Law School Lessons

[IBCoupe]

So, I'm taking three classes this fall: Property, Environmental Law, and Federal Income Tax Law. I figured that it might be nifty to share with you guys the most interesting of the life lessons and neato tidbits that I pick-up from these classes. I made this thread to post them.

Last night, I had my first class of Federal Income Tax, and we covered a lot of the basics. Turns out that a vast majority of Americans don't understand exactly how much they pay in taxes, because the marginal tax rates are a hard thing to understand.

So we worked through it. You might have heard some say (or have said yourself) that they, or that some theoretically, might choose not to work harder or not work more because it would push them over into another tax bracket. You might have heard some say (or have said yourself) that such a belief is entirely bogus. Here's why:

These aren't the numbers we used in class - these are numbers I fetched from the internet for 2010 Single filers.

1. You aren't taxed at all on your first $8,375. Not only does this mean that people who make less than $8,375 each year pay no taxes, it also means that you only pay taxes on the dollars that are in excess of $8,375. Easy enough, right?

2. The next jump is up to $34,000. Up to that number, the marginal tax rate is 15%. But we still don't count the first $8,375. So if you earn, say, $22,000 of taxable income, you'd tax that first $8,375 at a rate of 0%, and then you'd tax the next $13,625 at a rate of 15%, bringing your total tax amount to $2,044, which is actually only about 9.3% of your taxable income.

3. If you've gotten that far, you're ahead of the game, and it's just a matter of repeating the steps. The next tax rate is 25%, applied to the earnings up to $82,400. So, you earn $75,000 each year. That first $8,375 is tax-free, the next $25,625 (34,000-8,375) is taxed at 15%, and the next $41,000 (75,000-34,000) is taxed at a rate of 25%. Your total tax, then, is $14,094 (0+3,844+10,250), or an actual 18.8% of your taxable $75,000.

4. It goes on and on from there. So your first $8,375 is taxed at 0%, your next $25,625 is taxed at 15%, your next $48,400 is taxed at 25%, your next $89,450 is taxed at 28%, your next $201,800 is taxed at 33%, and anything beyond that is taxed at 35%. I'm sure the lefties out there can't help but notice that the tax increases get smaller and smaller, though the income leaps get larger and larger...

It's virtually impossible for you to lose money by earning more. There are a couple things that I'm not as fluent with that can cause such a thing, but for the vast majority of us, that rule holds true: being pushed into a higher tax bracket can't cause you to lose more through income tax.

If you don't believe me, let's work it out:
Let's look at the jump from 15% to 25%, and we'll look at someone who earns $35,000, just into the 25% category. If we were to look at that as a rate that was not applied marginally, and just as a simple graduated tax rate system, there might be some truth to the concern. 15% of 34000 is $5100, and 25% of 35000 is $8750 - a much bigger difference than the extra earned $1000.

But let's go through the steps.
On the first $8,375, you pay no taxes.
On the next $25,625, you pay $3,844.
On the next $1,000, you pay $250.
The overall tax percentage looks more like 11%.

Were you to stop yourself at $34,000 of taxable income, you'd still pay that $3,844 - you just wouldn't pay the $250 on the next $1,000. And you wouldn't have $750 more in your pocket, which is probably the more important thing to remember.

[heliochrome85]

i love math.


thanks for the thread since i think its pretty well known that no one understands how their taxes are calculated.

[stebo0728]

Turns out that a vast majority of Americans don't understand exactly how much they pay in taxes, because the marginal tax rates are a hard thing to understand.

^^^^ Argument enough that the system is FAIL. As any normal Joe what he pays, and if he gets a return he'll say NOTHING, even though uncle same really kept 8 grand, because he got 2 grand back he thinks he won the lottery. Progressive tax systems are not congruent with capitalist economies.

What if someone isnt comfortable with the government taking 25% of what they earn in that next bracket? What if they arent comfortable with giving up 35% at the highest bracket. I think alot of people who make the rational choice to not make the jump are the ones who are only going to "nudge" into the next bracket. If they are only gaining the $750, is it worth it, but if they are "jumping" up an extra 10 grand, then maybe the $7500 IS worth it.

[heliochrome85]

Turns out that a vast majority of Americans don't understand exactly how much they pay in taxes, because the marginal tax rates are a hard thing to understand.

^^^^ Argument enough that the system is FAIL. As any normal Joe what he pays, and if he gets a return he'll say NOTHING, even though uncle same really kept 8 grand, because he got 2 grand back he thinks he won the lottery. Progressive tax systems are not congruent with capitalist economies.

What if someone isnt comfortable with the government taking 25% of what they earn in that next bracket? What if they arent comfortable with giving up 35% at the highest bracket. I think alot of people who make the rational choice to not make the jump are the ones who are only going to "nudge" into the next bracket. If they are only gaining the $750, is it worth it, but if they are "jumping" up an extra 10 grand, then maybe the $7500 IS worth it.

most "Normal Joes" cant name where Kansas is, or the words to the national anthem. I dont think their inability to understand the tax code is evidence that it is FAIL. More like our education system fails its students in the math department because you have people who cant understand how to give back the change when i pay with a $20 at Taco Bell.

[stebo0728]

most "Normal Joes" cant name where Kansas is, or the words to the national anthem. I dont think their inability to understand the tax code is evidence that it is FAIL. More like our education system fails its students in the math department because you have people who cant understand how to give back the change when i pay with a $20 at Taco Bell.

LOL sadly this is true. But should taxes really be so complicated? Should large corporations really need to employ entire floors or even entire buildings devoted only to tax compliance?

[IBCoupe]

Stebo, as I just illustrated, it's never a full 35%. Even if you were to earn infinite money, it would still only ever be 34.99999999% of infinity. Try figuring that one out.

The crazy thing is that people have this weird feeling that, if it's going to be taxed, I don't want it. Nevermind that it's $750 dollars in my pocket - the government's going to get $250 out of the deal! I mean, I earn $16.35/hr, so it takes me an extra 61 hours in a year to get that money! But it's like I'm getting paid $12.30/hr in that time! Forget it! No more money for me! Instead of getting $88.70 for every $100 earned this year, I'm only going to get $88.30! No way! Instead of my $14.50/hr after-tax rate, I'm going to be stuck with a $14.44/hr after-tax rate! Screw that!

Edited to add:
And that's only if it's overtime for no extra pay. Maybe it's a pay raise. Then it makes even less sense! "Well, I don't want the 33-cent-per-hour raise, because it's only actually a 26-cent-per-hour raise! You can keep your money, Mr. Boss-man!"

Okay, so I went a little overboard. The reaction that making more money isn't worth it because it takes a little bit more work to make as much is a bit silly to me.

I don't want this thread to get too bogged down on this issue; I'll have something Property-related after tonight, probably.

[IBCoupe]

I wonder if they'd need that entire floor if they didn't have two others devoted to tax evasion...

But seriously, it seems perfectly reasonable to me to have a company that deals with humongous amounts of money to have to work harder to keep track of it.

[heliochrome85]

I wonder if they'd need that entire floor if they didn't have two others devoted to tax evasion...

ZING

[stebo0728]

Stebo, as I just illustrated, it's never a full 35%. Even if you were to earn infinite money, it would still only ever be 34.99999999% of infinity.

You dont have to school me on limits as x approaches infinity. Trust me I zinged calculus. I wasnt stating that the 35% would be on the whole, I understand what you've laid out. My comment was what if someone is looking only at the increase, and examining that they will incur a 35% taxation ON THAT INCREASE, then perhaps they dont feel as inclined to work as hard to shell out that high a percentage ON THE EXTRA WORK. Oh and for the record, Im on board for a salary where x approaches infinity.

And for the record also, tax evasion is good business policy.

[IBCoupe]

Only if the additional cost of three floors of tax lawyers (two for evasion, one for compliance" fails to outweigh the additional profits.

[stebo0728]

Only if the additional cost of three floors of tax lawyers (two for evasion, one for compliance" fails to outweigh the additional profits.

That requires an Asset Assessment floor to determine if its a viable option.

[IBCoupe]

I forgot about them. Totally a good business move, still.

[stebo0728]

Really though, its just alot easier to move your headquarters to somewhere more "business friendly" as far as taxation goes. Thats sort of par for the course now. Gets back to how we ought to make THIS country business friendly. Might help the employement situation too.

[IBCoupe]

Heck yeah! You can have any business-friendlier country you want, so long as it's Denmark, the only country out of 120 that Forbes ranked higher than the US on its 2009 "Best Countries for Business" list.
http://www.forbes.com/2009/03/18/best-c ... tries.html

Reminds me more than a little of the color choices available for this car:

[telcoman]

So, I'm taking three classes this fall: Property, Environmental Law, and Federal Income Tax Law. I figured that it might be nifty to share with you guys the most interesting of the life lessons and neato tidbits that I pick-up from these classes. I made this thread to post them.

Last night, I had my first class of Federal Income Tax, and we covered a lot of the basics. Turns out that a vast majority of Americans don't understand exactly how much they pay in taxes, because the marginal tax rates are a hard thing to understand.

So we worked through it. You might have heard some say (or have said yourself) that they, or that some theoretically, might choose not to work harder or not work more because it would push them over into another tax bracket. You might have heard some say (or have said yourself) that such a belief is entirely bogus. Here's why:

These aren't the numbers we used in class - these are numbers I fetched from the internet for 2010 Single filers.

1. You aren't taxed at all on your first $8,375. Not only does this mean that people who make less than $8,375 each year pay no taxes, it also means that you only pay taxes on the dollars that are in excess of $8,375. Easy enough, right?

2. The next jump is up to $34,000. Up to that number, the marginal tax rate is 15%. But we still don't count the first $8,375. So if you earn, say, $22,000 of taxable income, you'd tax that first $8,375 at a rate of 0%, and then you'd tax the next $13,625 at a rate of 15%, bringing your total tax amount to $2,044, which is actually only about 9.3% of your taxable income.

3. If you've gotten that far, you're ahead of the game, and it's just a matter of repeating the steps. The next tax rate is 25%, applied to the earnings up to $82,400. So, you earn $75,000 each year. That first $8,375 is tax-free, the next $25,625 (34,000-8,375) is taxed at 15%, and the next $41,000 (75,000-34,000) is taxed at a rate of 25%. Your total tax, then, is $14,094 (0+3,844+10,250), or an actual 18.8% of your taxable $75,000.

4. It goes on and on from there. So your first $8,375 is taxed at 0%, your next $25,625 is taxed at 15%, your next $48,400 is taxed at 25%, your next $89,450 is taxed at 28%, your next $201,800 is taxed at 33%, and anything beyond that is taxed at 35%. I'm sure the lefties out there can't help but notice that the tax increases get smaller and smaller, though the income leaps get larger and larger...

It's virtually impossible for you to lose money by earning more. There are a couple things that I'm not as fluent with that can cause such a thing, but for the vast majority of us, that rule holds true: being pushed into a higher tax bracket can't cause you to lose more through income tax.

If you don't believe me, let's work it out:
Let's look at the jump from 15% to 25%, and we'll look at someone who earns $35,000, just into the 25% category. If we were to look at that as a rate that was not applied marginally, and just as a simple graduated tax rate system, there might be some truth to the concern. 15% of 34000 is $5100, and 25% of 35000 is $8750 - a much bigger difference than the extra earned $1000.

But let's go through the steps.
On the first $8,375, you pay no taxes.
On the next $25,625, you pay $3,844.
On the next $1,000, you pay $250.
The overall tax percentage looks more like 11%.

Were you to stop yourself at $34,000 of taxable income, you'd still pay that $3,844 - you just wouldn't pay the $250 on the next $1,000. And you wouldn't have $750 more in your pocket, which is probably the more important thing to remember.

So the tax a 1st year associate pays at a starting salary of $160,000 at a major NYC Law Firm is how much?

Telcoman

[IBCoupe]

Can't say. You'd need to know his or her deductibles, whether there are additional sources of income, etc.

I don't intend to be an accountant, and I've only got one class under my belt. I'm just trying to illustrate how the marginal tax calculations come into play once you've determined taxable income amount.

[stebo0728]

Interesting article.

Amid the financial turmoil this year, we added stock market performance to reflect the extent of disrepair in countries' banking systems, as well as investor confidence in a recovery. Intellectual property rights, the promotion of free trade and low inflation, combined with low taxes on income and investment, give a snapshot of the conditions for business in each.

This is key. I believe you will continue to see countries who cater to businesses on a taxation basis start to slide further and further up the list while other nations who dont continue to slide further and further down the list. One thing that makes America stay up on the list is our size, and the lackadaisical fashion with which our populous spends money. Also you have alot of companies already rooted here, and the cost of moving has not exceeded the gain for moving. But make no mistake, if we dont get a handle on taxation, we will continue to see our businesses, and the jobs the provide, "shipped" overseas.

Also interesting in the article.

Sliding the most this year was Ireland (No. 14, down 12), which even saw plans for a Guinness mega-brewery shelved by parent Diageo (nyse: DEO - news - people ) as exports slowed.

This in light of the "Irish Miracle" that was supposed to create a bussling Irish economy. A move which I praised at the time, wonder what went wrong? Also, down 12 to spot 14, that means they WERE #2.

[IBCoupe]

I think our tax structure is already quite favorable to corporations and others with large concentrations of wealth.

Re: Ireland
Back in 2007, they were tied for 19, if memory serves, before the "miracle." I wasn't too familiar with it at the time, so I never commented. I don't know that I'd put much stock into what Ireland does.

If you don't like the way they did it for 2009, I can point to 2008, where the US was in fourth, behind the already mentioned Denmark and Ireland, as well as Finland.

It's really not that bad.

[stebo0728]

Question: When the FairTax passes, will you lose a quarter credit on your degree for the Income Tax Law class?

[IBCoupe]

If the fairtax passes, I'll retry my previous attempt at eating a bag of candy corn in one go.

[stebo0728]

Dude you lightweight, you cant eat a whole bag in a go? Shoot I can knock back a whole bag o them punkins in one sitting, fortunately I dont resemble the love d!ck guzzling lady from the other thread yet.

Our luck, and the way taxation seems to go here, rather than the FairTax, we'll be stuck with the opposite, the VAT tax. (Sorry for saying Value Added Tax tax, I know that eats at some of your nerves)

[heliochrome85]

Dude you lightweight, you cant eat a whole bag in a go? Shoot I can knock back a whole bag o them punkins in one sitting, fortunately I dont resemble the love d!ck guzzling lady from the other thread yet.

Our luck, and the way taxation seems to go here, rather than the FairTax, we'll be stuck with the opposite, the VAT tax. (Sorry for saying Value Added Tax tax, I know that eats at some of your nerves)

man, im good sometimes. most times though, im nothing but hot air.

[IBCoupe]

Class is almost over. Nothing really interesting to share so far. Sucks, because that means there's nothing really interesting that's come up.

[IBCoupe]

I guess the most interesting thing was that the U.S. adopted the colonial rules that individual citizens could not buy land from native Americans. It's an issue that still comes up today, and the same holding from the early 19th century still guides us: only the U.S. government has the right to buy land from native Americans.

Ahead: Environmental law, oooooooooh!

[AZhitman]

This thread RULES.

Although I've always LOL'ed at people who "fear" that next bracket, I never knew how to intelligently counter their position.

Now that I know, I don't care to share it. Let 'em eat cat food (or candy corn). IDGAF.

[IBCoupe]

Glad to be of service. I don't have the book for this class yet (it's in the mail, too) and the syllabus doesn't mention any cases by name, so it's hard for me to be prepared. I'm gonna wing it.

[IBCoupe]

So, I've got two pages of notes from last night (not in front of me, unfortunately), and all of them seemed to be post-worthy. I'll stick with what's on the first page, though. I have to say that, so far, this is the class that pushes me further in any direction to doing any particular kind of law. Still some other stuff I want to pursue, but I loved class last night.

As with my first post, much of this might not be new to you (it wasn’t really to me, either), but I found it to be an interesting subject nonetheless. It's a very long read, but I tried to phrase it as educationally and interestingly as possible.

What is Environmental Law?
For the most part, it's pollution control. In the few instances where it's not pollution control, it's an attempt to preserve come ecological characteristic. When we're proceeding on crafting environmental regulations, we usually focus on two big questions: (1) how much control do we want to impose, and (2) how do we go about imposing that control?

Let’s focus a little bit on global warming. Whatever its political and popular implications may be, the vast majority of the science on global warming points in one direction. But that’s not particularly important for this portion of the discussion. The issue is: how might we impose control to reduce the emissions of CO2 and the other five major greenhouse gases [hereinafter CO2]? There are four (five, actually, but really only four) options.

First, we could treat CO2 pollution as we treat most other kinds of air pollution: we can set ambient standards, and fine those who exceed them. That requires us to figure out just how much CO2 is okay in the air, then calculate all the emitters that contribute to that ambient level, and assign them each a standard to meet (not always the same standard for every source – a coal-burning power plant will have a different CO2-emission level than, say, Granny).

The major issue that comes up with this approach is that it works really well for local pollution, but doesn’t really work nearly as well for a larger scale approach. It’s just a much more complicated endeavor.

Second, we could try Cap & Trade (not Cap & “Tax,” thank you very much). We’ve done it before, and most experts agree that it worked reasonably well when it was instituted (by then-President George H.W. Bush, in trying to tackle acid rain), and continues to work reasonably well to this day. Not only did it curb its targeted pollution, but it also came in way under cost estimates (the industry tends to estimate way high, and the EPA sometimes estimates way high and sometimes way low – trying to calculate the cost of future technological replacement is a tricky thing). The idea is that you figure out the ideal level of pollution, set caps on how much pollution any given company is allowed to emit. You set those caps by giving a limited number of “credits” to any given polluter. If they don’t use all of their credits, they may sell their unused credits to another polluter who expects to exceed his or her limits.

This has the advantage of creating very strong incentives for reducing your pollution levels. Not only is excessive pollution made more expensive, but if you can get below a certain point, you can make money off of your competitors. The pitfalls are that it’s very difficult to create an artificial market and manipulate it well, as the Europeans have found out. The problems with Cap & Trade in Europe were arguably twofold: first, they set the “cap” too high. There were too many people selling credits, and not enough people buying them, so the value of the credits plummeted. This sort of thing is expected, and there’s no illusion that the system of regulation gets tweaked along the way after being set up. The second problem is that one needs the entire (developed) world to participate in order to make it workable. Europe’s big problem was that the two countries it needed most to participate in Cap & Trade, the United States and China, refused to. It won’t work if the easiest places for a polluting industry to move are friendly to their pollution.

The third option is to impose a tax on CO2 pollution. You get almost the same polluter incentives as Cap & Trade (except for the ability to make money), but it’s very unpopular. Because the additional costs of the tax will be passed along to consumers, a tax means it’s harder to heat your home, harder to buy a laptop, harder to maintain a car. While those things may be very bad from a PR standpoint, from a scientific and regulatory standpoint, those things are exactly what you want.

The point of a regulatory tax is to change behaviors, and if you set them high enough, you will, though people will hate you for it. Economists have found, however, that the major flaw in a regulatory tax is that (and brace yourself) it makes too much money! The point at which a regulatory tax becomes so burdensome as to change behavior, they say, is beyond the point at which it becomes a real drain on and problem for the rest of the economy.

The fourth option is to not bother trying to determine what exactly the right level of pollution is. Similar to what we’ve done with the auto industry and fuel efficiency standards, we could say to polluters – you need to be as clean as is technologically feasible.

The industry’s first response (as it was with fuel efficiency standards back in the 1970’s) will be, “It can’t be done. You’ll never be able to get a cleaner level of pollution.” When that turns out to be wrong, the next response will be, “It can’t be done cheaply.” When that eventually turns out to be wrong, they’ll come up with something else to say.

But the real problem with the fourth option is that it requires the regulators to examine the existing technology, determine a proper requirement, and then return for a periodic review of the available technologies. Regulators are notoriously bad in this country on that last part. Another issue is that we’re trying to make a regulatory-based market for new technologies.

The fifth option is to do what we used to do a lot more, and still do in some cases (like BP): liability. The theory being that if a polluter knows that they will eventually be financially liable for the harms caused by their pollution, they’ll pollute less.

The flaw with that theory (and why it’s not really an option here) is that it was hard enough to show when it was a local factory polluting in a small, relatively closed system. There are too many polluters in this issue, and each one will point to another, and no one will be stuck with liability (unless we try market-share liability, which has its own issues because we’re dealing with numerous different markets and different methods of pollution output).

[stebo0728]

<---- Really trying hard not to hijack thread on environmental issue .....

Great post though, and im sure typing all that back out helps seal the info into your mind, good study tactic

[IBCoupe]

It really does. As long as you're not hi-jacking onto some weird tangent, feel free. If you'd like to talk about the merits of the different kinds of regulation, go right ahead!

In my opinion, Cap & Trade is probably the most feasible way of actually getting some regulation passed, and the most feasible way of actually getting some regulating done. It's a shame that many are set on misrepresenting what it actually does and involves. It's actually probably the one approach to regulation that involves the least risk for the passing on of compliance costs.

[wingFeather]

Thanks for the lesson, IB. I actually found this thread very informative!!! Bravo