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Index Cap Gains to inflation, treat as ordinary income?
Old 02-09-2019, 09:10 AM   #1
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Index Cap Gains to inflation, treat as ordinary income?

I wonder what people think of this change to our tax laws. As far as I know there is nobody in a position to propose this actually advocating it.

Eliminate the Capital Gains provisions in the Federal Income Tax laws and make their rate the same as for ordinary income. But, also, adjust the capital gains amount to be taxed to account for inflation so people don't have to pay taxes on gain that is simply the result of inflation.
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Old 02-09-2019, 09:27 AM   #2
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I'm not in favor of any changes to our tax laws that make doing taxes more complicated. They'd better not start down that road.

Oh, wait...
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Old 02-09-2019, 09:43 AM   #3
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Inflation is only part of the story. There is also the double-taxation issue. As long as the current corporate income tax system exists, both capital gains (notionally, retained earnings) and dividends are taxed once at the corporate level before the shareholders recognize them and then the same dollars are taxed again. Hence the lower rates on both dividends and capital gains.
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Old 02-09-2019, 09:44 AM   #4
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Originally Posted by Chuckanut View Post
I wonder what people think of this change to our tax laws. As far as I know there is nobody in a position to propose this actually advocating it.

Eliminate the Capital Gains provisions in the Federal Income Tax laws and make their rate the same as for ordinary income. But, also, adjust the capital gains amount to be taxed to account for inflation so people don't have to pay taxes on gain that is simply the result of inflation.
I agree in principle, but would implement it only partially. Here is how I would determine the taxable gain/loss on a sale:

(1) If there is a nominal (unindexed) loss, use it instead of an indexed loss (same as current law).

(2) If there is an indexed gain, use it instead of the nominal gain.

(3) Anything else, such as a nominal gain and indexed loss, use zero for the taxable gain.

Any leftover gains or losses are taxed as ordinary income.
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Old 02-09-2019, 09:45 AM   #5
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Inflation is only part of the story. There is also the double-taxation issue. As long as the current corporate income tax system exists, both capital gains (notionally, retained earnings) and dividends are taxed once at the corporate level before the shareholders recognize them and the same dollars are taxed again. Hence the lower rates on both dividends and capital gains.
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Old 02-09-2019, 09:56 AM   #6
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Inflation is only part of the story. There is also the double-taxation issue. As long as the current corporate income tax system exists, both capital gains (notionally, retained earnings) and dividends are taxed once at the corporate level before the shareholders recognize them and the same dollars are taxed again. Hence the lower rates on both dividends and capital gains.
Simple solution to the double-taxation - stop taxing corporations.

Consumers just end up paying that tax, it gets included in the price of the product. And that becomes a flat/regressive tax rate, as everybody pays the same for a product, regardless of income.

So called 'progressives' should approve of this, as it removes a flat/regressive tax. But emotionally, all they see is "big bad business is getting a tax break!".

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Old 02-09-2019, 10:20 AM   #7
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Simple solution to the double-taxation - stop taxing corporations.

Consumers just end up paying that tax, it gets included in the price of the product. And that becomes a flat/regressive tax rate, as everybody pays the same for a product, regardless of income.

So called 'progressives' should approve of this, as it removes a flat/regressive tax. But emotionally, all they see is "big bad business is getting a tax break!".

-ERD50
Agree, corporations don't actually pay taxes - they just collect them and transmit them to the government. But the benefit is that the taxes are hidden from the voters

Also the current corporate system penalizes success and subsidizes failure. A lot of "corporations pay zero tax" noise is because losses are carried forward, essentially subsidizing losing companies. I'm not sure why the government should be in that business. To avoid that you would need to move to a gross receipts tax or VAT, which have their own issues. But they are "fairer" in the sense that the government doesn't really care how well or poorly you run your business.
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Old 02-09-2019, 10:26 AM   #8
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Moved to the public policy forum, itís a better fit.
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Old 02-09-2019, 10:39 AM   #9
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I am skeptical that would ever happen.

Federal capital gains tax rates have been relatively low historically compared to federal tax rates on ordinary income.
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Old 02-09-2019, 11:37 AM   #10
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I am skeptical that would ever happen.

Federal capital gains tax rates have been relatively low historically compared to federal tax rates on ordinary income.
But not when you take inflation into account.

Say I bought $10,000 stock in 1989, inflation is up over 2x in that time.

So I sell it in 2018 for $15,000. Inflation wise, those $ I bought the stock with are worth $20,000 today. So accounting for inflation, I had a LOSS.

Yet, I'm probably taxed 15% on a supposed $5,000 "gain", which would be $750. I really should be able to write off $5,000 as a loss.

Income is taxed in the year it was earned, inflation isn't a significant factor.

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Old 02-09-2019, 02:00 PM   #11
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Originally Posted by USGrant1962 View Post
Inflation is only part of the story. There is also the double-taxation issue. As long as the current corporate income tax system exists, both capital gains (notionally, retained earnings) and dividends are taxed once at the corporate level before the shareholders recognize them and then the same dollars are taxed again. Hence the lower rates on both dividends and capital gains.

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But not when you take inflation into account.
Say I bought $10,000 stock in 1989, inflation is up over 2x in that time.
So I sell it in 2018 for $15,000. Inflation wise, those $ I bought the stock with are worth $20,000 today. So accounting for inflation, I had a LOSS.

Yet, I'm probably taxed 15% on a supposed $5,000 "gain", which would be $750. I really should be able to write off $5,000 as a loss.
Income is taxed in the year it was earned, inflation isn't a significant factor.

-ERD50
Two of the clearest explanations on any subject I've seen in a long time. Bravo.
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Old 02-09-2019, 02:11 PM   #12
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Inflation is only part of the story. There is also the double-taxation issue. As long as the current corporate income tax system exists, both capital gains (notionally, retained earnings) and dividends are taxed once at the corporate level before the shareholders recognize them and then the same dollars are taxed again. Hence the lower rates on both dividends and capital gains.
Yes, but the lower tax rate on dividends and CGs can only be a rough approximation of "right" as inflation can't effectively be included (since the holding period isn't part of the calculation). Closer than nothing, though.


If we >did< get rid of corporate taxes on US companies, I'm assuming US equities would become comparatively more attractive than foreign ones (since, to any degree that their profits now are reduced by taxes, that would be eliminated (higher dividends), and since the companies would be more competitive since their pricing would no longer contain the US embedded taxes). That equity price appreciation would be good news for existing holders of US equities.
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Old 02-09-2019, 02:40 PM   #13
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Also the current corporate system penalizes success and subsidizes failure. A lot of "corporations pay zero tax" noise is because losses are carried forward, essentially subsidizing losing companies. I'm not sure why the government should be in that business. To avoid that you would need to move to a gross receipts tax or VAT, which have their own issues. But they are "fairer" in the sense that the government doesn't really care how well or poorly you run your business.
I'd look at it the other way--what's the rationale for the government caring how much a business received rather than how much they made? Is it not better to have the interests of the federal fisc enhanced when companies are profitable (i.e. productive) rather than just tax companies for moving money around?

I agree we should adjust our (tax code's) definition of "costs" to match common sense. Also, just removing the year-to-year loss carryover provisions could address a large portion of what you are observing. But are investors ready for the same treatment (no carryforward of CG losses)?
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Old 02-09-2019, 03:05 PM   #14
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I'd look at it the other way--what's the rationale for the government caring how much a business received rather than how much they made? Is it not better to have the interests of the federal fisc enhanced when companies are profitable (i.e. productive) rather than just tax companies for moving money around?

I agree we should adjust our (tax code's) definition of "costs" to match common sense. Also, just removing the year-to-year loss carryover provisions could address a large portion of what you are observing. But are investors ready for the same treatment (no carryforward of CG losses)?
Well, one of the sort-of-rational arguments for corporate taxation is that the corporation should contribute to pay for the benefits it receives from the nation - primarily infrastructure, rule of law, and security/defense. You could argue that revenue scales better with that benefit than profits, which may be highly fluctuating and easier to manipulate.

Regarding aligning interests, the problem with taxing profits is again that they fluctuate sometimes wildly. Like in a recession, exactly when the government could use the tax revenues.

Or you could solve the riddle by making all corporations pass-through tax entities with all capital gains and dividends as ordinary income to the owners/shareholders. Or you could have a higher tax on all corporate earnings and zero on CGs and divs!

I'm not advocating any of those. Though I'm kind of partial to the pass-through entity idea. Tax burden transparency to the voters is important.

Right now, shareholder income is half-taxed as corporate and half-taxed as personal. Say half-taxed a few times real fast...
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Old 02-09-2019, 03:28 PM   #15
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Paying tax on the phantom gains caused my inflation is here to stay. It's an essential component of the system. You've been thrown a bone in the tax code for "favorable treatment" of capital gains vs regular income. Like it.
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Old 02-09-2019, 03:39 PM   #16
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I... Also, just removing the year-to-year loss carryover provisions could address a large portion of what you are observing. But are investors ready for the same treatment (no carryforward of CG losses)?
No, I don't think that works for a business. Some businesses are volatile, with some good years and some bad years. Compare:

Company "Steady" makes a $5M profit every year, and pay taxes on that each and every year.

Company "Rocky" has losses some years, big gains in others. Say they lose $5M in years 1 and 2, and make $25M in year 3.

Both companies made $15M in the past 3 years. But Company "Rocky" would be taxed on $25M, Company "Steady" taxed on $15M.

That would penalize companies that already have a hard time carrying through bad times.

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