Another Consideration? Future "Tax" on Savings

[Tekward]

"Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression - defined as an opaque tax on savers.”

IMF paper warns of 'savings tax' and mass write-offs as West's debt hits 200-year high - Telegraph

Is this possible to model? I generally assume 2% inflation on my yearly needs, 0% on my investments and -1% return on my COLA'd pensions.

 

[Fermion]

You mean like a special tax on savings for people with high incomes? They would never do anything like that. If they did, it would probably be something small, like 3.8%.

 

[teejayevans]

You mean like a special tax on savings for people with high incomes? They would never do anything like that. If they did, it would probably be something small, like 3.8%.

Are those high income thresholds are not inflation adjusted, so eventually those high incomes will be middle class incomes....

 

[MasterBlaster]

The IMF has a point.

Something has to give to pay for all that deficit spending and unfunded entitlements. One way or another it will come back as higher taxes and/or higher inflation which is just another tax.

The only question that remains are the details. You can count on lots of shouting as the situation inevitably reveals itself.

Somehow though I suspect that the people adversely affected won't just be a few rich guys.

 

[seraphim]

I don't consider 3.8% 'small'. With a 2% inflation that means a 5.8% return is required to break even. An 8% historical return will provide only a 2.2% real return! Less than most people plan to withdraw after retirement. That 3.8% will destroy a lot of potential retirements, IMO.

And no, Fermion, a wealth tax is a tax on your actual accrued assets. It's been mentioned occasionally in our Congress, but never by anyone taken seriously.

A pity there's no link to this alleged IMF paper. Anyone else actually heard of it?

A search revealed a dozen rinky-dink sites reprinting the same article from the UK source, but no reputable news or financial sources carrying it; nor does a search come up with an actual PAPER of any sort.

Please people, let's try for a little credibility and check our alleged sources.

 

[Fermion]

Geez...I was being sarcastic when I said they would never do that and then mentioned 3.8%.

They already ARE taxing savings for high income earners with the 3.8% tax on investment returns to fund ACA. After a few years when they realize that is not enough money, they will expand it to lower income earners and maybe increase the rate.

And it is a wealth tax, as the only way to prevent inflation from eroding your wealth is to invest it.

 

[seraphim]

This is the IMF paper refered to. It is not by the IMF, and there is a clear disclaimer that it does not represent the views of the IMF


http://www.imf.org/external/pubs/ft/wp/2013/wp13266.pdf

Reading the paper, then reading the Telegraph article, merely confirms my reasons for never reading the Telegraph. What the paper says does not appear to be accurately represented in the Telegraph rag...

Read the paper.

 

[audreyh1]

Geez...I was being sarcastic when I said they would never do that and then mentioned 3.8%.

They already ARE taxing savings for high income earners with the 3.8% tax on investment returns to fund ACA. After a few years when they realize that is not enough money, they will expand it to lower income earners and maybe increase the rate.

And it is a wealth tax, as the only way to prevent inflation from eroding your wealth is to invest it.

No - in this case they aren't taxing savings/portfolio. They are taxing the income generated by the savings/investment/portfolio.

Big difference.

 

[seraphim]

Fermion - you stated a tax on savings, not a tax on returns. There's a major difference.

I agree the taxes from ACA will seep down to middle incomes. Already happening, with the 3.5% tax on insurance providers on all policies acquired via the federal exchange. The consumer will end up paying that increase.

 

[Fermion]

No - in this case they aren't taxing savings/portfolio. They are taxing the income generated by the savings/investment/portfolio.

Big difference.

No it isn't that big of a difference...here, let me explain.

If you have $2,000,000 in a muni fund earning 3%, that would be $60,000 a year that you earn. If they tax this 3.8%, then they are taxing you $2,280 a year. If inflation is running near 3%, then the $2,280 is actually a 1% wealth tax on your $2,000,000 portfolio as you needed the full $60,000 just to maintain the same spending power.

It would get much more obvious with high inflation and perhaps a bit higher ACA tax. I wouldn't rule either of these out.

 

[seraphim]

You're example demonstrates a tax on earnings. You merely phrased it poorly when you called it a tax on savings. In your example, a tax on savings would be .038 times the $2M. We now understand what you meant to say.

 

[Buddy Love]

Well I just picked up a new tax this year on deferred salary that I put in place 12 years ago

 

[seraphim]

The OPs comment is also misleading. The paper called it an opaque tax on savers ( those who save) not a tax on savings, as the OP stated in his topic title.

 

[aim-high]

That tax is only on modified adjusted gross income over $250,000 (married filing jointly.) So if you net $60K from your investments and have no other income, you're not paying it.

Questions and Answers on the Net Investment Income Tax

 

[seraphim]

Aim-high

The article is not country specific and is not referring to the US income tax code. Different topic. We merely had a semantic issue to clear up.

 

[Fermion]

Ok, I will admit that there is a difference between the tax on savings and a wealth tax...sort of.

The 3.8% tax right now only hits high earners. That is the trick to getting things like that passed. You can ease it down to lower levels in the future by letting inflation erode the definition of high earner (like the AMT did) or you can convince enough people that a lower high that still doesn't directly impact them is still ok.

 

[audreyh1]

No it isn't that big of a difference...here, let me explain.

If you have $2,000,000 in a muni fund earning 3%, that would be $60,000 a year that you earn. If they tax this 3.8%, then they are taxing you $2,280 a year. If inflation is running near 3%, then the $2,280 is actually a 1% wealth tax on your $2,000,000 portfolio as you needed the full $60,000 just to maintain the same spending power.

It would get much more obvious with high inflation and perhaps a bit higher ACA tax. I wouldn't rule either of these out.

I guess you have to get more accurate with your "examples" because muni bond fund dividends are currently exempt from the ACA Net Investment Income Tax (a.k.a the ACA "Medicare Surtax")

Usually, "tax on savings" indicates some kind of tax on net worth or investment holdings - not on the earnings from the savings. You pay taxes on those already unless they are in tax-deferred accounts or generate non-taxable income.

According to your example above we already have a "wealth" tax as no-one can reinvest the income generated by their investments in taxable accounts without paying taxes. But that is not usually what people mean when they talk about a "wealth tax" - although of course any taxes at all could be considered a "wealth tax" as you describe it above. At some point the terminology becomes meaningless.

 

[seraphim]

Fermion - I understand the tax code. That's not what the article was discussing. The idiot (IMO) who wrote the Telegraph article called it a "savings tax", when the actual paper never mention a savings tax. Forget the tax code. It's not germane to the original topic. Read the paper, not the screwed up article.

Beddy bye time. Night all...

 

[MichaelB]

A boss of mine always said "Never let the facts get in the way of a good argument"

seraphim, thanks for the link to the paper. Reihnart and Rogoff always make for good reading, I'm positive this paper will be no different.

 

[Fermion]

I guess you have to get more accurate with your "examples" because muni bond fund dividends are currently exempt from the ACA Net Investment Income Tax (a.k.a the ACA "Medicare Surtax")

Usually, "tax on savings" indicates some kind of tax on net worth or investment holdings - not on the earnings from the savings. You pay taxes on those already unless they are in tax-deferred accounts or generate non-taxable income.

According to your example above we already have a "wealth" tax as no-one can reinvest the income generated by their investments in taxable accounts without paying taxes. But that is not usually what people mean when they talk about a "wealth tax" - although of course any taxes at all could be considered a "wealth tax". At some point the terminology becomes meaningless.

Yes I just realized that muni bond interest doesn't apply to the 3.8% tax. I really have not investigated the tax enough because it will not impact me directly. I hate to say that because I know at some point down the road there will be someone who doesn't care about what new taxes do impact me because it doesn't impact them.

 

[meierlde]

Fermion - you stated a tax on savings, not a tax on returns. There's a major difference.

I agree the taxes from ACA will seep down to middle incomes. Already happening, with the 3.5% tax on insurance providers on all policies acquired via the federal exchange. The consumer will end up paying that increase.

Of course France does have a wealth tax, and the US sort of has a 1 time wealth tax if your estate is above 5.2 million. (The Estate tax).

 

[marko]

Somehow though I suspect that the people adversely affected won't just be a few rich guys.

The rich guys always have a work-around. It's financial whack-a-mole.

The middle guys will pay the freight --as it's always been-- while the very rich will just move themselves/their money to a better location. "Tax the rich" makes people feel better but never really happens.

OTOH, Isn't this research written by the same Harvard weenies who made some big math mistake modeling another dire, end-of-the-world warning?

 

[kmt1972]

Yes I just realized that muni bond interest doesn't apply to the 3.8% tax. I really have not investigated the tax enough because it will not impact me directly. I hate to say that because I know at some point down the road there will be someone who doesn't care about what new taxes do impact me because it doesn't impact them.

Yep. I took some time a while ago to research this just to make sure as it affects me a lot as I own quite a bit of Munis. Also the way the 3.8% tax is structured it makes it even more lucrative for me to sell my losers while our AGI is above $250K and sell our winners after we FIRE and AGI are below $250K.

As for tax on net worth, I guess it is possible but then all it will do is to push people to invest money into hard to track, assess, and tax assets like art and wine. And in the end it will not raise the revenue as assumed. Because of that this is not likely.

 

[meierlde]

As for tax on net worth, I guess it is possible but then all it will do is to push people to invest money into hard to track, assess, and tax assets like art and wine. And in the end it will not raise the revenue as assumed. Because of that this is not likely.

Note that there used to be more universal wealth taxes, in that you paid an intangibles tax on stocks and bonds, this has gradually disappeared (it was a state tax btw). Of course we have the 1 time in your life wealth tax, the estate tax, all be it you have to have a net worth of above 5.3 million to hit it.

 

[AllDone]

Since federal taxes are at a 50 or 60 year low, it's likely that they will go up sometime in the future. At some other time they'll go down. Ideally they'll go up a bit in good times and down a bit in the bad times. Taxes are the price of we pay for a civilized society according to Oliver Wendell Holmes and he was a pretty smart guy.