" we described above and paying more interest for it besides).
If we account for all that, we're looking at much closer to $190k being available to us after the privilege of living and working (that's adjusting for the taxes, but it's not so clean as interest is a sliding scale over the years) - just now we have a place to ourselves that cost us around a year or two of savings time just to start the house purchase and a recurring expense that's over double the nearby rent. This is largely not favorable to the majority of people unless they're wanting to lay roots. That said, given people seem to be leaving I'd imagine housing prices will become less steep in a matter of years; albeit whether it makes it more reasonable to buy than rent for those not looking to stay for 15+ years remains something of an open question.
I see multiple people in this thread talking about high taxes without knowing how tax brackets actually work in reality. I wish people understood them. It's very easy to senationalize high taxes.
I'll make up some numbers to make it simple. Let's say there's 2 brackets. Everyone who makes under $399,999.99 pays 0% tax. And everyone who makes over $400k pays 90% tax. You make $400k. How much do you owe the taxman? Did you know it's only 90 pennies out of $400k? The first $399,999.99 you make is in the 0% bracket. It will always be taxed at that rate. Only the amount over that ($1) will be taxed in the next bracket.
Now in reality, we have 7 tax brackets. This is how much you really pay, assuming filing single for 2020.
$9875 of $400k @ 10%
$30,250 of $400k @ 12%
$45,399 of $400k @ 22%
$77,775 of $400k @ 24%
$44,049 of $400k @ 32%
$192,649 of $400k @ 35%
You wouldn't even make enough to pay anything into the 7th bracket @ 37%.
Personally, I believe yes, we need to raise taxes on the uber rich just to slow their growth. NO, it will not affect you who make $400k (which is already wealthy compared to most of America!) And add more brackets while we're at it. There was a time in America where the uber rich had a 94% tax bracket. I'm not saying we need to go that high. But 37% and too many deductions is a joke.
I don't think anyone on either side of this thread is confused by this simple concept. But perhaps in writing your own comment you realize how unprogressive these tax brackets are. You start paying pretty close to the top rate on income over 44,000. And then it stops increasing at a tiny fraction of the incomes of the truly wealthy (the wealthiest of whom don't need help from offshore tax gymnastics -- they just pay the highest rate on the capital gains bracket which is even LESS progressive). Not to mention people making ~400K are also significantly affected by employment taxes (social security and medicare) which are extremely anti-progressive.
So a tax increase at 400K will indeed affect someone who makes 400K (or maybe ~450K, or someone who files jointly) now or in the ensuing years when they get raises to combat inflation. The brackets never keep up with inflation, because the government uses CPI to pretend like there isn't much inflation. The highest bracket in 1913 was 1 million dollars (NOT ADJUSTED FOR INFLATION).
Sure, the tax bracket in 1913 might have been 1 million USD (not adjusted for inflation). The highest tax bracket was also paying 67 percent in 1917 and 77 percent in 1918 [1]. During WW2, the tax rate for the highest bracket jumped to a whopping 94% [1]. Most people don't realize how low the rates have gotten compared to previous times. Subsequently, as rates have gotten lower, the income inequality gap is near all-time highs [2].
I'm in agreement. But to tax people 67% starting at 400K is ludicrous to me, barring emergency wartime measures (although nowadays the Fed would just print the money and dissolve the value of USD). That 67% rate was for income over TWO MILLION (not inflation adjusted). Using the extremely conservative CPI figure, that's over $25M USD today. Using the median price of a home in the US for inflation, that's nearly $100M. A much more sensible maximum bracket than what we have today.
The point is that the distribution of tax rates is broken, with no statement made about the rates themselves.
Also, making 400K does not make you rich. In California, you are actually bringing home around 200K with high cost of living in areas where an engineer might make that much, whereas the top 1% (measured by household wealth instead of income) still has a net worth of ~$10M.