Bishop Savas claims:

“Mr Banescu’s third point on calculating the taxes earned for the wealthy is very deceptive. He uses the 35% tax rate that would be paid if all of that hypothetical money was “ordinary income”, which is unlikely. Most of the wealthiest people in America don’t receive ludicrous salaries, they likely have invested their money into stocks, bonds, or investment property, turning their profits on those investments into capital gains.”

Chris Banescu responds:
The point of the article centered on the compensation of the CEO of Viacom centered on his SALARY (caps meant for emphasis not loudness), not additional investment income from long-term investments that said CEO may have also received from stocks he owned in other companies. When the $754 million number was mentioned it was clearly intended as such. This fact was confirmed by Bishop Savas when he himself admitted on 9/1/2011: “Chris Banescu is right. The CEO of Viacom made only $85,000,000 last year, not $750,000,000. I apologize for my error.” He now wants to re-write history and deflect from the plain meaning of his own words that he himself admitted to already. Can’t unring that bell.

Furthermore, this is not just a “misunderstanding” on his part. The salaries of CEOs are public information. Their actual personal incomes on their 1040 forms are NOT. When someone claims that such and such CEO “made this amount” they are clearly taking about his salary, not his dividends or capital gains from other investments.

Bishop Savas claims:

“If they invest, and hold those assets over a year, the value would be taxed at 15% in 2010 on the gains accrued. You don’t need to be an economist to understand how much less the wealthiest would pay in taxes.”

Chris Banescu responds:
Yes, it’s true that the Income Tax on dividends and capital gains from stock investments held for at least one year are taxed at a much lower 15% rate.

However, Bishop Savas completely ignores the double taxation aspect of investments. He fails to mention (as does President Obama, Warrant Buffet, and many others) that dividend income streams reach the taxpayers after they have been already taxed once at the corporate level (there are some exceptions with REITs and certain Trusts, etc.). The dividend income then gets taxed a second time when individuals report this income to the IRS. That 15% tax rate is on top of the other 35% to 41.6% average corporate federal and state tax rates — from the lowest (35%) in Nevada, Wyoning, and South Dakota to the highest (41.6%) in Pennsylvania and Iowa, as reported by the nonpartisan Tax Foundation — across the US.

Stocks grant investors part-ownership of companies. The money invested buying stocks is 100% at risk. You are an owner of this business and the earnings it produces are lawfully and ethically yours. That income is your income. Yet, you are not entitled to see a dime of it until the government confiscates at least half of it (50% to 56.6% approximate rates) before you’re allowed to keep it. This truth is almost always ignored or purposely misrepresented when the issue of dividends taxation is brought up.

Bishop Savas claims:

“In short, that 35% sounds much higher in theory than in practice. Also, don’t forget that state and local income taxes are deductible on federal taxes. Not a huge difference, but in article supposedly based in facts, it strikes me as misleading to leave that part out.”

Chris Banescu responds:
Yes, certain taxpayers are allowed to reduce their federal taxable income by the amount of state and local taxes they pay via Itemized Deductions in Schedule A of the 1040 form.

However, there is more to the issue.
(1) The federal rate is actually 36.45% since the 1.45% Medicare tax is on ALL earnings. (http://ssa.gov/pubs/10003.html) I covered this already!

(2) Bishop Savas presumes that everyone will itemize their deductions and take advantage of this allowance. If individuals opt instead for a Standard Deduction, then those state income taxes will not offset the federal rate.

(3) Even if rich individuals do itemize deductions, they also face several hurdles that LIMIT and eventually ELIMINATE most of those deductions. One is the Alternative Minimum Tax (AMT) regulations. The other is the Pease Phaseout of Itemized Deductions for high-income individuals. “The limitation on itemized deductions – known as Pease after the congressman who introduced it – cuts itemized deductions by 3 percent of adjusted gross income above specified thresholds but not by more than 80 percent.” http://www.taxpolicycenter.org/taxtopics/2011_reinstate_exemption.cfm

To put it in layman’s terms, as I understand it, (only tax lawyers and accountants can really make full sense of these convoluted regulations) the 8.9% state income taxes that a rich CEO can “theoretically” use to reduce their income for federal tax purposes can be limited by as much as 80% past a certain income point (meaning only 20% of the allowable Itemized Deductions can be claimed). That point is somewhere in the $300K to $400K range, I believe (check with a tax specialist on that!).

The taxable income subject to the 36.45% Federal Income Tax rate can be reduced by 1.78% (20% x 8.9%), effectively lowering the overall federal rate to approximately 34.67%. Then, we add the 8.9% New York State income tax to it and we get an approximate 43.57% rate (vs. the 45.3% I estimated in my original article). A lot closer to reality than the 33.1% Bishop Savas assumed in his comments.

[NOTE – My rough estimates were and are only approximations. There are also varied rules applicable to certain years. Only tax professionals can understand this fully. I never claimed to be a tax lawyer or a CPA. My analysis, as can be glimpsed from the notes I included, was not meant to be a treatise on tax regulations and accounting for high-income earners.]

A Final Word
All of this misdirection and continuing re-writing of history misses the key points of my original critique.

(1) That Bishops Savas just made up the salary information of Viacom’s CEO and assumed tax rates on rich executive salaries that are nowhere near reality.

(2) That he did not bother to spend a few minutes to verify his presumptions.

(3) That he has a superficial understanding of economics and tax issues in general.

(4) That he’s more preoccupied with promoting a liberal/leftist bias and world-view that mimics the Democrat platform and President Obama’s “keep increasing taxes on the rich” agenda, than engaging in a reasoned and balanced debate of the actual issues.