Taxes

Since the top tax rates here in Minnesota is about 8% and the top federal rate is 35% a wealthy person net is 57% of what they gross. Suppose a man earns 1.75 million and after tax nets 1 million. He puts that in an interest bearing account and earns 5% which is a very good rate in today’s market. His interest on the million would be $50,000 and now he pays 43% in taxes so he nets $28,500. Let’s say instead he invests in stocks and earns a 5% dividend and then he would pay 22% tax and net $39,000. Or he could invest in municipal bonds and pay 0 tax and net $50,000. Compare that to a typical family with two children whose income is $50,000. They would pay no income tax but they would pay payroll tax (social security and Medicare) and net $46,000.
The president’s plan to be released on Monday will increase the dividend tax rate to the regular rate which means the rich person would likely just invest in an interest account since that entails less risk than dividends. The result will be less investment in business and more into fixed interest accounts like money markets. It is also suggested that Obama will raise the tax on capital gains like dividends. Both today are taxed at 15% and this will rise to 35% for the rich. Both will make investing in business less desirable We might expect a big increase in investments in municipal bonds as I don’t for see any change in this area. But who knows what might happen next.