Charles Farrell From “Your Money Ratios” Speaks! Part II

Social Security Act FDR

The following is the second and last part of my interview with Charles Farrell, the author of “Your Money Ratios“.  We discuss the much maligned 401k, whether Social Security will survive, and crowd favorite, how raising personal income tax levels further will ruin America!

The 401K AND ALL ITS GLORY

Question: Why do you think there are so many detractors of the 401k plan? Furthermore, do you think it is fair that the pre-tax limit contribution is only $16,500 for some 22 as well as someone who is 45? Presumably, the average 45 year old is making much more than the average 22 year old, so how come the government doesn’t propose an increased pre-tax contribution scale the older one gets?

Answer: Many people don’t like 401(k) plans because they believe the burden of funding retirements should fall on employers and not employees; thus they would like to see us go back to defined benefit plans that are funded by employers. Well, that is just not going to happen. Employers have no appetite for guaranteeing to pay their workers for 30 or 40 years after they stop working for them. And DB plans are not flexible enough to accommodate a globally competitive marketplace, plus they discriminate against individuals who change jobs or careers. Moreover, many DB plans (particularly government plans) are significantly underfunded and many who thought they had guaranteed retirements may be unpleasantly surprised at some point. So I think the “romance” with DB plans is misguided, but many people would like to see those types of plans again. I just don’t think it’s going to happen.

Then there is another set of individuals who don’t like 401(k) plans because of the limited investment choices and sometimes high expense structure of the plans. I agree with people on this front, and there are problems with some 401(k) providers, particularly those smaller plans that can’t drive better deals on their investment platforms.

But, most plans do offer competitive options and are low cost. It’s important for readers not to lose sight of the primary reason to use a 401(k) plan, which is the huge tax benefit provided to those who contribute; and if you get a match, that is just makes it more attractive. The tax deduction, the match and the tax deferral on growth are incredibly valuable tools to help build your capital. So even with some restrictions, the plans are basically the best place to build your retirement assets.

Regulators Are The Problem! (401K Con’t)

Now, the 401(k) plan itself is not the problem. 401(k) is just a reference to the tax code section that allows for pre-tax deferrals, which is a great idea and a great tax benefit. It’s the regulations and the heavy costs of ERISA that create the challenges. At some point, we may see the ERISA issues relaxed and allow for more open plans. Some big plans already are very flexible and allow employees to open their own brokerage accounts within the 401(k), but unfortunately many aren’t. As technology improves, I expect we will see more flexibility on the investment side.

I wrote an article on the prospects of eliminating or reducing the ERISA burden for Investment News last October that your readers might appreciate.

If you happen to work for a large employer, ask about a self directed brokerage option; you may have one and not even know it; or you might be able to get your other co-workers to help push for that option.

Plus, as mentioned in the book, a lot of this could be addressed by increasing the IRA limits to equal the 401(k) limits and then let employees choose how they want to save. If you like your employer plan, then use it. If not, use your own IRA with the same deduction limits.

With respect to the tax deduction, there is one limit for those under age 50, which is $16,500, and another limit for those 50 and over, which is $22,000. I personally don’t think it’s fair to have a disparity in contribution limits based on age. Everyone should get the same tax benefit opportunity, which at this time means everyone should be able to do $22,000 if they desire.

SOCIAL SECURITY

Question: Social Security’s existence is something you vigorously defend in your book. You highlight that even if nothing is done, people retiring 30-40 years from now will still receive at least 70% of their benefits. You also discuss how you are afraid that the government will over-shift the burden of social security onto those who need it the least. Why do you think the government doesn’t do a better job in aligning the costs of the program with the users?

Answer: Social Security is one of the most successful programs because it is pretty simple. We take in money as a contribution from wages and we pay out money to retirees. It is a good hedge because the assets are not invested in the markets and it’s not a bad idea to have a portion of your income guaranteed by a government pension that you paid for. Having a basic social security benefit actually allows you to take a little more risk with some of your other money.

The problem comes when you pay out more than what people contributed, which is what is happening. The reason this happens is because of a flaw in the structure of social security. It was structured as a social welfare program, not a personal property or ownership plan. Thus, Congress can change the rules whenever they want. And it is easy to grant benefits to get votes especially if you don’t require people to contribute more to fund those benefits. I mean who wouldn’t want a bigger retirement benefit without having to pay for it?

That is what needs to change. We each need a property right in our contributions, meaning it’s our money and in general our payment is based on what we put into the plan. This is critically important to ensuring its long term viability. People get frustrated when they pay in and then don’t receive a fair deal on the payout.

Readers should fight for a property right because they are contributing a huge amount of their pay into Social Security. It is about 12.4% of everything you make up to about $107,000 (you pay half and your employer pays half; or if you’re self employed you pay the full 12.4%). Then readers must save another 12% to 15% in their own plans, which takes us to a savings rate above 25% of pay which is more than sufficient to ensure a secure retirement. But if that 12.4% that goes into Social Security is primarily granted to someone else, then you’ve got a big problem.

The funding issues can be easily fixed at this time if voters insist on electing political leaders who promote a property right to Social Security. Politicians won’t do the right thing until they are convinced that voters want it, so let them know that’s what you want.

INCOME TAXES

Question: Taxes are set to go up for “the rich” who make $200,000 or more in 2011. How high do you think the marginal federal tax rate can go before Capitalism stops working? We’re strong proponents of a flat tax system on individuals above the poverty line given as a percentage of income as well as the absolute dollar amount of taxes paid is completely equal. What are your thoughts on the flat tax, and why people argue against its fairness?

Answer: I am also for a flat tax system for most taxpayers. To me, it makes the most sense. Far too much of our productive brain power and resources are going toward tax management and it’s quite honestly a waste of energy. The only reason we have to do it is because the tax code has become so complicated. I used to be a tax attorney, so I know this area pretty well. But the reason it is complicated is because so many taxpayers lobby for exemptions and want special treatment. They don’t want to compete on a level playing field. And since tax benefits are one of the main ways legislators can reward voters, we have a 10,000 page tax code that is basically incomprehensible.

As far as rates getting too high, we have been through multiple high and low tax cycles. So if rates rise too high, they will reduce economic growth and in the end hurt the average American, at which point people will eventually vote in leaders who want to reduce taxes. The key is to try to reduce your tax rate as much as possible during the high tax cycles by using every tax planning tool that applies to your situation.

As far as the actual tax rate, if you raise individual rates (combined federal and state) up into the 40% range, then I think it will have a detrimental effect on the economy. We are there in many states in the U.S., and I think it will hurt those states.

Readers, would love to hear your thoughts on whether you think Social Security will really be around in 30 years.

Do you think maxing out your 401K alone is enough to retire comfortably on, especially if you believe there’s no SS in your future?  Is $16,500/yr max + any matching really enough to retire on?

Finally, if a smart fella like Charles believes in the flat tax, why don’t you?

Keiju,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

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Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    The problem with a flat tax is what happens in the immediate future? Right now, taxes bring in a certain amount of money. With a flat tax, either it won’t bring in as much, or we’ll have to raise taxes on what is now the lower tax brackets. I don’t see that happen. Can you imagine Obama giving a speech and saying the average American needs to do more to help? I’ll be in favor of flat tax as soon as I hit the threshold where it will lower my taxes! What do you think, the 28% tax bracket?

    I think for me, a 401(k) should be enough to retire on. The problem is that not enough people are contributing enough to their retirement plans. By forcing people to contribute, you’re at least providing them something in the future. Imagine what would happen if there was no SS contribution requirement…people would see all that money in their bank accounts on payday and blow it all!

  2. says

    I think the SSA will be around in 30 years but it’s funds will be so decimated I don’t plan on depending on SS for retirement. Of course I’m a little prejudiced; I used to work in the Federal Building in Kansas City one floor above the SSA’s floor and you could easily tell which floor someone worked on: shirt and tie (pocket protectors were optional) you were either with the Corps of Engineers, the National Weather Service, or the National Oceanic and Administrative Administration (where I worked), and if you looked like a casual Friday gone horribly wrong every day of the week you were probably with the SSA :-)

    I’m working on an article about the “Silver Tsunami” and what that means to retirement, and with our demographics rapidly shifting and people living longer I don’t see how the SSA is going to be able to keep up. This is also going to greatly affect how people view retirement in the near future.

    I don’t think a maxed out 401-K is going to be enough. I want to have as many revenue streams as I can when I’m too old to work, whether that’s silent ownership in a business, managed real estate properties, a Roth IRA, royalties from my many movie and television appearances (I can dream!), etc. I’m sure I’ll also work part-time at something when I’m retirement age just so I don’t get bored.

    I’m all for a flat tax, and am sick at how much more complicated my taxes get every year. I’m sure a percentage of our GDP goes toward collecting and maintaining our current tax system, from the IRS to the tax preparers, companies like Turbo Tax, tax lawyers, etc., most of which would be made unnecessary under a flat tax system.
    .-= David @ MBA briefs´s last blog ..Easy ways to improve your memory =-.

  3. says

    I won’t comment on the specific Byzantine arcana of the US tax and pensions system, but I will say I’m all for a flat tax.

    The idea the rich don’t pay more in tax that gets put about is ridiculous. Firstly, they do – the top 10% pay a huge swathe of the tax bill in the US and the UK (around the 50% mark from memory, but don’t quote me).

    Secondly, 40% of say $500,000 is $200,000. 40% of $50K is $20,000. The rich guy is paying $180,000 more.

    I think there’s no doubt people ease up at work as taxes become punitive. The money I make at the lower tax rates here is worth much more to me than that at the higher rate. I’d rather take a day off work than fund unlimited government largesse.
    .-= Monevator´s last blog ..Playing chicken with house prices =-.

  4. says

    @Monevator
    Bravo mate for coming around to the BRIGHT SIDE! I would never have thought you’d be for fairness and equality in the tax system after all your banker bashing posts! I am shedding a tear right now! Hooray!

    @Matt
    Yes, Charles makes a GREAT point about having a “personal property” angle to it. If the government changes the rules on us for the negative, which they can…. I’ll be pissed, but not surprised. Baby boomers did change everything.

    @Daniel
    There are studies that show a flat tax will bring in MORE revenue than the current tax system, depending on the rate of course. If 30-40% of Americans don’t pay tax, well the flat tax for all will tax care of that for one. That’s equality right there. With a flat tax, less people will try and EVADE taxes, which is another positive. There will be less waste, less energy and time spent, and a much better system.

    17% flat tax on your income is 17%! There is no going around it b/c there are no deductions or shady loop holes!
    .-= admin´s last blog ..The Most Important Tip For Job Hoppers: Join People, Not Firms =-.

  5. says

    @Daniel
    There are studies that show a flat tax will bring in MORE revenue than the current tax system, depending on the rate of course. If 30-40% of Americans don’t pay tax, well the flat tax for all will tax care of that for one. That’s equality right there. With a flat tax, less people will try and EVADE taxes, which is another positive. There will be less waste, less energy and time spent, and a much better system.

    17% flat tax on your income is 17%! There is no going around it b/c there are no deductions or shady loop holes!
    .-= admin´s last blog ..The Most Important Tip For Job Hoppers: Join People, Not Firms =-.

  6. says

    @David @ MBA briefs
    Hmmm, very insightful commentary on being able to tell who works in what government department! Ahhh, the good life sounds good!

    “Silver Tsunami” sounds like a great name! Look forward to reading it. Demographics have really screwed us since we’re all living so much longer.

    Movie royalties and stuff huh? Sign me up! Just remember to be based on of Washington, Nevada, Texas, Florida or several more so you don’t have to pay local state taxes!

  7. says

    @admin
    I’m on board. Let’s do it!

    Still, taxing the poor who don’t pay taxes now would be hard to explain. “You weren’t making enough before so we let you keep everything…but now we need your money.”

    I think it’s a little naive to say that fewer people will try and evade taxes. Sure, it may decrease, but people love underreporting income, whether its in a 17% tax bracket or 33%.

  8. says

    @Daniel
    Who’s to say the 30-40% of people not paying taxes are predominantly the poor? Would love to read that study. I’m sure there are plenty of very wealthy rich who don’t pay taxes that make up that amount.

    You don’t think there will be less people underreporting their income at 17% than 33%, or 39.6% next year? Really? You have to way the costs and benefits. If I’m paying 39.6% next year in FEderal, and it suddenly goes to 17% for every dollar over $380k I make, I am saving 22% and I am DEFINITELY never ever ever ever going to think about trying to under report income.

  9. says

    @admin
    Not all the non-payers are poor, but the ones build into the system who make very little money are (and I’m sure there are lots). I’d like to investigate more. Do you know where to find that?

    If I am a small business owner, I’m still thinking about ways to maximize my earnings. After a year or two, it won’t seem like “saving” anymore. People get greedy and I just don’t trust that making a flat tax will cure that. Those who have been doing it won’t suddenly wake up. How often does that happen? I’ve never heard that, but I have heard people who lie and cheat say “I don’t know how it happened, it just spun out of control.”

  10. fredct says

    I find it interesting that you mention 45 years old up front. Why 45? You are aware that at 50, you *are* allowed to put more into a 401(k) than someone younger, right? Its called catch-up contributions. If you’re arguing that it should occur at 45 instead of 50, you can make that argument. But the government *does* offer an increased contribution for older workers.

    Second, I find the question “How high do you think the marginal federal tax rate can go before Capitalism stops working?” remarkably lacking in historical context. The top marginal tax rate has been in the 90-percentile for years.

    In fact for probably about 2/3rds of the 20th century, the top tax rate was above 50%. For probably about half of the 20th century, the top marginal tax rate was 70% of higher. Did capitalism ‘stop working’ then? The concern that a few percentage increase above the mid-30s could prevent capitalism from working is well beyond reasonable.

    http://en.wikipedia.org/wiki/File:MarginalIncomeTax.svg

  11. says

    @Sam – Yep, I’m totally into fairness, which is why bankers making millions borrowing at 0.5% and sticking it in govvie bonds at 3% after being propped up directly and indirectly by the state should not be allowed to take home massive bonuses this year. Viva la revolution!

    In general I’m all for flat taxes and incentives to reward those who create wealth. It’s instructive to see what’s happened in the new Eastern European countries playing catch up and trying to generate entrepreneurs – several have gone for flat taxes.

    Trouble is politicians start to meddle to create special circumstances designed to win votes by appealing to their demographic. As you say, NO LOOPHOLES. Send out benefits some other way if required, but tax flat and fire/re-purpose an army of private and public sector bureacrats!

    Viva la revolution! Again!

    (Aren’t you meant to be lazing by a pool or similar?)
    .-= Monevator´s last blog ..Playing chicken with house prices =-.

  12. says

    @ fredct
    401K limit of $22,000 at 50 does very little. $16,500/yr for the rest of us younger folks, also is not enough.

    Marginal tax rates were higher, but you forget that the highest marginal tax rate is on levels much much higher than today. How do you not point this out and forget this key fact? You need better arguments, otherwise don’t bring them up.
    .-= The Genius´s last blog ..Center for Gifted Education hosts visitors from Ukraine =-.

  13. says

    I’m all for a flat tax above the poverty line, which is just about at $11,000 for one person. If the flat tax was about 20%, a person making $15,000 a year would pay $3,000 in taxes, a person making $210,000 would pay $42,000. This makes sense to me, it’s 1/5 of your income no matter what the income is.

    As for social security, I see it as a little extra income when I hit my late 60′s. I’m not counting on it to get me through retirement, but it will be a nice little ‘extra’. I currently don’t pay into it, I’m paying into CalSTRS instead, so I’m not so sure I’ll get much of the money I put in. It gets reduced based on my final retirement pension.
    .-= Little House´s last blog ..Making the Most of a 3-Day Weekend =-.

  14. fredct says

    @ The Genius

    Yes, sure, don’t get me wrong, the levels they kicked in were different. But the idea that there’s some marginal tax rate at which ‘capitalism doesnt work’ isn’t based in reality. And the idea that it could be 40% is even more off the wall.

    For some specifics, in 1982 – under President Reagan – the top bracket was 50% and it kicked in at $82,500 (around $185K today). That’s a higher rate and a lower threshold than our current brackets. The treshhold for the 50% increased up to about $175K in 1986 or about $330K in today’s dollars. Again, a higher rate and a lower threshold than today. Don’t pretend like all those example were for multi-millionaires in today’s dollars… they weren’t.

    On the other topic… you can say that the amounts are too low. You can say that the age limit for catch up contributions should be different. But what you *can’t* say is that the rules doesn’t allow for older workers to contribute more. They do.

  15. says

    I noticed a number of you had some questions about the allocation of stocks to bonds. While it is difficult to get into an elaborate discussion of the issue here, the book takes you through the risk management items and helps you understand why I think it is important to have both a plan B and plan C for your investment holdings. And a good part of that comes from the interest or cash flow you get on your securities if you use a balanced approach. While there are concerns about rising rates, if you follow a passive, laddered approach to bonds (let’s just assume U.S. Treasury bonds here – as I do in the book), then you have the ability to capture a current rate of interest and primarily ignore the price movements that result from interest rate changes.

    But this is a technical issue, and it’s a good idea to make sure you know how to structure this or work with someone who does. Every person will need to determine how comfortable he or she is with the risks they are taking, but in my opinion, fixed income is incredibly important to managing risks and capturing a positive return through the interest payments on a portion of your account each year.

    For instance, a few of you mentioned CDs, which are a type of fixed income security. So if you are comfortable using say FDIC insured CDs, instead of say Treasury bonds, then that would also fall into the bond side of the equation. The key is to consider high-quality fixed income, such as U.S. Treasury bonds. And so when people mention the bond market, it is made up of a number of different kinds of fixed income securities. The real issue is what sort do you own and how do you go about owning them.

    It’s important to understand what makes up the bond market, and it is probably the least understood investment class for individuals.

    As I do in the book, I recommend that investors seek qualified assistance prior to making any of these investment decisions.
    .-= Charlie Farrell´s last undefined ..Response cached until Thu 18 @ 17:45 GMT (Refreshes in 19.17 Hours) =-.

  16. says

    On the Social Security issue, as I mention in the book, I think it will be around for 30 years. It has funding challenges, but they can be fixed with some modest adjustments to contributions and benefit formulas. The real issue to me is making sure that taxpayers receive a property right to their Social Security benefit. I spell this out in more detail in the book, but given that the Soc Sec contribution tax is over 12% of your pay up to about $107,000, your retirement security depends on making legislative changes to the program. The Soc Sec tax is crowding out opportunities for savings because it is consuming a large percentage of people’s wages, so you need to ensure that you receive a retirement benefit that is tied to what you contributed to the program. Right now, there is no link and Congress can change the rules whenever and however they desire. To me, that’s just not fair given how much people are contributing into the system, and will eventually undermine confidence in the system. It’s an excellent program and the integrity of it needs to be preserved through legislative changes.
    .-= Charlie Farrell´s last undefined ..Response cached until Thu 18 @ 22:35 GMT (Refreshes in 23.92 Hours) =-.

  17. Edwin says

    I’m currently about 2/3 of the way through “Your Money Ratios” and am loving it. I generally have a lot of nitpicks with personal finance books but Mr. Farrell does an astounding job getting into the specifics of why he recommends what he does (most authors tend to leave this out, take a look at Dave Ramsey’s 12% return on investment).

    As for social security, it amazes me that people still say ridiculous things like “no one my age will see any social security benefits”. There are countless articles (I prefer the ones from good academic journals) which show you in depth why social security is not in such a miserable state. As Mr. Farrell said, you can fix it with some modest adjustments. People really need to look at the issues before making such ignorant claims.

  18. Charlie says

    I agree that there needs to be a change in how the govt runs social security. I had no idea contributions were over 12 %, wow, and that self employed are paying that entire amount, ouch. I think the tax laws are overly complicated and sadly doubt that will ever change. Thank goodness for easy to use tax software programs.

  19. Jimmy D says

    It is a JOKE that we can only contribute $16,500 pre-tax to fund our own retirement. 20 years at $16,500 is MAYBE $500,000…. 40 years maxing out is MAYBE $1,000,000 depending on returns. We can’t retire off of only $1mil in 40 years.

    The contribution limit needs to be raised to $50,000 at least!

  20. fredct says

    @ Jimmy D

    Well, you can very possibly retire on that depending assuming you get even a modest amount of SS. However, you’re still missing several thing… the effect of compounding, inflation increases, catch up & matching contributions, and other ways to save.

    Let me first mention the two that I won’t go into detail on. The limits adjust for inflation, so over your 20 or 40 year careers, the limits will defintely increase as time goes on. But its impossible to predict, so we’ll assume that one away. Second, your company will likely provide a couple K in matching contributions, which over time will really add up and grow. But this isn’t true for everyone either, so we’ll assume that way too.

    Now, lets assume you’re right on, and you contribute $16.5K for 20 years. How much would you have? Assuming even a modest growth rate of 6% from a fairly conservative mix. How much would you have after 20 years? Around $645K, not “maybe $500K.” What about after 40 years? $2.7 million, not maybe $1 million.

    If we assume a more aggressive mix with 8% growth, those numbers change to $815K and $4.6 million. And with 10% growth those numbers are $1.03 million and $8.03 million.

    But that’s not all. Lets assume you retire at the age of 65. For the last 15 years of your savings, you will be eligible for an extra $5K contribution. How does that effect it?

    6% growth:
    $766K or $2.8M (20 & 40 years respectively)

    8% => $962K / $4.6M

    10% => $1.2M / $8.2M

    So the idea that you can “maybe” save up $1M to a 401K in 40 years is just not true. Its very possible to save up nearly or over $1M in 20 year, and in 40 you can have several million. And that’s without any inflation or matching contributions.

    But since when should a 401K be your only retirement vehicle? You may have a pension (yes, they still exist :) )… as discussed in this article you are likely to have at least a good portion of your SS. You can probably add yet another $5K/year to an IRA. And whether you can or you can’t, there’s nothing saying that you can’t save as much money as you please in other places… be it low-cost annuities, non-deductible IRAs, SEPs if you’re self employed, or regular old taxable accounts.

    Your numbers are just way off. And the whole idea is predicated on the underlying assumption that retirement accounts are the only place to save for retirement, which is just not true.

  21. says

    @Little House
    You’ve got the right thinking going, I like! Great job treating SS as “bonus money”. If it’s there, it’s there, but if it’s not, it’s OK! That helps focus your finances now.

    @The Genius
    I agree… the $16,500 pre-tax cap is so limiting. How can it be the same for a 22 yr old as it is for a 40 year old? $20K doesn’t help much either. The cap contribution should be raised in 5 year increments by $10,000 I propose. 22-27, $16,500, 28-33 $26,500 etc.

    @Charlie Farrell
    Good point about the Social Security 12% tax “crowding out” more productive spending i.e. investments. Talks are that the Obama administration will RAISE the taxable income level for SS to $200-250,000 on the 12%. You think this will happen? Seems like a big time b*tt kicking to me!

    Why doesn’t the government try and curb their spending, like people do when they are in so much debt? Just makes no sense!

  22. says

    @Edwin
    Hi Edwin, welcome aboard the discussion! Glad you are reading the book! I 100% agree! Charlie does a great job breaking things down and covering all the bases.

    It’s more fun to say SS is going to ZERO in 30 years than say it exists. The media needs to sell, as do politicians so they can keep peddling change!

    @Jimmy D
    I agree that the 401K alone is NOT enough to survive on. Anybody believing their 401K is good enough for retirement is unfortunately delusional.

    @fredct
    I’m impressed you believe in a 6% guaranteed return. The current risk free rate is 3.74%, and the past 10 years have basically seen 0% in equities. The only thing that has helped the large majority of people in the portfolios is contribution and savings.

    It’s always good to believe though! Personally, I’m using a 4% rate of return, and 50% of me thinks that is too aggressive!

    BTW, regarding taxes, have had the luxury of paying every single marginal tax bracket in the US? I’m trying to understand where you are coming from given your belief that raising the marginal tax rate to 40% and higher is OK, and won’t dampen people’s desire to work and hide more of their income.

    thnx!

  23. fredct says

    Of course I don’t believe in a 6% guaranteed return, I never said such a thing. Its not risk free, but if you’re investing long-term retirement money in risk-free investments, you’re barking up the wrong tree. The fact that we had two major stock market corrections/crashes/bubbles pops in the past 10 years as we’re still even is actually a credit to the market.

    But go ahead, use 4% – which you can get risk-free even in this time of historically low interest rates. You still get fairly higher numbers than what Jimmy said, especially over 40 years.

    But I still disagree with your premise. Assuming a reasonable amount of social security (not 100%, but even the 70% mentioned in the post… that plus a 401K is more than enough to live comfortably on. Not luxuriously, but comfortably. If you want to retire luxuriously, you will have to say more elsewhere. But is that such a problem?

    By the way, all this is assuming only one person working, one 401K, one IRA, etc. If – as is very typically – both of a couple are working, all the amounts double.

    To answer your last question, I have typically been in the 25 or 28% tax brackets. So, no, I haven’t been in every one. But historical context just shows otherwise. If 70, 80, 90% tax bracket didn’t ruin the economy in the past, then why would 40% do it now?

  24. says

    @ fredct
    I think Sam got you there. If you’re only earning $34,000-$171,000 (25-28% tax bracket), you have no idea of how people in the the 35%-going-to-40% Federal tax bracket will feel. Of course you are going to argue for other people to pay more taxes to fund spending!

    At 70 80, 90% tax brackets in the past, please highlight what the marginal income levels were for each. Maybe you are too young, but there was a major recession in the 80′s.

    When you start earning in the $500,000+ range, let me know how you feel about 40% federal taxes. Before then, you don’t have any credibility, sorry.

  25. fredct says

    @ The Genius

    Ah, so no one who earns under $500K should have any say on tax policy. I see. Lets let only people making over $500K make all the tax decisions, fantastic.

    Sam, have *you* been in every tax bracket while working full time? From 0% all the way up to 35%? Have you, The Genius?

  26. fredct says

    @ Edwin
    Ha, good call Edwin.

    Yeah, lets take this to its logical conclusion. Unless you’ve been in prison you have no dredibility in crime policy. Unless you’ve been homeless you have no credibility in social programs. Unless you’ve been a single parent trying to feed 2 kids on minimum wage, you have no credibility in food stamp policy. Unless you’ve been a four star general, you have no credibility in foreign policy.

    Yeah, lets let everyone have exclusive say in the areas that most impact their special interests. That’d be a great way to run it.

  27. says

    @ fredct
    Of course I’ve had to pay every single tax bracket. I wouldn’t be sharing my opinion on the detriment of raising the highest top tax bracket to 40% if I didn’t. At your income level, you know very little about the psychology of making over $380,000, so don’t pretend you do.

    If you want me to perform open heart surgery on you, even though I know nothing about heart surgery, let me know.

    @ Edwin
    You’re right, I don’t have any credibility when it comes to determining prison sentences, b/c I have neither gone to prison, nor studied criminal law. Well done.

  28. fredct says

    @ The Genius

    “Of course I’ve had to pay every single tax bracket.”

    Forgive me, but I have to wonder about your wording here. I don’t know you from Adam, so let me dig a bit deeper. Trust, but verify. “Paying every single tax bracket” could simply mean that you’re in the top bracket, and therefore each year a portion of your income is in each. If that’s the case, it was not the question that was asked.

    The question that was asked was have you actually *been* *in* each tax bracket. More precisely defined to mean that you’ve worked full time (not part time as a student or anything, not when you were living with your parents and didn’t have to pay expenses… not a time you started your first job late in the year and so only got to a certain level) and your full income for the full year brought you up only to the level of each marginal tax bracket.

    Was there a time when you worked full time and made less than the ~$17K married/$8.5K single of taxable income required to be in the 10% bracket? Etc

    Lets make sure we’re all being fully disclosing here.

    “If you want me to perform open heart surgery on you, even though I know nothing about heart surgery, let me know.”

    Of course not, and by your standards, since you haven’t worked in all aspects of the medical profession, I suppose that means that your opinion has no credibility when it comes to healthcare policy either, right?

  29. fredct says

    @ The Genius

    Do it in a revenue neutral way that doesn’t punish the people who need it most, and I’d be fine with it.

    The upper tax bracket was 40% in the 90s and the economy was roaring. The 35% reduction was always planned to be temporary. You can throw up fear all you want, but reality has already proven that a 40% rate doesn’t impede the economy. I know its inconvenient when reality doesn’t match your ideology, but it’s already occurred.

  30. fredct says

    @ admin

    17% flat tax on your income is 17%! There is no going around it b/c there are no deductions or shady loop holes!

    Sorry, Sam, but you still don’t understand what a flat tax is and what it isn’t. I fully agree with you that the most difficult and problematic thing about taxes is all the shady loopholes and deductions. But that has nothing to do with a flat tax!

    You could eliminate all those things from the progressive tax system. Or you could still have them in a flat tax. I conceptually agree with seeing them eliminated just like you, but it is *not* the same thing as a flat tax. It a separate concept.

    (Btw, practically, eliminating deductions would have serious secondary implications. The biggest one I can think of is it would probably knock 10-25% off the value of people’s homes overnight. Because you’d lose all the tax breaks. Great for home buyers going forward, awful for anyone who already owns a home.)

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