ObamaCare's Worst Tax Hike.

[samclem]

What's the goal of taxing "unearned" income (love that loaded term! Somehow the guy that buys a run-down apartment building, renovates it, then searches for renters and keeps them satisfied through all kinds of circumstances is receiving "unearned income" when he sells. Love it!) at the same rate as wages? Every tax generates second and third order impacts, and taxing cap gains, interest, etc at higher rates has the effect of discouraging foreign investment in the US and discouraging domestic investment. This drives up the cost of capital for our businesses and makes them less competitive in the global economy. That reduces jobs (and income for US workers). Is there some offsetting benefit to "soaking" investors? Or is the hoped-for benefit some intangible feeling of goodness we hope to receive by taxing two entirely different things (wages and cap gains/interest/dividends) as though they were the same?

 

[FIRE'd@51]

The point wasn't to come up with an easy system (indexing assets to inflation is a nightmare bookeeping exercise that everyone seems to want to take on).

How hard would it be to have a table of year-end CPI's? The taxpayer would divide the number for the year he sold the asset by the number for the year he bought it, and multiply his purchase price by this ratio to get his inflation-adjusted basis. Seems pretty simple to me.

The point was to see who would want to give up their currently sweet deal on capital assets in favor of something that looks a lot more like how typical income is taxed.

I said above (and I believe you have indirectly said it too), that in the case of equities the corporate income tax makes it much less of a "sweet deal" than you are implying.

Not really. I can realize and spend my unrealized capital gains at any time. Just because I choose not to, doesn't make it any less real income to me at that moment in time.

I disagree. Unrealized capital gains can disappear. Unreceived wages, for the most part, can't.


While we're at it, in your attempt to treat all income equally why haven't you suggested taxing employer-provided health insurance for employees and retirees? Since corporations deduct those expenses, isn't that a "double non-taxation"? Why should some folks have to purchase health insurance with after-tax $, while others receive it free?

 

[youbet]

While we're at it, in your attempt to treat all income equally why haven't you suggested taxing employer-provided health insurance for employees and retirees? Since corporations deduct those expenses, isn't that a "double non-taxation"? Why should some folks have to purchase health insurance with after-tax $, while others receive it free?

Well, I know you weren't asking me, but I'll give it a go anyway.......

I am in favor of taxing all non-cash compensation given by businesses to employees. Whether it is the limo, free use of the corp jet, free country club membership or free/subsidized health insurance, it should be taxed. The not-taxed items are simply a scam to avoid paying tax on the cash equivalent value of these items.

 

[ERD50]

The argument ERD50 is making is that capital assets deserve all of their perks because of inflation. Well if that is true, he should be willing to give up all of the perks for inflation indexing . . . any takers?

Taken. It is fine with me. It makes it consistent, puts it on a level playing field and that is what I was asking for. Next question?

As FIRE'd@51 points out:

How hard would it be to have a table of year-end CPI's? The taxpayer would divide the number for the year he sold the asset by the number for the year he bought it, and multiply his purchase price by this ratio to get his inflation-adjusted basis. Seems pretty simple to me.

Yes, it would be a bit of extra work, but at least it is an objective calculation, not some subjective 'what does essentially the same' mean. And tax programs could do it automatically based on the buy/sell dates. Not really a problem.


Now, your idea on taxing paper gains is what seems unworkable. So say a $1M portfolio goes up 20% one year, and I owe taxes on $200,000 that year - but I don't have the cash to pay because I didn't sell it. And it pushes me into a higher bracket and makes deductions/credits get squashed and probably triggers AMT. Then next year, it goes down 16.67% and now I have a $200,000 paper loss. Do I get a credit to offset the extra taxes I paid the previous year? How is that going to work, since at a low 'income' I'm going to be in a low tax bracket?

And don't forget that currently, if I have a $100K Cap Gain, I pay on those gains in that year. If I have a $100K Cap Loss, I get to take that (wait for it....).... $3,000 per year! Gains paid in ONE year, Losses taken over 34 years! Yeah, that 'massive tax advantage' is just overwhelming me!


-ERD50

 

[ERD50]

The argument ERD50 is making is that capital assets deserve all of their perks because of inflation.

Sorry for the double post, but I realized I wanted to clarify one thing, outside of the other response.

I do not think that 'capital assets deserve all of their perks because of inflation.'. In my view, that is a screwed up way to try to make adjustments for other problems. Giving all LT Cap Gains a lower rate is some sort of wacky averaging thing that does not apply to a specific investment transaction. So I don't like it at all. If we are going to tax CG, then add in the inflation adjustment to level that aspect of the playing field. And let me claim all my losses.

-ERD50

 

[haha]

Very interesting, that changes the situation a lot. I hate sleazy reporting that misreports key facts. This drastically lowers my opinion of the WSJ, it really does look like they are becoming like Fox News (and Yahoo news).

The biggest concern then (for 99% of people), would be capital gains on their houses/property that exceed 250k for singles/500k for married, AND exceeds further exceeds their basis in the property.

I think people have been completely ignoring basis when discussing housing. In reality, taxable gains work like this Gain - Basis - Single/Married Exclusion = Taxable gain/Investment Income.

Take a $1M dollar house bought by a couple it was bought for $400K (basis), they then apply their $500K exclusion, and end up with only $100K (capital gain). This may be enough to push them up to the 250K mark, if they have 150K of other income, but this is only a maybe. We would have to be talking massive capital gains in order to trigger this tax. This tax could also be avoided (such as by those in California), by not selling the house and letting someone inherit it upon their death, which would result in their basis getting stepped up to its present worth.

The only major effect I can see from this, is a slight slow-down on the prices of homes in California/Manhattan, and some other highly inflationary real estate areas.

In other worlds, you do not expect to ever pay this tax so it's fine with you.

What became of the flat tax?

Ha

 

[Gone4Good]

What's the goal of taxing "unearned" income

In my opinion, there should be no goal of tax policy other than to raise revenue. It is when we start trying to use the tax code to do something else (subsidize one group, punish another) where we create market inefficiencies that result in a misallocation of capital. My position is that all income should be treated exactly the same. To the extent there is a goal in taxing "unearned" income, specifically, it is to eliminate the distortions created by treating different kinds of income differently.

It seems to me that the other side of this argument selectively sees adverse tax incentives only when it can be used as an argument for lowering certain people's taxes. What is the real goal there?

 

[Gone4Good]

How hard would it be to have a table of year-end CPI's? The taxpayer would divide the number for the year he sold the asset by the number for the year he bought it, and multiply his purchase price by this ratio to get his inflation-adjusted basis. Seems pretty simple to me.

Take a portfolio of 5 stock funds, with monthly DCA and reinvested dividends over 10 years, throw in a couple of partial liquidations and tell me at what point you want to start ripping your hair out. BTW, this approach would prevent using the "average cost" method of determining basis. Everyone would be forced to use the specific security method (because every purchase will have its own CPI calculation). There is a reason most people use average cost, because the other way is a royal PITA. Adjusting for inflation is specific security basis determination on steroids.

 

[samclem]

My position is that all income should be treated exactly the same.

Okay, then I know you'll be in favor of a single tax rate for all income, and elimination of the standard deduction, the personal exemption, and all other deductions. That's certainly simple (which seems to be an objective), "treats all income the same," (a stated objective) and it avoids favoring certain taxpayers over others (another implied objective).

Well, it seems a little extreme to me, but I guess I'd go along with your idea. We could probably get away with a tax rate of somewhere between 10-15%, which would make the whole "favorable treatment of unearned income" question moot. As a very significant bonus, virtually all Americans would become taxpayers, which I'm confident would have an immediate and salutary influence in reducing government spending and limiting the size of government. When all voters get a tax bill, the demand for more government services will diminish.

 

[Gone4Good]

Taken. It is fine with me. It makes it consistent, puts it on a level playing field and that is what I was asking for. Next question?

Yes, it does all of those things.

The other thing it does is raise substantially the amount of taxes owed on any reasonably profitable investment.

Assuming a $100k investment, 3% inflation, 10 year holding period, and top marginal rates here is what your after tax investment would look like under current law and the "deal" you just said you'd agree to . . .

Real Return	Current Law	ERD50's "deal"
7%	235,468	207,064
5%	198,509	183,354
3%	167,222	162,115
0%	129,233	134,392

This deal will obviously look even worse in the brackets where the 0% gains rate applies.

Notwithstanding your professed desire to take a bad deal, this "thought experiment" and accompanying calculation does illustrate how good a deal the current tax code is giving to capital gains. At a historically normal 3% inflation rate and 10% nominal total return, the stock investor pays one third less taxes under current law than under the "deal" you accepted.

 

[Gone4Good]

Okay, then I know you'll be in favor of a single tax rate for all income, and elimination of the standard deduction, the personal exemption, and all other deductions. . . .

Well, it seems a little extreme to me, but I guess I'd go along with your idea.

Yes, that is a little extreme but directionally correct. I'd get rid of all deductions, credits, and other nonsense except for a fairly generous standard deduction / personal exemption. Beyond what is accomplished by the standard deduction, I don't think the tax rate structure should be steeply progressive, but a single rate is not an absolute necessity.

 

[Disappointed]

And don't forget that currently, if I have a $100K Cap Gain, I pay on those gains in that year. If I have a $100K Cap Loss, I get to take that (wait for it....).... $3,000 per year! Gains paid in ONE year, Losses taken over 34 years! Yeah, that 'massive tax advantage' is just overwhelming me!


This is actually happening to me. I took profit in 1999-2000, paid a good sum of cap gain, got back into the market, racked up huge losses in 2000-2001, I still have a good sum of "carry forward cap loss" to take advantage of. Unfortunately I won't be able to transfer that to my kids, I will never be able to use up those losses. I wish they would allow us to go back three years to offset gains/losses (just like businesses).

Talk about being unfair, what is the reason behind $3,000 offset per year which has never been CPI adjusted, why can't I offset the whole losses in the year that I incurred the losses? I paid taxes on the full amount of my gains both in 1999 and 2000.

mP

 

[Gone4Good]

And don't forget that currently, if I have a $100K Cap Gain, I pay on those gains in that year. If I have a $100K Cap Loss, I get to take that (wait for it....).... $3,000 per year! Gains paid in ONE year, Losses taken over 34 years! Yeah, that 'massive tax advantage' is just overwhelming me!

Um, because your gains are taxed at a maximum of 15% and you are trying to deduct losses against ordinary income taxed at a maximum of 35%.

BTW, my income declined about 50% from 2007 to 2009 . . . I can't seem to find anywhere on my tax form where I get to carry forward my lost wages to offset against future gains.

 

[samclem]

Um, because your gains are taxed at a maximum of 15% and you are trying to deduct losses against ordinary income taxed at a maximum of 35%.

Um, or, a minimum of as little as 10% rate on the earned income, in which case the taxpayer is getting a bad deal due to the relatively low value of the carryforward loss. The $3000n cap is an arbitrary, imprecise way of attempting to even things out. If the goal is to prevent people from taking advantage of the difference between CG and earned income rates, then apply a ratio between their CG rate and their earned income rate to the carryforward losses when they are applied. But it makes no sense to apply an arbitrary limit of $3000 per year.

What's wrong with us? Going on as if there's some rational basis for the tax code. Sheesh!

 

[kumquat]

Interesting what a border will do to the tax on people. Up here we pay more taxes than you guys, but:

And don't forget that currently, if I have a $100K Cap Gain, I pay on those gains in that year. If I have a $100K Cap Loss, I get to take that (wait for it....).... $3,000 per year! Gains paid in ONE year, Losses taken over 34 years! Yeah, that 'massive tax advantage' is just overwhelming me!

We can refile and "carry back" these losses to previous years.

Whether it is the limo, free use of the corp jet, free country club membership or free/subsidized health insurance, it should be taxed.

We have a box on our T4 (employment income) slips for "Taxable Benefits". It includes all of the above (well, business travel on the jet and limo is ok, personal is taxed). CEO (and minions) of mega-corp used to bitch about 6 digit "Taxable Benefits". Us peons thought tough sh$t, even though our bennies all had a price attached (mine were about 5% of income).

 

[Texas Proud]

...

BTW, my income declined about 50% from 2007 to 2009 . . . I can't seem to find anywhere on my tax form where I get to carry forward my lost wages to offset against future gains.

I bet you were laughing a lot when you wrote this one...

You didn't LOSE anything.... you just did not MAKE as much... and the taxes you paid were less... very stupid example IMO...

 

[Gone4Good]

What's wrong with us? Going on as if there's some rational basis for the tax code. Sheesh!

But I can't resist. If your normal income tax rate is 10%, your cap gains rate is zero . . .in which case you are getting a really, really, good deal. Pay no tax on the gains, deduct your losses.

 

[FIRE'd@51]

And it is equally easy to show that a married couple earning $100K in dividends or capital gains pays just $2K in federal taxes whereas a working couple will pay $12,700 in federal taxes.

I hate to keep repeating myself, because I think we are in agreement on the corporate income tax; but you keep posting these examples to try to show how advantaged dividend and capital gain income is. You continue to neglect the effect of the corporate income tax in your calculations. The top marginal corporate rate is 35%, so that 100K the investor receives in dividends could be 100 / ( 1 - 0.35) = 154K of pretax corporate income. So the corporation has already paid a tax of 54K on that income. Between the investor and the corporation, 56K of taxes have been paid on 154K of corporate income, or 36%.

If the corporation pays an employee 100K out of that same 154K, it is deductible to the corporation, so it would pay a corporate income tax of 35% of 54K, or 18.9K. Add that to the 12.7K, the employee pays on his income tax, and the total income tax paid is 31.6K, or 21% of the the 154K. Why is that such a "sweet deal" to the investor?

If there were no corporate income tax, the investor would have received the whole 154K. If treated as ordinary income, his tax would be 26.2K, or 17% of the 154K.

Seems to me it would be a better deal for this family to have no corporate income tax and pay ordinary income tax rates on dividends. The preferential rate on dividends and LTCG is simply an attempt to level the playing field.

 

[Gone4Good]

You didn't LOSE anything.... you just did not MAKE as much... and the taxes you paid were less... very stupid example IMO...

I didn't lose anything? The present value of my future earnings decreased tremendously. That is a huge loss. What's the difference between the PV decline in my future earnings and the decline in the PV of future corporate earnings (i.e. the value of a stock).

And you paid less in taxes the year you had losses too.

 

[Gone4Good]

You continue to neglect the effect of the corporate income tax in your calculations.

That's because I keep saying the corporate tax should be eliminated.

 

[FIRE'd@51]

That's because I keep saying the corporate tax should be eliminated.

OK, as I said, we are in agreement on that point. But in reality it exists, so your examples are incomplete and misleading if you don't include it.

 

[ERD50]

BTW, my income declined about 50% from 2007 to 2009 . . . I can't seem to find anywhere on my tax form where I get to carry forward my lost wages to offset against future gains.

I bet you were laughing a lot when you wrote this one...

You didn't LOSE anything.... you just did not MAKE as much... and the taxes you paid were less... very stupid example IMO...

Exactly. GTG, you are >>>this<<< close to hitting my "no point in talking to a brick wall" limit. And I know that my limit is about 1000x the median person, I'll keep going if I think there is even a chance of a slight return on investment of time/energy.

You are clearly far too smart to not understand the difference between a reduction in income from one year to the next, versus an investment gain in one year and a loss in the next. So, if you want to have an impact here, stop playing games.

EXAMPLE: Hey, I had a $100,000 Cap Gain in 2003, but I only had a $50,000 Cap gain in 2004! Where do I claim my $50,000 'loss'? Get real - that is not apples-to-apples, and it is not what we are talking about.

Assuming a $100k investment, 3% inflation, 10 year holding period, and top marginal rates here is what your after tax investment would look like under current law and the "deal" you just said you'd agree to . . .

Real Return	Current Law	ERD50's "deal"
7%	235,468	207,064
5%	198,509	183,354
3%	167,222	162,115
0%	129,233	134,392

This deal will obviously look even worse in the brackets where the 0% gains rate applies.

Notwithstanding your professed desire to take a bad deal, ...

Well, I don't have time/motivation right now to reverse engineer your calculations, but here is where old ERD50 throws a monkey wrench into your works....

I never said I wanted a 'better' (or 'worse') deal for ERD50 - I said Cap Gains taxes ought to be 'fair'. If that means I pay more (or less) on average, so be it. I actually believe in 'fairness', not 'screw the other guy , I want MINE'.

A data point - my total 2008 tax liability was... $23.00 (twenty-three dollars, no cents). That is freakin' ridiculous. I'm living a comfy lifestyle, and I feel that my 'fair share', even if the Govt was 100% efficient/effective in using funds, should be much higher than that. No, I'm not gonna donate more, because in other years I feel I got screwed with no recourse. Hopefully, it averages out, but who knows.

A friend of mine called me, this guy lives a pretty lavish lifestyle (multiple fancy overseas vacations every single year, lots of luxurious spending), and he also 'complained' that he was getting a tax CREDIT this year! In his words, ' the Federal Govt simply cannot continue to function this way'. Like me, he paid big bucks in other years, so he's taking the credit. But we both feel it is not 'fair', and we don't want that debt being pushed onto future generations..

Um, or, a minimum of as little as 10% rate on the earned income, ...

10%? The heck with 10%, how about all those people who get paid to file (the refundable tax credit)?

What's wrong with us? Going on as if there's some rational basis for the tax code. Sheesh!

You are right, back to earth, time for another beer. I actually had more to say to our Canadian friends (all supportive), but the quotes within quotes were just getting the best of me. Enough for now


cheers -ERD50

 

[Texas Proud]

I didn't lose anything? The present value of my future earnings decreased tremendously. That is a huge loss. What's the difference between the PV decline in my future earnings and the decline in the PV of future corporate earnings (i.e. the value of a stock).

And you paid less in taxes the year you had losses too.

The present value of a paycheck (your earnings) is the work you did to earn it... if you do not do any work, you do not get any pay... PV=0... so you did not lose anything....

It is not the same as an investment... you put MONEY into an investment to get money back... sometimes it is a debt with a stated earnings... so in a way a bond can be 'a paycheck' if you want to deal with that... you put money in, you get money back... no money in, no money back.. but INTEREST is taxed as ordinary income, just like your paycheck...

Now, if you buy equity, you are hoping to buy a stream of future earnings... and you will be taxed on those future earnings (as a corporate tax).. every once in awhile you might want some of your money back, so you pay a second tax to remove some of your investment... that could be dividends or capital gains.. again, it is not like a job.. but then again, I think you know that...

 

[Texas Proud]

WOW..... ERD... I was north of $25K in 2008... and I have been north of $20K for many years...

But for 2009 it looks like it will be less than $4K with the credits... a cut in salary, a wife and two kids gives me a LOT off of being single...

 

[ERD50]

WOW..... ERD... I was north of $25K in 2008... and I have been north of $20K for many years...

I was in your 2008 ballpark in 2007 - one miss-timed Cap Gains transaction made me 'rich' for that one year. Yet my taxes that year were as if I had that income every year. That is one reason I like the NST over all the attempts to determine what is 'fair' or equitable.

Lets say a business person is in a line of work where they occasionally make a big profit/earnings. But then they have 5 dry years. And that is just the nature of the work they do. If they are smart, they will spend accordingly ( as if they made ~ 20% of the big years each year) to even out their earnings ebb and flow. An NST would tax them at that even rate of spending. Since the tax code did away with income averaging (except for select groups), there is no way to make that 'fair' or 'equitable'.

When I had that big Cap Gain, I knew I wasn't any 'richer' that year than previous years - it is my whole portfolio of unrealized gains/losses that determine by ability to pay, or my overall 'wealth'. These tax regs simply do not measure that in any reasonable way. My spending was a better, fairer, more equitable measure of my 'wealth' than anything I can think of. Not perfect, but much closer to reality.

The present value of a paycheck (your earnings) is the work you did to earn it... if you do not do any work, you do not get any pay... PV=0... so you did not lose anything....


again, it is not like a job.. but then again, I think you know that...

Yep, and it is getting pointless to try to learn anything from a discussion with someone who continually frames things in order to get a point in, w/o really making that point. It's getting to be a lot of babbling.

-ERD50