Dividends, Taxes and SWR

[wabmester]

Charlie, at least with an EE degree you should be able to model the economy as a non-linear feedback system or something.   I just pull my theories out of thin air  

My (3) was just one scenario.   I agree that deficit spending can stimulate the economy, but that'll eventually bite us as well.   There may be some balance of taxation, spending, and monetary policy that will turn the economy into a perpetual motion machine, but I don't think we've come close to hitting it yet.

One thing I think is clear is that the gap between rich and poor is widening, and reducing taxes will speed up that process.   That sort of thing always ends badly.

 

[retire@40]

It is true that those in higher tax brackets get more bang for the buck in tax free munis, but it also follows that those in lower brackets or paying 0% in taxes would get proportionally less or even no bang out of removing taxes on interest, dividends,etc.  Additionally, if their income is low enough to be in a low bracket to begin with, it is less likely that they will be able to be saving and investing significant amounts anyway, so it really wouldn't be much of an encouragement for them.  As for the rich getting  a free ride, that doesn't ring true to me at all.  Nice sweeping generalization though.

Oh boy, you are so off the mark, I don't know where to begin. Let me just say that the rich do not need to save anymore. They don't need incentives like tax-free funds and Roth IRAs to save. THE POORER YOU ARE, THE MORE YOU NEED TO SAVE. Even if you can only start saving $25 a week in a Roth IRA, it's a good start. Believe me, smart poor people utilize vehicles like Roth IRAs to help them become rich. Stupid poor people don't contribute to Roth IRAs and many times waste their money on $5 lattes, cigarettes, and lottery tickets.

 

[Nords]

Do you know the black market that would exist to avoid the consumption tax (as it does in Europe) if there was no requirement to account for your income (no tax returns required)? A lot of illegal money would be spent on non-register items like electronics sold from a truck on the side of a road.

Hey, retire@40, waddya mean "would" be spent? That's where we make some of our best purchases! But we draw the line at buying stuff that fell off the truck...

 

[retire@40]

If a poor slob at the poverty level had $25 a week to save, and that's a really big if, a Roth would be of no immediate use to him.  Nor would any tax-deferred investment vehicle.  When you're poor, it's all about making it through today.  Now talk about lazy or stupid or wasteful people, that's not limited to one's economic status.  I got to where I am by consistant hard work, living well below my means, and I don't have a Roth and didn't get a free ride.  I guess I'm dumber than all those supposed rich people who apparently had it handed to them and aren't contributing to society.  Obviously, the poorer you are the  more you need to save, but I would say the more you need to earn first.  Which means the better your skills and education need to be first.  Which means the harder you have to apply yourself to the task of personal improvement.  Which means the more self disciplined you need to be.  It is more complex than lottery tickets and coffee.  Now where is that confounded mark?

Well, in your first post, you said that "if their income is low enough to be in a low bracket to begin with, it is less likely that they will be able to be saving and investing significant amounts anyway."  Now you are saying that it all starts with self-discipline to eventually earn more and save more.  I like the more positive philosophy you used in your second post about what a person needs to do to get into a better financial situation, instead of the more negative philosophy in your first post about why a person can't.

By the way, as an example, I started off with zero, and my parents came to this country not knowing any English and with no more than a 3rd grade education between the both of them and not even enough money to pay the bills for the first 6 months so they had to live with relatives just to get started.  I could say I grew up poor too, but I didn't feel poor even though I knew we were not even in the middle class.  I just know my father worked as hard as he could to support his family AND save for his future while my mother stayed at home raising 4 kids.  I managed to put myself through college without any financial help from my parents and then work hard enough to start my own business and work just as hard as my father sometimes 7 days a week for months because I feared ever being poor again.  I nor anyone in my family ever looked for a federal hand-out, never felt like we were entitled to any special treatment, and always knew the only way to get ahead in life was to help ourselves.  

There are a lot of people in this country that grew up and have done the same as I have.  One major difference I have found is that I feel it's important to stop and smell the roses.  Just as I have maximized my savings, I also want to maxamize the fruits of my labor as soon as possible.

 

[JOhn Galt]

This is in answer to a previous post by retire@40
with a question about the dividends I receive from my holding company. The answer is that I bought the company which was already set up as a "C" corp. and could not be converted to Sub S.
The dividends might have been a problem for me
but it turned out okay.

John Galt

 

[retire@40]

The answer is that I bought the company which was already set up as a "C" corp. and could not be converted to Sub S.

Not to belabor the point, but I'd love to know why the C-corp could not be converted to an S-corp as soon as you bought it.

 

[John Galt]

The "C" corp. had a large NOL which would have been lost.

John Galt

 

[preben]

I still hate having to pay taxes on interest/dividends on money I have already paid taxes on through my income taxes.... Whether rich or poor that sucks....

 

[retire@40]

The "C" corp. had a large NOL which would have been lost.

So you bought a c-corp with a pre-existing NOL?

 

[John Galt]

Not exactly. I produced a lot of the NOL myself
through my creative and enlightened management

John Galt

 

[wabmester]

There's a short article in the NY Times about overhauling the tax system. Interesting statistics relevant to the topic being discussed here:

Percentage of income from cap gains and dividends (by 2000 AGI):

<$50K: 3%
$50-100K: 4%
$100-500K: 11.5%
$500K-$1M: 24.7%
$1-10M: 37.6%
>$10M: 61.4%

50% of all dividends were paid to those in the top 3.8% incomes.

 

[sgeeeee]

There's a short article in the NY Times about overhauling the tax system.   Interesting statistics relevant to the topic being discussed here:

Percentage of income from cap gains and dividends (by 2000 AGI):

<$50K: 3%
$50-100K: 4%
$100-500K: 11.5%
$500K-$1M: 24.7%
$1-10M: 37.6%
>$10M: 61.4%

50% of all dividends were paid to those in the top 3.8% incomes.

Thanks for the data, wab. I had seen this data years ago and tried to allude to it in my previous post on this thread, but I couldn't find the actual data.

The other data I alluded to that looks similar is the data on percentage of lifetime income from inheritance.

It is no coincidence that certain wealthy, elite political forces work so hard to elliminate tax on these two sources of income.

 

[retire@40]

There's a short article in the NY Times about overhauling the tax system.   Interesting statistics relevant to the topic being discussed here:

Percentage of income from cap gains and dividends (by 2000 AGI):

<$50K: 3%
$50-100K: 4%
$100-500K: 11.5%
$500K-$1M: 24.7%
$1-10M: 37.6%
>$10M: 61.4%

50% of all dividends were paid to those in the top 3.8% incomes.

I'm trying to figure out what those % represent. It's not % by population because they add up to more than 100%. So is it % of AGI that represents dividends and cap gains? If so, the amounts look unreasonable to me. Are you saying that people with AGI of over $10 million make $6,140,000 of that $10 million in dividends and cap gains? That's an aweful lot of dividends and cap gain. Where does it come from?

I wonder how the Times arrived at these %. For example, did they take into account any tax free cap gains like the first $500,000 on the sale of a personal residence? There are a lot of middle class people making under $100K AGI that qualify for that every year. That alone would make the people in the $50K - $100K 500% instead of 4% Plus, what about all the hidden dividends and cap gains that many middle class people have in untouched 401(k) plans and IRAs? Was that factored in?

 

[wabmester]

I'm trying to figure out what those % represent.

For each income bracket, it's the percentage of AGI that came from dividends and cap gains. I believe the data came from analysis of tax forms, so I assume it only reflects taxable gains, not exemptions.

If you're in the $10M bracket, chances are you didn't get there on salary. People in that bracket just sold a bunch of insider shares, stock options, etc. They are the ones who would benefit most from a reduction of taxes on investment gains/income.

 

[retire@40]

For each income bracket, it's the percentage of AGI that came from dividends and cap gains.   I believe the data came from analysis of tax forms, so I assume it only reflects taxable gains, not exemptions.

If you're in the $10M bracket, chances are you didn't get there on salary.    People in that bracket just sold a bunch of insider shares, stock options, etc.   They are the ones who would benefit most from a reduction of taxes on investment gains/income.

But are you looking at the whole picture? If what you say is true about these capital gains coming from stock options, the AMT for these people will be very high. They would pay lot higher tax than what you or I would pay even at the highest long-term capital gain rate. Eliminating or reducing the tax on dividends and capital gains would help me as a middle-class guy more than it would the guy getting rich on stock options. I can get richer a lot faster if the government didn't tax my reinvested dividends and capital gains.

 

[Michael]

Eliminating or reducing the tax on dividends and capital gains would help me as a middle-class guy more than it would the guy getting rich on stock options.

That was my understanding also.  The AMT was designed to make sure the very rich pay a lot of tax.  Eliminating tax on dividends, capital gains, and interest would mostly help the middle class by encouraging them to save and invest for their future.  They would no longer be punished by paying tax on interest that does not even keep up with inflation, and would not have to keep file cabinets full of cost basis information for their DRIP stocks.

This is not likely to happen though, the rich want the middle class to hate the tax code so the middle class does not ignore complaints of the rich about taxes.  They lobby to make sure that the middle class has to jump through a lot of tax hoops for this reason, despite the fact that the government does not get much of its income tax receipts from the middle class.  The poor are allied with the rich in putting tax pressure on the middle class, because they figure more benefits for them.  The middle class has mostly switched to saving by building up equity in their homes, because they are not similarly punished for doing so.

 

[sgeeeee]

. . . Eliminating tax on dividends, capital gains, and interest would mostly help the middle class by encouraging them to save and invest for their future.  . . . .

That's not consistent with the data I have seen:


http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&contentId=A51841-2003Jan27&notFound=true

"In fact, those earning less than $50,000 get 14.7 percent of dividend income, and those earning less than $100,000 get 32.7 percent, according to a Brookings Institution/Urban Institute analysis. The former would get 6.8 percent of the benefit of Bush's dividend plan, while the latter would get 20.9 percent. "

So that would mean that over 70% of the benefit of the Bush dividend plan would go to those earning over $100,000.

 

[wabmester]

AMT is broken. The main defect is that it's not indexed to inflation, so it's impacting the middle class more and more each year.

The potentially good thing about fixing the broken AMT is that they may try to fix other parts of the tax code as well. But chances are they'll only make it more complex and less fair.

I wouldn't mind seeing a cut on investment gains/income tax if we keep taxing the rich at high enough rates and with few enough loopholes that we can keep tax revenue coming in at a healthy rate. That's not happening now, and it certainly wouldn't happen if we just blindly cut taxes on gains/dividends.

 

[retire@40]

That's not consistent with the data I have seen:


http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&contentId=A51841-2003Jan27¬Found=true

"In fact, those earning less than $50,000 get 14.7 percent of dividend income, and those earning less than $100,000 get 32.7 percent, according to a Brookings Institution/Urban Institute analysis. The former would get 6.8 percent of the benefit of Bush's dividend plan, while the latter would get 20.9 percent. "

So that would mean that over 70% of the benefit of the Bush dividend plan would go to those earning over $100,000.

Wait a second.  Now these % are dramatically different from the ones wabmester posted a few posts ago (copied below) AND his numbers included dividends AND capital gains while yours only includes dividends.  My thought is that it's almost impossible to compile these numbers correctly because there are too many unknowns.  You can't just extract dividends and capital gains from tax returns, because not all dividends and capital gains are reported on tax returns and sometimes they are not reported anywhere.

All I know for a fact is that if there were no tax on dividends or capital gains, I as a middle class chump would have more money saved.  I don't care if the rich also benefit, good luck to them.  What are they going to do with all that money anyway?

There's a short article in the NY Times about overhauling the tax system.   Interesting statistics relevant to the topic being discussed here:

Percentage of income from cap gains and dividends (by 2000 AGI):

<$50K: 3%
$50-100K: 4%
$100-500K: 11.5%
$500K-$1M: 24.7%
$1-10M: 37.6%
>$10M: 61.4%

50% of all dividends were paid to those in the top 3.8% incomes.

 

[wabmester]

SG's numbers are consistent with mine. Mine tell you that an average middle class person doesn't make much from dividends and cap gains. SG's numbers tell you that the middle class is larger than the "rich" class.

 

[retire@40]

SG's numbers are consistent with mine.   Mine tell you that an average middle class person doesn't make much from dividends and cap gains.   SG's numbers tell you that the middle class is larger than the "rich" class.

What are you talking about?  

Your numbers say under $50K of income - 3% is from dividends and capital gains.  His say under 50K of income - 14.7% is from dividends.

Your numbers say $50k-$100K - 4% from dividends and capital gains.  His say under $100K - 32.7% from dividends.

Average your under $50K and $50K-$100K percentages and you get 3.5%.  His total is 32.7%

You both can't be right.  I still say don't tax me on my investment income and I will be better off.  If it would make you happy then maybe the tax code could be changed to allow no taxes on the first $20K of investment income.  That would still make me happy.

 

[wabmester]

Your numbers say $50k-$100K - 4% from dividends and capital gains.  His say under $100K - 32.7% from dividends.

I'm clearly not making myself clear, so I'll try once more.

Welcome to JoeCountry. Everybody here is named Joe. We have 1000 people named Joe Middle. They all make $100K, $4K of which comes from dividends. And we have one guy named Joe Rich. He made $10M, $6M of which came from dividends.

40% of dividends went to the Joe Middles (1000 x $4K). 60% went to Joe Rich.

 

[farmerEd]

They would no longer be punished by paying tax on interest that does not even keep up with inflation

Again with the term "punish"...if anyone is being punished, I'd say its the wage earner, not the investors, and especially the small business owner/wage earner that not only has to pay the 15.3% SS/Medicare tax, but also has to deal with top brackets in the high 30%'s if I remember correctly....(plus state taxes)

15% cap gain rates, and low dividend tax rates and no SS/Medicare taxes on passive earnings stack up pretty favorably to what a small business owner pays when he draws a salary...and is almost as bad for the wage earner too, except he "only" pays the 7.65% to SS/Medicare, Plus federal taxes, plus state taxes (and maybe local too someplaces).

If I had to choose people wether I wanted to "punish" people for living off their investments, or "punish" people for earning a wage, I guess I'd come down on the side of giving the wage earner a break...not the investor.

Yes, we do as a country want to encourage people to save and invest...but first, don't we need to encourage people to work?

 

[haha]

Yes, we do as a country want to encourage people to save and invest...but first, don't we need to encourage people to work?

The cruel fact is that workers will work, come hell or high water. Avoidance of starvation is all the encouragement they need.

Mikey

 

[John Galt]

HI Mikey. Not a "cruel fact" at all. Actually, one of the underpinnings of free enterprise. People need clothes , food and shelter. Until the government provides it all,
people either have to work, steal, or be very very
creative.

John Galt