[dmk23]

What would you expect? If you live in a state like California and are in the highest tax bracket, your total tax rate (federal + state + local + various surtaxes) would be close to 60%. It is ludicrous to expect most people to just fork over such an outrageous percentage of their earnings without complain.

No wonder the high-income individuals are fleeing high-tax states and "tax-the-rich" ideology is failing to fill the states' coffers. Raising taxes hurts poor people more than the rich. http://www.forbes.com/sites/trulia/2013/02/12/jobs-arent-lea...

[jandrewrogers]

It is bad, but not quite that bad. If you just look at taxes on wages for someone making $250k per year, you will pay about 40% in obvious taxes in California. There are sales and other taxes on top of this and some additional regulatory taxes as well.

Since I have operated companies with substantial payrolls in California and therefore been privy to the cost details, I can say that the total outlay to various government authorities when a paycheck is cut can exceed the total value of the paycheck in California but not much beyond that; maybe 52% to government, 48% to the employee.

In summary, you will only approach 60% if you include all possible taxes on the income including the spending of said income, which does not happen often in practice. Even in California, the worst case is closer to 50% if you manage your income reasonably well.

This still adds up to a lot of money if you compare it to a state like Washington with similar software engineering wages and no income tax, since that adds up to tens of thousands of extra income.

[superuser2]

Say your income is $406,750 (highest federal tax bracket for an individual). Federal income tax is $118,188.75. California income tax is $37,941.45. Effective tax rate is 38%. San Francisco could add 1.5% so now we're at around 40%.

How are you getting to 60%?

[gamblor956]

(Tax advisor here.) You don't get a 60% rate in the US. Anyone who claims otherwise doesn't understand the basic principles of U.S. taxation or is lying to try and make a political point.

State taxes are deductible for federal income tax purposes (meaning that they reduce your taxable income as determined for federal purposes). Also, Medicare and Medicaid taxes are part of payroll taxes (or FICA, for the self-employed), so you don't pay them both.

As every tax advisor in the CNBC article pointed out, Michelson knows diddly squat about taxes. He was taking every single tax rate and adding them together, but he should have been averaging them out. For example, the 20% rate on his capital gains and dividends replaces the 39.6% rate; he's double-counting some of the FICA taxes, and worst of all, he thinks his marginal rate (the highest rate he pays) applies to all of his income.

[anigbrowl]

Thank you. I am so tired of seeing this 'federal + state income taxes are cumulative' lie. Not only is it dishonest, it's an insult to the intelligence since anyone who who has ever done their own taxes knows they're deductible just by filling out the 1040.

[mixmastamyk]

> State taxes are deductible for federal income tax purposes.

How does that work, considering federal taxes must be figured before the state?

Edit: looks like itemize and sched A are necessary.

[dmk23]

Excellent question and here is the answer: http://www.cnbc.com/id/100398096

[smtddr]

>>So the maximum Mickelson could pay in state and income taxes, payroll and other income-related taxes would be around 60 percent. But that rate is only if he did absolutely no tax planning or basic deductions.

So it's absolute worse case scenario then. Reading the rest of the article, it sounds like he can get it to below 50% with some moderate effort. Since rich people can afford professional accountants, I conclude he actually could get it to below 50% if he wanted or his accountants could suggest some tax loophole in another state to get it below 50%.

[dmk23]

Sure, that's just the start.

A further improvement could be to move from California to say Nevada and pay no state tax at all. The next step would be reorganizing the business structure to keep most income / assets in the offshore jurisdictions. So on, so on, so on...

See, you are starting to justify cutting the tax rate from 60% to 50%, but why stop there?

The problem is created by the government/public asking for 60% to begin with and creating the sticker shock.

[gamblor956]

1) Yes, but if you legally reside in California [edit] or continue to do business in California, you still owe California taxes. Indeed, California will treat you as having not actually left California--and the federal courts would agree with them. (These jurisdictional principles have basic tax law worldwide for more than a century.) If you don't pay your income taxes to the jurisdiction(s) in which it is owed, you've committed a felony, and you'll end up paying all of the taxes owed, plus penalties and penalty-rate interest. There's also the potential for jail time.

2) There are many tax-regimes that are specifically targeted to prevent the movement of business assets offshore. In the US, running afoul of these rules is a minimum of $10,000 per violation (depending on the circumstances, potentially meaning per asset), plus the possibility of criminal sanctions. Moreover, locating assets offshore doesn't eliminate tax jurisdiction--you still owe income taxes in the jurisdiction in which you earn the income. (Basic international tax law.) All you really accomplish is to make yourself subject to additional income taxes in another jurisdiction, and worse--you may have rendered yourself out of eligibility for tax treaties that would have eliminated the double taxation.

3) Stop spreading FUD. The government isn't asking for 60%. And that's besides the point. Before the Reagan "Revolution", the marginal rate was greater than 60%. Right now, taxes are at near-historical lows. If you would prefer not to pay taxes, you could always move to a zero-tax haven like Somalia. I hear it's a lovely place this time of year.

[speeq]

" If you would prefer not to pay taxes, you could always move to a zero-tax haven like Somalia. I hear it's a lovely place this time of year."

Dubai is a pretty lovely place this time of the year (21C/70F temperature), and you'll pay exactly zero income and corporate tax.

[anigbrowl]

Oh please. Your CA income taxes are deductible, IIRC there's a line on the 1040 specifically for you to fill in your state income taxes. And I say that as someone who has filed self-employed for several years and so pay double the payroll taxes (ie picking up the employer's part as well as the employees).

[mixmastamyk]

I was trying to figure out where this was myself, digging thru last year's tax forms. Looks like you need to itemize and complete a Schedule A to use it.

[yummyfajitas]

35% corporate income tax + 20%-39.6% dividend tax.

[gamblor956]

You're talking about at least 2 different taxpayers: the corporation, and it's owner(s).

Also, dividends to shareholders are not subject to a 39.6% rate. By definition, any dividend from a U.S. corporation is a "qualified dividend" subject to the 0-20% rates (plus potentially up to 4.3% in Medicare and Medicaid investment taxes).

[guelo]

Get your facts straight before you go Galt. This story has nothing to do with state income taxes.

[paul9290]

Indeed tax rates are out of control for those who work hard, smart and strive for a better life.

When your making say 50k the amount of taxes they take from you is no sweat. Though when your hard work pays off and you start making six figures you wonder huh I'm not making six figures and wont see six figures in my pocket until I start making north of 160K a year.

Ridiculous!

[redwood]

Is it ludicrous to expect most people to do that, when most don't and aren't expected to?

Most don't make much money at all. Many more make none at all. The reason the tax rate is high on the ultra-well-to-do is to help cover the rest.

[thenmar]

That's only outrageous to Americans who are used to bowing down before the wealthy and worshipping financial success as some sort of moral ideal.

[qwerta]

I would call myself European hippie, but I find it outrageous as well.