ObamaCare's Worst Tax Hike.

[Gone4Good]

Ordinary dividends are already taxed at the normal rate, only qualified dividends are taxed at a lower rate (And I didn't say anything about capital gains being taxed at a higher rate than earned income). But, it is my understanding that qualified dividends will be taxed at normal rates too starting in 2011, when the Bush tax cuts expire for high earners. So all dividends (except tax-exempt dividends) should be taxed as ordinary income starting next year (again for high earners only). So someone in the top tax bracket who currently pays 15% in taxes on qualified dividends will pay at least 39.6% in taxes on those same dividends starting in 2011 and 42.5% in taxes (39.6% federal income tax + 2.9% Medicare tax) on those dividends whenever the proposed Medicare tax goes into effect. That would be one hell of a tax increase.

You're absolutely right on the ordinary dividends. But I don't think so on the 2011 numbers. The Tax Foundation shows Long-term Capital Gains rates in 2011+ at 20%.**

** edit: You're right on both counts. The LT Gains rate is 20% in 2011 but the qualified dividend reverts to ordinary income rates under current law.

 

[FIREd]

You're absolutely right on the ordinary dividends. But I don't think so on the 2011 numbers. The Tax Foundation shows 2011 Long-term Capital Gains rates at 20%.

Why do you keep talking about capital gains? I do not dispute that the LTCG rate will only increase to 20% next year. I never said otherwise. What I said is that qualified dividends that are currently taxed at the LTCG rate will be taxed at the ordinary income tax rate starting in 2011 (for high earners).

 

[eridanus]

Meanwhile deficit scolds should be happy that for the first time in at least a decade the government is proposing to actually pay for its policies (including the tax cuts that lowered rates to their current level).

Since most "fiscal conservatives" keep dodging the spending question, it seems the only answer is to raise taxes. Pay-as-you-go is the only sane response we've heard to our fiscal crisis.

 

[FIRE'd@51]

For a single person wouldn't it be a $450K exclusion ($250K for the home and then $200K in gains).

Nope. Did you read the article, or the quote from it in my post #7 above? It's not a marginal tax. Once triggered, it applies to all unearned income. That's what potentially makes it onerous for middle class folks.

 

[FinanceDude]

Since most "fiscal conservatives" keep dodging the spending question, it seems the only answer is to raise taxes. Pay-as-you-go is the only sane response we've heard to our fiscal crisis.

As a fiscal conservative, I will agree that when elected, almost always so-called "fiscal conservatives" go into a coma and start doing the opposite. However, am I supposed to believe that a Congress that passed the biggest pork-laden bill in recent memory are suddenly going to "buckle down" and "pay-as-you-go"...........I doubt it!

As far as the health care debate goes, this is not about health care, and most folks that are informed know that..........

 

[Gone4Good]

Nope. Did you read the article, or the quote from it in my post #7 above? It's not a marginal tax. Once triggered, it applies to all unearned income. That's what potentially makes it onerous for middle class folks.

From the article:

Earning even a single dollar more than $200,000 in adjusted gross income will slap the 2.9 percent tax on every dollar of a taxpayer's investment income, creating a huge marginal rate spike that will most hurt middle-class earners, as opposed to the super rich, says the Journal.

Looks like the sale of a home in a high-priced area could trigger this tax.

Except that isn't how the law is written. Now that Murdoch has taken over the paper it's starting to look like the WSJ is adopting the reporting habits of Fox News. Sad, and unfortunate.

But here's the text . . .

2 ‘‘SEC. 1411. IMPOSITION OF TAX.
3 ‘‘(a) IN GENERAL.—Except as provided in subsection
4 (e)—
5 ‘‘(1) APPLICATION TO INDIVIDUALS.—In the
6 case of an individual, there is hereby imposed (in ad
7 dition to any other tax imposed by this subtitle) for
8 each taxable year a tax equal to 3.8 percent of the
9 lesser of—
10 ‘‘(A) net investment income for such tax
11 able year, or
12 ‘‘(B) the excess (if any) of—
13 ‘‘(i) the modified adjusted gross in
14 come for such taxable year, over
15 ‘‘(ii) the threshold amount.

The threshold amount is the $250K for married folks and $200K for singles. So if a single person has $201K in AGI, the tax applies to the LESSER of net investment income or ($201K - $200K). So in this case, only $1K gets taxed at 3.8%. And with housing gains, because between $250K and $500K is excluded from AGI, this is a pretty high threshold.

 

[plex]

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.

 

[Texas Proud]

Thanks gone4good... I had not read the story.. nor anything else on this, but I would not have believed that they would tax everything up to $250K (or $200K)... just by being over $1... it does not make sense and no politician (IMO) would vote for it.. that is the fastest way to get booted out of office, and these guys are not that stupid...



I do think that ziggy has an interesting point... but what are you going to do When you subsidize something, taking it away by making more money does cost someone... but I would rather see this than try and pay for everybody's insurance...

Then again, this is already in the tax code for a number of items.. so another is not any different.

 

[Gone4Good]

I do think that ziggy has an interesting point... but what are you going to do When you subsidize something, taking it away by making more money does cost someone... but I would rather see this than try and pay for everybody's insurance...

It is an argument for single payer . . . and not the only, or even best, one.

 

[LOL!]

So if I am upper middle class with an AGI of $195K, then I have nothing to worry about. Sounds good to me.

 

[ERD50]

We had a thread on this already.

Hey, I remember that thread!

Investment income is already massively tax advantaged, ...

Hey, I recall coming to a far different conclusion!

Like, an investment can lose buying power, yet still be taxed at a gain. With advantages like that, who needs enemies


-ERD50

 

[FIRE'd@51]

Except that isn't how the law is written. Now that Murdoch has taken over the paper it's starting to look like the WSJ is adopting the reporting habits of Fox News. Sad, and unfortunate.

But here's the text . . .


The threshold amount is the $250K for married folks and $200K for singles. So if a single person has $201K in AGI, the tax applies to the LESSER of net investment income or ($201K - $200K). So in this case, only $1K gets taxed at 3.8%. And with housing gains, because between $250K and $500K is excluded from AGI, this is a pretty high threshold.

I'm not trying to defend the WSJ, but note that their article was dated March 17. Also, the rate they used was 2.9%, not 3.8%. It appears there have been changes made by the House to Obama's recommended additions to the Senate bill, and these changes were unavailable at the time the WSJ published their article, so the WSJ based their article on Obama's recommendations. Whether the application of the rate, once triggered, applied to all investment income, or just that over 200K (or 250K) was in Obama's recommendation, or the WSJ simply got it wrong, I don't know.

 

[Gone4Good]

Hey, I recall coming to a far different conclusion!

Like, an investment can lose buying power, yet still be taxed at a gain. With advantages like that, who needs enemies


-ERD50

Sure, if you look at a very specific case you can come to that conclusion. But you act as if that specific case was the norm, which it isn't. You also ignore the benefits of tax deferral on appreciating assets. And you ignore tax advantages of dividends. So yes, in an isolated case designed specifically to make a point it is possible to construct a scenario where a capital asset is treated worse than earned income.

 

[ERD50]

Sure, if you look at a very specific case you can come to that conclusion.

No, I used a specific case to help illustrate the point. In *any* case, inflation is a very real factor that isn't considered in the Cap Gains tax calculation. And since the 'norm' is positive inflation, I don't think the example is outside the norm in any way.

-ERD50

 

[Texas Proud]

It is an argument for single payer . . . and not the only, or even best, one.

With all the fraud they are showing on the Fleecing of America series on the news.... I have a great one against single payer...

I do not think the number is right... but they suggested that the total fraud over the next decade will be 1 trillion... that sounds way to high to me...

One of the prosecutors said he could use IIRC all 277 attorneys working 24/7 and still not get to all of the fraud cases in Florida.... so maybe when you factor in the cost of prosecuting and the actual fraud and putting them in prison (if they even do any time) maybe it could approach that number... I still think not though....

 

[Gone4Good]

With all the fraud they are showing on the Fleecing of America series on the news....

Yup, fraud is certainly an issue. But a relatively straight forward one to control if people prioritize it.

Funny that you didn't mention the main point of the Fleecing of America piece that aired the other night . . . that this administration has moved more aggressively against medicare fraud, closed down a bunch of front companies, and has put more stringent registration requirements on companies seeking medicare reimbursement. And that those efforts are having a positive effect.

 

[Gone4Good]

No, I used a specific case to help illustrate the point. In *any* case, inflation is a very real factor that isn't considered in the Cap Gains tax calculation. And since the 'norm' is positive inflation, I don't think the example is outside the norm in any way.

-ERD50

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, ~$7K in SS taxes, and another $3K in medicare taxes.

Or we can show that because of the tax deferral and favorable tax rate of gains someone earning 8% per year on a $100K investment will end up with $198.5K after 10 years if invested in an appreciating asset versus $166K if invested in bonds or taken as an annuity (wage).

Or how investment expenses are tax deductible but work expenses typically aren't

Or how losses can be opportunistically harvested and gains opportunistically deferred, whereas earned income is taxable "as earned"

Or how gains get a lower tax rate, while some losses can be deducted at the higher income rate

Or how the wash rule can be gamed to step up ones basis and avoid taxes altogether.

Or how losses can be carried forward pretty much indefinitely.

Or how asset basis gets stepped up for heirs.

But you're right. Earned income is really the place to be.

 

[Texas Proud]

Yup, fraud is certainly an issue. But a relatively straight forward one to control if people prioritize it.

Funny that you didn't mention the main point of the Fleecing of America piece that aired the other night . . . that this administration has moved more aggressively against medicare fraud, closed down a bunch of front companies, and has put more stringent registration requirements on companies seeking medicare reimbursement. And that those efforts are having a positive effect.

I did not see that point in the ones I saw.... but I can see where someone might see it...

If they just changed the system to be more like private health insurance (yes... I said it).... and actually reviewed their payments.... and actually stopped paying when they suspect fraud (who in their right mind would continue to pay someone if they thought they were being ripped off)... then a lot of the fraud would go away...

What they are doing now is great... but does not address the root problem... if you stop paying out so much money so easily, then you do not have to spend a lot of money prosecuting them... and I did not hear if they got back any of the money....

 

[ERD50]

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, ~$7K in SS taxes, and another $3K in medicare taxes.

Still not a real comparison that allows one to call it "massively tax advantaged".

A) As stated before, that $100K in Cap Gains may represent a loss in buying power.

B) Taxes were paid when that person earned the money to invest.

You might be able make the case that some investment income is tax advantaged. It is the broad brush and the extreme adjectives you use that I object to. That doesn't really help us to learn anything at all, other than your 'feelings' on the subject.

-ERD50

 

[FIRE'd@51]

Still not a real comparison that allows one to call it "massively tax advantaged".

A) As stated before, that $100K in Cap Gains may represent a loss in buying power.

B) Taxes were paid when that person earned the money to invest.

You might be able make the case that some investment income is tax advantaged.

Don't forget the double taxation issue because of the corporate income tax. G4G has argued many times that the corporate income tax should be eliminated, and dividends and capital gains be taxed to the individual at ordinary income rates. I have no objection to this view. However, so long as there continues to be a corporate income tax, IMO it is not "unfair" that relief be given at the individual level. You can't have it both ways. Presumably, if there were no corporate income tax, dividends and capital gains would be higher, ceteras paribus, so the after-tax return in the aggregate would be approximately the same. Note that non-municipal interest income has always been taxed at ordinary rates because it is deductible to the corporation.

This issue was debated at length when formulating the Bush tax cuts, and Congress settled on giving relief at the individual level, because less tax revenue would be lost doing it this way (at least in the short-term), presumably because of the large amount of stock (over 50%) held in tax-free accounts (pension funds, 401k's, IRA's, foundations, etc.).

 

[Gone4Good]

You might be able make the case that some investment income is tax advantaged. It is the broad brush and the extreme adjectives you use that I object to. That doesn't really help us to learn anything at all, other than your 'feelings' on the subject.

-ERD50

Yes, and you ignore dividends and all of the other advantages, in addition to tax rates as low as zero.

You also seem to ignore the fact that CPI has averaged something in the neighborhood of 3% whereas total returns on stocks have historically been around 10% . . . so real gains are very much the norm, not the exception. And those 10% gains are average. But for tax purposes I get to select when, where and how I pay taxes. I don't pay taxes on the average gain. I get to harvest the losses on my under performing investments to shield gains on my winners, possibly stepping up the basis by gaming the wash rules. Meanwhile, for those gains not offset by losses I can continue to defer them in perpetuity using it as a pseudo 401(k) until I'm in a lower tax bracket or possibly passing the assets on to heirs completely tax free.

When looked at in totality, its hard not to see how capital assets are massively tax advantaged unless you assume, as you want to do, that they only appreciate at the rate of inflation or less and ignore all of the other benefits.

This argument is pretty easy to settle. Based on your position you should be willing to accept the following deal:

1) Assets are indexed for inflation
2) Unearned income is taxed at the same rate as earned income (including social security and medicare taxes)
3) Real unrealized gains and losses are taxed annually "as earned", just like for zero coupon bonds and wages
4) The corporate tax rate is eliminated

Anybody want to take that deal? I doubt any sane person would. Why? Because it is a bad deal relative to the extremely sweet deal investors have currently.

 

[ERD50]

Yes, and you ignore dividends and all of the other advantages, in addition to tax rates as low as zero.

I'll have to get back to you on some of this, gotta run, but...

I'm not ignoring dividends, I have not fully thought that one through yet, so I have chosen not to comment on them. But since I have thought through Cap Gains (thanks to that previous thread with input from ziggy & haha), and they are included in your broad brush 'massively tax advantaged' statement, I think it is fair for me to speak specifically to those. Maybe later Ill tackle dividends/interest.

You also seem to ignore the fact that CPI has averaged something in the neighborhood of 3% whereas total returns on stocks have historically been around 10% . . .

I don't think we should base investment taxes on 'historical rates of real return' any more than we should base someone's earned income tax rates on 'historical rates' of earnings. 'Historical rates of real return' tell me NOTHING about whether I made or lost money (inflation adjusted or not) on a specific investment, but I get taxed on specific investments.

I don't think you are making sense now.

-ERD50

 

[FIRE'd@51]

This argument is pretty easy to settle. Based on your position you should be willing to accept the following deal:

1) Assets are indexed for inflation
2) Unearned income is taxed at the same rate as earned income (including social security and medicare taxes)
3) Real unrealized gains and losses are taxed annually "as earned", just like for zero coupon bonds and wages
4) The corporate tax rate is eliminated

Anybody want to take that deal? I doubt any sane person would. Why? Because it is a bad deal relative to the extremely sweet deal investors have currently.

I would accept #1, #2, and #4. Practically, #3 would cause a logistical nightmare, and IMO would be unworkable. Assets would have to be marked-to-the-market at year-end. For example, it's hard to imagine how most taxpayers would be able to come up with the money to pay the taxes on unrealized gains on their houses, so housing would likely have to be exempted. Once you've exempted housing, there would be a cry for other exemptions. Also, the government would have to issue massive refundable tax credits in years that assets declined in value. This would cause too much volatility in the tax revenue stream to the government. So I think your proposal to tax unrealized gains, although perhaps theoretically sound, would be a bad idea

Your analogy with zero-coupon bonds breaks down because they are not marked-to-the-market. Only the the original discount is linearly imputed as interest income. Your analogy with wages breaks down, because they are actually received (and therefore not unrealized).

 

[Gone4Good]

I would accept #1, #2, and #4. Practically, #3 would cause a logistical nightmare, and IMO would be unworkable.

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). 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.

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?

Your analogy with wages breaks down, because they are actually received (and therefore not unrealized).

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.

 

[Gone4Good]

I don't think we should base investment taxes on 'historical rates of real return' any more than we should base someone's earned income tax rates on 'historical rates' of earnings. 'Historical rates of real return' tell me NOTHING about whether I made or lost money (inflation adjusted or not) on a specific investment, but I get taxed on specific investments.

I don't think you are making sense now.

-ERD50

I'm not suggesting we base taxes on historical rates of returns. But the only way your argument stands up is if capital gains are driven almost entirely by inflation. Historical rates of return and historical rates of inflation say that isn't the case. So their are plenty of real gains out their getting favorable tax treatment.