Cut capital gains tax?

[ERD50]

I think it's terrible that my capital is taxed at a lower rate than someone's labor. ...

Short term capital gains are taxed the same as labor.

What we are talking about is, should inflation be considered in Long Term Cap Gains taxes? In anybody's book, a $1,000 gain over 30 years is not the same as that gain over 13 months. I don't think it should be taxed the same.

In the earlier CD example of 2.5% interest and 2% inflation, we would need to weight the interest and inflation over the year, some of that interest was only earned for the most recent month or day. Only the amount earned early in the year would be degraded by a full year of inflation. I think keeping this down to an annual adjustment would be sufficient.

-ERD50

 

[jollystomper]

Thanks again, but my comment remains.

"So this is something some people say might happen, maybe. Wake me when there is news."

+1

This seems more like a common "let's leak a thought to see what the reaction is, based on the reaction we may or may not decide to pursue it" political action.

 

[ERD50]

I...

Why should inflation on a capital asset be tax free but the portion of bond interest that is paid to compensate the holder for inflation be taxable? It doesn't make sense... remember the basics of constructions of rates of return... it begins with inflation with additions for credit risk, liquidity, market risk, etc.

See my previous posts, but you receive the dividends/interest as it accumulates. So you can spend it at that time, and inflation really doesn't have an effect.

That's different with a capital investment. If I invested $1,000 30 years ago, and sell for $2,000, inflation has eaten up any gains, it is actually a loss. Not so with monthly/quarterly dividend/interest payments. I can spend/invest the money the day I receive it. With the capital 'gain' I can't go back and buy a gallon of gas for $1.00, from 30 years ago.

-ERD50

 

[pb4uski]

....In anybody's book, a $1,000 gain over 30 years is not the same as that gain over 13 months. I don't think it should be taxed the same. ....

Why not? The amount of the gain reflects the taxpayer's investment prowness or the lack thereof... it doesn't matter how long it is held, that $1,000 gain is still income.

If an investor invests in something that the return doesn't keep up with inflation that is their stupidity... we shouldn't be rewarding them for it by giving them a tax break.

Besides, taxes are too complicated as it is... it is a stupid idea to make taxes more complicated as the administration is proposing.... just 18 months ago they were trumpeting about how the new tax law was simplifying taxes and now they want to make it more complex.

 

[ERD50]

...
Besides, taxes are too complicated as it is... it is a stupid idea to make taxes more complicated ...

There is only one way to do that, IMO. Tax spending, not income. Yes, the Federal Sales Tax.

Income is difficult to define. I don't agree with you that $1,000 earned in one year is the same as $1,000 earned over 30 years. Spend a dollar and that's that. The wealthy spend more (on average, - you can always point out an exception), so they will be taxed more.

But that won't happen either.

-ERD50

 

[pb4uski]

No, federal sales tax is a bad idea. Family A makes $50k and spends most of it and gets taxed on the $50k that they spend. Family B makes $100k, saves $50k and spends $50k and gets taxed the same as Family A. Essentially makes income earned that is saved tax-free.... horrible idea.

It would likely reduce my tax bill but it is still a horrible idea... not to mention extremely regressive.

 

[ERD50]

No, federal sales tax is a bad idea. Family A makes $50k and spends most of it and gets taxed on the $50k that they spend. Family B makes $100k, saves $50 and spends $50k and gets taxed the same as Family A? Essentially makes income earned that is saved tax-free.... horrible idea.

It would likely reduce my tax bill but it is still a horrible idea.

Well, the actual plans for this include an offset, essentially a 'standard deduction' in the form of a prebate, so that scenario is covered.

Yes, it adds some complexity back in, but removes thousands of times more complexity. You'd also need to adjust for ROTH accounts, but again, I think that is simpler than all our weird income rules.

And it still would encourage savings - I thought that was a good thing? There is much derision of non-savers here on this forum.

-ERD50

 

[zinger1457]

Anyone know how much of a donation is needed to get an executive order written up? My 2% interest paying savings account isn't even keeping up with inflation, would like to have that taxable interest inflation adjusted.

 

[Independent]

I want to start here:

I don't look at any law or tax ruling in terms of benefiting/hurting the poor/rich. I look at it as is it a reasonable and consistent approach to collecting this tax. We shouldn't be able to be unfair to a group, just because they are a minority, whether that minority is rich or poor. I don't think things should be justified because they only affect a few people. Right is right, wrong is wrong.

It looks like we are coming at this from different directions. I don't think our tax laws should be designed to favor any race, religion, sex, etc. over another. But, I definitely believe that tax rates should be graduated.

We have to collect taxes to support the gov't. We should do it with the least pain. People with more income or assets should pay higher tax rates than people with less simply because they give up luxuries to pay the tax, not neccessities. For the very wealthy, they have so much money they can't spend it on normal "consumer goods" during their lifetimes, we should tax them at the highest rates.

Since I've had a higher income than most Americans, I should pay above average rates. And, people with more than me should pay even higher rates.

So the fact that this is another tax cut where most of the money would go to the very wealthy, means that it goes in the wrong direction for me.

I understand the taxing nominal investment income instead of real investment income makes our "income" tax actually two taxes. An income tax on the real income plus an asset tax driven by inflation. That's okay by me. Normal people pay many taxes - income, SS, Medicare, sales, real estate, gasoline, etc. If high wealth individuals also pay an asset tax, fine. (Especially since that is actually simpler than trying to inflation adjust all investment income.)

But be aware, for most people this would not be such a big deal for CDs overall. You have that rate compared to inflation for the year, versus a capital gain over many years. I suppose if you were in CDs for 10 years, it kinda comes out the same, though cap gains are expected to be higher than CD rates, so more impact on cap gains.

Maybe we're not understanding this the same way. Suppose Andy buys a 1 year* CD that pays 5% and credits interest annually. Bob buys a stock with no dividend, and sells it one year later for 5% more than he bought it. I think if Bob gets to adjust his gain for inflation, then Andy should get to adjust his interest the same. If the rates are 2% and 10%, I also think that both should be adjusted for inflation. If they both hold for 10 years, they should both adjust for inflation. Presumably the CD every year, as interest is paid, but the stock only at the end when the cap gain is realized.

Wouldn't that be accounted for? If I sell a bond at a gain or loss, that is a capital gain, same as a stock. Am I missing something?

Same as the CD, shouldn't I be getting my inflation adjustment every year as I'm paying taxes on my interest?

* Or 13 month, if you want to allow for the current ST vs. LT cap gains rates.

 

[Independent]

Anyone know how much of a donation is needed to get an executive order written up? My 2% interest paying savings account isn't even keeping up with inflation, would like to have that taxable interest inflation adjusted.

 

[Independent]

Well, the actual plans for this include an offset, essentially a 'standard deduction' in the form of a prebate, so that scenario is covered.

Yes, it adds some complexity back in, but removes thousands of times more complexity. You'd also need to adjust for ROTH accounts, but again, I think that is simpler than all our weird income rules.

And it still would encourage savings - I thought that was a good thing? There is much derision of non-savers here on this forum.

-ERD50

This is a tangent, and discretion says I shouldn't chase after it, but .....
A high-rate national sales tax gets plenty complex too.

Should a soup kitchen pay the tax on the food it buys? Should I pay the tax on medical bills? Trash collection services? Trash collection paid via local taxes? How about tuition? A computer that I buy to use (at least some of the time) for school work, or for my home business? How about if I fly to Bermuda and take delivery of my yacht there instead of in Miami? Does it matter if I dock it part of the year in Nassau vs. Miami? How much? What about families who are so incredibly rich that most of their income just builds up their fortunes and doesn't get spent? (in my world, that's the first money we should tax)

I think this forum is extremely pro savings. The market provides incentives for people to get out of bed and go to work. It also provides incentives (investment income) to defer spending. I don't think the gov't is so smart that it should say that the market incentives are "wrong" and need to be corrected by favoring one type of income over the other. Especially in today's environment where we seem to be swimming in capital.

 

[gwraigty]

Yep.

And, bonds. Regular bonds bought at par, bonds resold at a discount or premium, amortizing bonds, and convertible bonds that have been converted. We need rules for all of them.

Wouldn't that be accounted for? If I sell a bond at a gain or loss, that is a capital gain, same as a stock. Am I missing something?

Yes, it's not always the same. I hold many individual bonds and have had to deal with the tax complexities of them for several years (one reason I'm gradually switching to ETFs).

For example, a bond bought at a discount of $900 that is sold/called/matured at it's par value of $1,000 does not necessarily result in a capital gain of $100. Some of that $100 might be considered Accrued Market Discount and is taxable as ordinary income on Schedule B. The remainder would be considered a capital gain on Schedule D. The brokerage 1099 gives the adjusted figures.

That's just one complexity. I won't get into amortizable bond premiums, accrued interest paid, muni bonds, etc. It's way beyond the scope of this discussion. Info for individual bond investors is readily available in somewhat easy-to-understand language from many sources via a Google search.

 

[ERD50]

I want to start here:
It looks like we are coming at this from different directions. I don't think our tax laws should be designed to favor any race, religion, sex, etc. over another. But, I definitely believe that tax rates should be graduated.

We have to collect taxes to support the gov't. We should do it with the least pain. People with more income or assets should pay higher tax rates than people with less simply because they give up luxuries to pay the tax, not neccessities. ....

We are actually in agreement on that, for the reasons you mention. My issue is that I think it is inconsistent/unfair to treat a 30 year 'gain' (a loss to inflation) the same as a 13 month gain. And I don't accept that it's "OK, because they are rich".

IOW, a graduated tax can be applied consistently, and I'm fine with it. It's the inconsistency of cap gains that bothers me.

... Maybe we're not understanding this the same way. Suppose Andy buys a 1 year* CD that pays 5% and credits interest annually. Bob buys a stock with no dividend, and sells it one year later for 5% more than he bought it. I think if Bob gets to adjust his gain for inflation, then Andy should get to adjust his interest the same. If the rates are 2% and 10%, I also think that both should be adjusted for inflation. If they both hold for 10 years, they should both adjust for inflation. Presumably the CD every year, as interest is paid, but the stock only at the end when the cap gain is realized.

Same as the CD, shouldn't I be getting my inflation adjustment every year as I'm paying taxes on my interest?

* Or 13 month, if you want to allow for the current ST vs. LT cap gains rates.

Later yesterday, I thought of a way to equalize this and simplify it. Don't apply an inflation adjustment to the most recent year of the investment. So neither a capital gain held for a year, nor a div/int payment would be adjusted. Hold a stock for 5 years, you get just 4 years of inflation adjustment.

And I had to look this up, I have not owned a CD since the last century, but " most CDs credit interest monthly", so the inflation factor is not as great as just subtracting the two annual rates.

-ERD50

 

[RE2Boys]

Isn't this a bit of double counting of inflation as the income tax brackets, along with other elements of the tax code, are already indexed to inflation?

 

[ERD50]

This is a tangent, and discretion says I shouldn't chase after it, but .....
A high-rate national sales tax gets plenty complex too.

Should a soup kitchen pay the tax on the food it buys? Should I pay the tax on medical bills? Trash collection services? ...l.

Simple, consistent answer. Yes.

It's all these carve outs that make taxes complex. What is 'food', who is a "charity", and on and on. Tax it all, if you buy it it is taxed. The market will adjust. All these other adjustments that are made now are just a shell game. We all end up paying for them somewhere else, and the adjustments require more administration and lawyers and accountants, and we pay for those in addition. It's a shell game with overhead.

... Trash collection paid via local taxes? How about tuition? A computer that I buy to use (at least some of the time) for school work, or for my home business? ...

No, Yes, Yes.

And we no longer need to worry about expensing, depreciating or any other things about that expense as a business expense. The business will have no income tax, they just pay tax on what they buy, collect tax on what they sell (at the end user).

You already paid for that trash service in your taxes, we don't tax taxes. I'd have to think about this, but it seems to me the municipality should pay the Federal tax when they pay for something. Yes, that tax is passed on to us, but we aren't actually taxed on it, it is just pass through. That would avoid all sorts of tricks of having a local municipality skirt Fed taxes for its people.

... How about if I fly to Bermuda and take delivery of my yacht there instead of in Miami? Does it matter if I dock it part of the year in Nassau vs. Miami? How much? ...

I don't know enough about how taxes outside the US are taxed now, so I really can't say w/o more research. I'm sure there is a not-too-complex answer though.

... What about families who are so incredibly rich that most of their income just builds up their fortunes and doesn't get spent? (in my world, that's the first money we should tax) ....

The rich that are not spending money are an exception that we don't need to worry about. Are they going to horde their money for generation after generation? I'm confident that 'problem' will take care of itself.

And anyhow, if they are holding those assets and not selling, they are not generating income anyhow (other than divs).

And if they are investing their divs rather than spending them, that's a good thing in terms of supporting investment in our economy. It's not all bad.

-ERD50

 

[Montecfo]

I want to start here:
It looks like we are coming at this from different directions. I don't think our tax laws should be designed to favor any race, religion, sex, etc. over another. But, I definitely believe that tax rates should be graduated.

We have to collect taxes to support the gov't. We should do it with the least pain. People with more income or assets should pay higher tax rates than people with less simply because they give up luxuries to pay the tax, not neccessities. For the very wealthy, they have so much money they can't spend it on normal "consumer goods" during their lifetimes, we should tax them at the highest rates.

Since I've had a higher income than most Americans, I should pay above average rates. And, people with more than me should pay even higher rates.

So the fact that this is another tax cut where most of the money would go to the very wealthy, means that it goes in the wrong direction for me.

I understand the taxing nominal investment income instead of real investment income makes our "income" tax actually two taxes. An income tax on the real income plus an asset tax driven by inflation. That's okay by me. Normal people pay many taxes - income, SS, Medicare, sales, real estate, gasoline, etc. If high wealth individuals also pay an asset tax, fine. (Especially since that is actually simpler than trying to inflation adjust all investment income.)

Maybe we're not understanding this the same way. Suppose Andy buys a 1 year* CD that pays 5% and credits interest annually. Bob buys a stock with no dividend, and sells it one year later for 5% more than he bought it. I think if Bob gets to adjust his gain for inflation, then Andy should get to adjust his interest the same. If the rates are 2% and 10%, I also think that both should be adjusted for inflation. If they both hold for 10 years, they should both adjust for inflation. Presumably the CD every year, as interest is paid, but the stock only at the end when the cap gain is realized.

Same as the CD, shouldn't I be getting my inflation adjustment every year as I'm paying taxes on my interest?

* Or 13 month, if you want to allow for the current ST vs. LT cap gains rates.

Since the "wealthy" pay virtually all of the federal income tax, virtually all tax cuts are for the "wealthy".

And given that you think rates should be progressive, you presumably love our current tax structure where close to half pay no FIT.

As far as indexing gains to inflation, bad idea in my view as it is too complicated, and the premise that $1000 of income should be taxed differently based on the rate of annual gain is mixing 2 concepts. You have the same amount of gain dollars to spend no matter the holding period, which is how tax law views it.

Or so it seems from here.

 

[ERD50]

... But, I definitely believe that tax rates should be graduated.

We have to collect taxes to support the gov't. We should do it with the least pain. People with more income or assets should pay higher tax rates than people with less simply because they give up luxuries to pay the tax, not neccessities. ...

Related to this, I'm surprised I never seem to hear talk of graduated property taxes.

It seems to me the same thought process applies, maybe more so. The people in my community who live in the lowest quintile of home values almost certainly have less discretionary income than the people with home values in the highest quintile. Yet their tax rates are the same. No equivalent of a 'standard deduction' either.

-ERD50

 

[Independent]

Since the "wealthy" pay virtually all of the federal income tax, virtually all [-]tax[/-] FIT cuts are for the "wealthy".

And given that you think rates should be progressive, you presumably love our current tax structure where close to half pay no FIT.

I modified your post.

Suppose we increased the standard deduction, increased the child tax credit, or decreased the rate for the first band (the 10%). All of those would be FIT "cuts" where most of the dollars would go to the non-wealthy.

Or, we could decrease all FIT rates by x% (10%->9% ; 12%->10.8% ; 22% -> 19.8% ; etc). That would give everyone the same percentage FIT reduction, but the higher income get more dollars.

This cap gains tax decrease not only gives more dollars to the wealthy, but also gives them a bigger percentage reduction.

Our current federal tax system mixes a progressive income tax and a couple regressive payroll taxes. Saying that half the people pay no FIT kind of ignores the fact that most of those who don't pay FIT do pay (or paid) substantial payroll taxes. I don't "love" our current excessively complex system. But, when you put all the pieces together, it is modestly progressive and that is one good feature.

 

[Montecfo]

Your post in my view validates the premise that all FIT cuts are for the "wealthy" since they pay all the tax. Notice I do not have to repeat FIT again in the sentence.

A related truth is FIT cuts benefit the lower earners more on a percentage basis than higher earners. The pundits seem to ignore that one.

Payroll taxes are a completely different topic and most view payroll taxes as different since federal payroll taxes are for entitlements generally.

Our federal income tax system is very progressive and has just grown more progressive over the past two decades, by removing more folks from the income tax rolls altogether and pushing more of the tax burden to higher earners.

Thanks for the discusion.

 

[Bir48die]

This reduces taxes for a small slice of Americans:


But, I'm pretty confident the tax impact is even more skewed than the ownership. As we look down the pyramid, we'll find that higher percents of the stocks that individuals own are inside tax qualified plans. The capital gains treatment isn't relevant for them.

Furthermore, the numbers above sort families based on income, not wealth. If we sorted by wealth we'd get even more concentration at the top.

Yes, some people on this board have enough wealth to hold some of it outside qualified plans. But, they have trivial amounts compared to the small slice at the top.

https://en.wikipedia.org/wiki/Wealt...ates#U.S._stock_market_ownership_distribution

And, we already have a $1 trillion annual deficit.

+1 on the deficit comment

 

[Independent]

We are actually in agreement on that, for the reasons you mention. My issue is that I think it is inconsistent/unfair to treat a 30 year 'gain' (a loss to inflation) the same as a 13 month gain. And I don't accept that it's "OK, because they are rich".

IOW, a graduated tax can be applied consistently, and I'm fine with it. It's the inconsistency of cap gains that bothers me.

Many ordinary US workers have access to Roth 401k accounts. For most of them, the $19,000/$25,000 annual cap covers all their savings. The result is that they can pay no tax at all on the investment income on their retirement savings.

But, higher income people may want to save even more. They end up paying taxes on the investment income in those additional taxable accounts. The more money they have, the smaller percent that they can squeeze into the qualified accounts. IMO, that difference is "OK, because they are rich". This is one of the way we graduate our FIT.

I don't care if the asset is a stock, a bond, or a CD. I'm fine with giving a tax break on the first __ dollars as a way of providing a somewhat better deal to lower income/wealth taxpayers.

Later yesterday, I thought of a way to equalize this and simplify it. Don't apply an inflation adjustment to the most recent year of the investment. So neither a capital gain held for a year, nor a div/int payment would be adjusted. Hold a stock for 5 years, you get just 4 years of inflation adjustment.

And I had to look this up, I have not owned a CD since the last century, but " most CDs credit interest monthly", so the inflation factor is not as great as just subtracting the two annual rates.

If you ignore one year of inflation, then the person who owns stocks for 30 years, but tends to hold individual postions for 3 years, will pay more tax than someone who owns stocks for 30 years but tends to hold individual positions for 10 years. Is that what you want? The same is true for bonds or CDs. The more often you reposition your money, the more tax you would pay.

The payment frequency on CDs or bond coupons is irrelevant. At the end of the year I get a 1099 that says I've got a dollar amount of taxable income. Some of those dollars aren't "real income" because inflation eats them away. If equity investors get an inflation adjustment via indexed cost basis on cap gains, then I think fixed income investors should get an inflation adjustment on 1099 interest income, probably by subtracting the inflation rate from the interest rate.

Related to this, I'm surprised I never seem to hear talk of graduated property taxes.

It seems to me the same thought process applies, maybe more so. The people in my community who live in the lowest quintile of home values almost certainly have less discretionary income than the people with home values in the highest quintile. Yet their tax rates are the same. No equivalent of a 'standard deduction' either.

You can put me down as a person who thinks we should have a national "luxury" real estate tax. x% of the value of residential properties in excess of $y million. NY city almost did that on residences over $5 million that are not principal residences this year.

A few states have fixed dollar deductibles on principal residences, NY and CA come to mind.

 

[pb4uski]

Vermont has a property tax relief program that grants property tax credits for property tax in excess of a percentage of household income. About 2/3rds of households qualify. Credits phase out at ~$145k of household income IIRC. A different form of graduated property taxes.

 

[Tiger8693]

Yes, there are payroll taxes for everyone (almost), but at the low end it is more of a "savings account" with a very high return rate, for those that have windfall of additional "refunds" at year end tax time....

My sisters DD is a graduate of the school of hard knocks, and one of those who benefit.

 

[Closet_Gamer]

Intellectually, adjusting for inflation makes a lot of sense to me. Over the long term, the value of the market is the discounted future free cash flow of the assets AFTER taxes. Lower taxes should equal higher values which should benefit assets housed in tax deferred structures. Its a bank-shot, but it should happen.

If this was married with an CG rate increase or used as an opportunity to say that CG = Income rates and put the issue to bed once and for all, along with some level of mandatory automation to address the complexity issue, I think it could be a good thing.

I skeptical of my pre-conditions happening, however, so net I think this is a bad idea.

Doing it via executive order is a horrendously bad idea.

 

[Tiger8693]

Doing it via executive order is a horrendously bad idea.

Not sure how anything (of substance) is going to get done by other than executive order. Been happening this way for (at least) the last 10 years....