Cut capital gains tax?

[Montecfo]

To me, corporations are separate entities from their investors. If corporate income is taxed at the corporate level, then it is separate from the dividend income it distributes to its investors, income which is also taxable. Until 2003, dividends were taxed as ordinary income, and I think that policy should be resumed (even it costs me more in taxes).

How is it different?

I could argue very effectively that we should eliminate the corporate federal income tax.

Reasons:

It is in fact an indirect tax borne by consumers and shareholders, not the corporations themselves.

Improve competitiveness and grow jobs in US vs overseas.

The recent corporate tax reform was a step in the right direction for competitiveness. But not sure how a tax which directly reduces cash available to stockholders is seperate and unrelated.

 

[Ducati52]

So much for the idea of "you should be able to file your tax return on a post card" idea that kept getting trotted out during the 2016 campaign . . .

 

[joeea]

So much for the idea of "you should be able to file your tax return on a post card" idea that kept getting trotted out during the 2016 campaign . . .

I don't know anyone who believed that would actually happen. Do you?

 

[pb4uski]

I dunno... most households only have W-2 earnings, interest and dividends and the standard deduction which could be done on the post card form.

 

[scrabbler1]

The discussion was more of income being taxed more than once.... while you seem to be fine with it others are not and don't think that the same income should be fully taxed twice.

While you can consider it separate, the reality is that it is not separate... it is the same income, passed on to investors.

WADR, my friend, you have a different definition of reality than I do. The corporate income is not the same as the income I, as an investor receive. I don't feel I am "one" with the corporations whose dividends they decide to pay me. They pay income taxes on their income, I pay income taxes on my mine.

 

[pb4uski]

..... The corporate income is not the same as the income I, as an investor receive. ...

That's totally silly. I know you're a smart guy and know better than that. The dividends that you receive as an investor absolutely is the same corporate income. For capital gains, the relationship is less direct but nonetheless valid.

Where do you think dividends come from? Dividends by law can only be paid from retained earnings... so they have to be net income aka earnings first... then they go into a pot (retained earnings) and later get paid out of the retained earnings pot to investors.

Many investors rely on dividends from their investments to provide much-needed income. But companies aren't always allowed to continue making dividend payments. If a company no longer has any retained earnings on its balance sheet, then it typically can't pay dividends except in extraordinary circumstances. (liquidation)

https://www.fool.com/knowledge-center/can-dividends-be-paid-in-excess-of-retained-earnin.aspx

If not all earnings are paid out, which is typical, then retained earnings/equity grows and indirectly increae the value of the stock.

 

[scrabbler1]

How is it different?

I could argue very effectively that we should eliminate the corporate federal income tax.

Reasons:

It is in fact an indirect tax borne by consumers and shareholders, not the corporations themselves.

Improve competitiveness and grow jobs in US vs overseas.

The recent corporate tax reform was a step in the right direction for competitiveness. But not sure how a tax which directly reduces cash available to stockholders is seperate and unrelated.

The corporate income tax is not borne by the employees and executives of the corporation in the form of salaries and perks? You don't think if the corporate income tax were repealed, the corporate bigwigs would get fat pay raises and bonuses, instead of the consumers seeing lower prices?

The recent corporate tax reform was awful, and debt-financed. A lot of the tax cuts went to stock buybacks, good for CEOs.

https://www.forbes.com/sites/teresa...rom-the-tax-cut-10-months-later/#4a07354226bb

 

[scrabbler1]

Back in my working days, when I received a bonus due to the company doing well, it was taxable as ordinary income. If a company is doing well and pays me, as an investor, a dividend, it should also be taxed as ordinary income.

 

[pb4uski]

No, because your bonus is just another flavor of your compensation and is taxable to you like any other compensation... and the bonus is deductible by the company so at the end of the day the earnings that are used to pay your bonus hasn't ever been taxed because it is offset by the deduction.

OTOH, earnings that are paid in dividends to investors have been taxed.

HUGE difference.

 

[scrabbler1]

To me, as the receiver of dividends and, at one time, bonuses and wages, I never felt slighted all those years prior to 2003 by having my unearned, dividend income taxed the same way as my wage income, on both my federal and state returns. To me, it's all income. If it has been taxed by a separate entity such as a corporation, big deal. It's a meaningless difference, but one somehow exploited in 2003 by those in power in Washington so that a relatively small slice of people would get a big tax cut, one which unfortunately remains in place today (and should be repealed).

 

[pb4uski]

^^^ you forgot to add "in my opinion".

 

[mpeirce]

Interesting how far apart folks here are on their basic understanding of economic concepts.

 

[ERD50]

How is it different?

I could argue very effectively that we should eliminate the corporate federal income tax.

Reasons:

It is in fact an indirect tax borne by consumers and shareholders, not the corporations themselves.

Improve competitiveness and grow jobs in US vs overseas.

The recent corporate tax reform was a step in the right direction for competitiveness. But not sure how a tax which directly reduces cash available to stockholders is separate and unrelated.

Here, here!

.... You don't think if the corporate income tax were repealed, the corporate bigwigs would get fat pay raises and bonuses, instead of the consumers seeing lower prices? ...

This is the response I get from some people when discussing corporate taxes. Let me try my explanation on this crowd:

So you say if a Corp sees a tax savings, the savings will not be passed onto the consumer? You probably would say, no, because the Corp is 'greedy'.

Well, I say they will pass the savings on to the consumer, because they are 'greedy'.

Imagine 10 companies that make a commodity product. They sell their product to a distributor for $11, it costs them $10 all-in to make it. Fine 10% profit, all is well. That profit is in line with other products they make.

Then one day, one of the main components in that product sees a price drop, and all 10 companies can now produce the product for $9 instead of $10. They just doubled their profit from $1 to $2! Whoopie!

Well, I'm one of those 10, and I'm the greediest SOB you ever met. It takes me 10 seconds to realize that with that outsize profit, I should start pulling production from the other lines that only make 10% profit, and/or pay overtime, and/or expand, to make more of that high profit product.

But there is only so much demand. In the next 10 seconds, I call the distributor, and say " I can give you 2x the volume and I'll drop my price from $11.00 to $10.75. Well, the distributor likes this, so he takes me on, and starts reducing orders to the other nine companies. It doesn't take long before they catch on, and drop their prices to get back their volume, so being the greediest SOB of the bunch, I drop my price again. This will continue until everyone is back at making all their products at a 10% profit.

It didn't take a Government regulation, it didn't take anyone being 'nice'. Greed took care of it all. And the consumer benefits.

-ERD50

 

[Montecfo]

The corporate income tax is not borne by the employees and executives of the corporation in the form of salaries and perks? You don't think if the corporate income tax were repealed, the corporate bigwigs would get fat pay raises and bonuses, instead of the consumers seeing lower prices?

You seem to be moving far afield of your original point. I guess you are conceding that the corporate income tax is flawed. Or perhaps you believe it performs a valid purpose if keeping wages down. I would disagree with that but it has little to do with the discussion.

The recent corporate tax reform was awful, and debt-financed. A lot of the tax cuts went to stock buybacks, good for CEOs.

The corporate tax reform was a step in the right direction, encouraging corporations to locate in the US instead of fleeing to pretty much anywhere else, all had higher tax rates than the US.

Failing to balance the budget is another issue completely. It will require entitlements reform in order to happen.

 

[Montecfo]

To me, as the receiver of dividends and, at one time, bonuses and wages, I never felt slighted all those years prior to 2003 by having my unearned, dividend income taxed the same way as my wage income, on both my federal and state returns. To me, it's all income. If it has been taxed by a separate entity such as a corporation, big deal. It's a meaningless difference, but one somehow exploited in 2003 by those in power in Washington so that a relatively small slice of people would get a big tax cut, one which unfortunately remains in place today (and should be repealed).

You do not have the accept lower tax rates on dividends and capital gains. You can vote with your wallet and pay the difference as a donation to the US Treasury.

 

[scrabbler1]

Here, here!



This is the response I get from some people when discussing corporate taxes. Let me try my explanation on this crowd:

So you say if a Corp sees a tax savings, the savings will not be passed onto the consumer? You probably would say, no, because the Corp is 'greedy'.

Well, I say they will pass the savings on to the consumer, because they are 'greedy'.

Imagine 10 companies that make a commodity product. They sell their product to a distributor for $11, it costs them $10 all-in to make it. Fine 10% profit, all is well. That profit is in line with other products they make.

Then one day, one of the main components in that product sees a price drop, and all 10 companies can now produce the product for $9 instead of $10. They just doubled their profit from $1 to $2! Whoopie!

Well, I'm one of those 10, and I'm the greediest SOB you ever met. It takes me 10 seconds to realize that with that outsize profit, I should start pulling production from the other lines that only make 10% profit, and/or pay overtime, and/or expand, to make more of that high profit product.

But there is only so much demand. In the next 10 seconds, I call the distributor, and say " I can give you 2x the volume and I'll drop my price from $11.00 to $10.75. Well, the distributor likes this, so he takes me on, and starts reducing orders to the other nine companies. It doesn't take long before they catch on, and drop their prices to get back their volume, so being the greediest SOB of the bunch, I drop my price again. This will continue until everyone is back at making all their products at a 10% profit.

It didn't take a Government regulation, it didn't take anyone being 'nice'. Greed took care of it all. And the consumer benefits.

-ERD50

I prefer a much simpler scenario: The corporation sells an item for $12 which used to cost them $10 and overnight, and without any effort or risk, now costs them $9, increasing profits by $1. They throw a few pennies in high-exposure bonuses to the workers for good PR while secretly pocketing the rest in the form of higher stock dividends and more impressive quarterly reports for their Boards. They don't have to risk a price war with their competitors, think about relocating, or worry about their labor unions. They just take their extra $1 per item and use it on themselves. And the consumer pays the same as they did before.

 

[scrabbler1]

You seem to be moving far afield of your original point. I guess you are conceding that the corporate income tax is flawed. Or perhaps you believe it performs a valid purpose if keeping wages down. I would disagree with that but it has little to do with the discussion.



The corporate tax reform was a step in the right direction, encouraging corporations to locate in the US instead of fleeing to pretty much anywhere else, all had higher tax rates than the US.

Failing to balance the budget is another issue completely. It will require entitlements reform in order to happen.

The last tax reform was close to revenue-neutral on the personal side but hugely in the red on the corporate side.

Comparing the Latest House and Senate Tax Bills by Provision | Committee for a Responsible Federal Budget

Had the corporate rate been reduced not as much, and in a way to be totally offset by broadening the corporate base, I'd be fine with that. But it was not, instead a needlessly debt-financed giveaway to the corporations.

 

[scrabbler1]

You do not have the accept lower tax rates on dividends and capital gains. You can vote with your wallet and pay the difference as a donation to the US Treasury.

I would be happy to, as long as everyone else does, too.

 

[triangle]

Back in my working days, when I received a bonus due to the company doing well, it was taxable as ordinary income. If a company is doing well and pays me, as an investor, a dividend, it should also be taxed as ordinary income.

Your bonus was paid out of revenue the company received for its services and products sold. It was a tax deduction for the corporation. No taxes had been paid thus far, so the IRS (as well as your state) collected income taxes on that portion of the companies revenue stream that end up in your paycheck.

Bond holders are also paid from this revenue stream before any corporate taxes are levied. Thus bond holders have their revenue taxed at the ordinary level.

Banks do not pay taxes on the income stream that it uses to pay interest on CDs or other member deposits, thus the interest counts as ordinary income for the depositor.

REITs must pay out at least 90% of their taxable income, so the REIT investor pays taxes on this as ordinary income (though the recent Tax Cuts and Jobs Act did give some extra relief to some investors)

MLPs pay out distributions to unit holders, which look a lot like a dividend but are paid out before any corporate taxes, thus the unit holder receives a schedule K-1 and pays taxes at an ordinary income.

Dividends are paid out of net income after the corporation has paid taxes on the incoming revenue. Thus this discussion about double taxation by the same government entity on the same flow of money.

As an investor you are allowed to pay a higher tax rate on dividends if you wish, but as public policy I think this would drive companies to retain more earnings requiring people to sell more stocks to capture that payout as capital gains. Sort of like what Berkshire Hathaway does to its investors.

 

[joeea]

So you say if a Corp sees a tax savings, the savings will not be passed onto the consumer? You probably would say, no, because the Corp is 'greedy'.

Well, I say they will pass the savings on to the consumer, because they are 'greedy'.

Is there evidence that any savings were passed on to the consumer due to the last corporate tax cut?

 

[ERD50]

I prefer a much simpler scenario: The corporation sells an item for $12 which used to cost them $10 and overnight, and without any effort or risk, now costs them $9, increasing profits by $1. They throw a few pennies in high-exposure bonuses to the workers for good PR while secretly pocketing the rest in the form of higher stock dividends and more impressive quarterly reports for their Boards. They don't have to risk a price war with their competitors, think about relocating, or worry about their labor unions. They just take their extra $1 per item and use it on themselves. And the consumer pays the same as they did before.

Your "simpler scenario" is a fantasy world. Most companies do face competition.

Probably the most obvious example of this is gas prices. They go up when there are oil or refinery shortages, then they go back down. In your fantasy world, they would only go up.

-ERD50

 

[scrabbler1]

Your "simpler scenario" is a fantasy world. Most companies do face competition.

Probably the most obvious example of this is gas prices. They go up when there are oil or refinery shortages, then they go back down. In your fantasy world, they would only go up.

-ERD50

Fantasy? I think not. When is the last time ticket prices for movies and other entertainment events went down, including after a tax cut? Or rents for apartments, even if there happens to be a drop in mortgage interest rates or property taxes, the two biggest costs for landlords?

Your exception surely doesn't prove any rule.

 

[ERD50]

Is there evidence that any savings were passed on to the consumer due to the last corporate tax cut?

Interesting question, but I think it would be hard to parse out from the noise and all the other global effects. Maybe someone else has some ideas on how to do this? I'm not trying to be evasive, I honestly think it's a tough thing to see. I'd like to see it, whatever the result, if someone can find a good methodology. I'll think about it, too.

Inflation has been pretty tame, unemployment is low, those are positive signs, but not conclusive as to cause/effect.

There are a lot of things a company could do with the savings, increase wages/compensation, add to the workforce, reduce prices, invest in their business (which might help their suppliers add more jobs, etc).

I sometimes look at 'noisy' data by applying logic to it. My example is if my house has insufficient insulation, and I pay to have it upgraded. We know that logically that should improve my utility expense. But in the real world, there are many other effects - I might decide to use my HVAC for added comfort, there may be a different number of people in the house, the weather changed, the utility rates changed. So if I don't see it in my bill, that doesn't mean the insulation didn't help. But if you manage to take all that into account, you should see the benefit. But it can be difficult to parse that out.

Until we find a way to do that, I'll go with the logic and examples we see in the open market, where companies do cut prices when their costs are reduced (my gasoline example) for one.

-ERD50

 

[ERD50]

Fantasy? I think not. When is the last time ticket prices for movies and other entertainment events went down, including after a tax cut? Or rents for apartments, even if there happens to be a drop in mortgage interest rates or property taxes, the two biggest costs for landlords?

Your exception surely doesn't prove any rule.

Gas prices aren't an exception, they are an example. True, it isn't proof in and of itself. But neither are your examples.

As I said, there is a lot of 'noise' in the data, it's not easy to parse out. Maybe later, I or someone else will be able to find some illustrative data.

-ERD50

 

[MichaelB]

Interesting question, but I think it would be hard to parse out from the noise and all the other global effects. Maybe someone else has some ideas on how to do this? I'm not trying to be evasive, I honestly think it's a tough thing to see. I'd like to see it, whatever the result, if someone can find a good methodology. I'll think about it, too.

Inflation has been pretty tame, unemployment is low, those are positive signs, but not conclusive as to cause/effect.

There are a lot of things a company could do with the savings, increase wages/compensation, add to the workforce, reduce prices, invest in their business (which might help their suppliers add more jobs, etc).

I sometimes look at 'noisy' data by applying logic to it. My example is if my house has insufficient insulation, and I pay to have it upgraded. We know that logically that should improve my utility expense. But in the real world, there are many other effects - I might decide to use my HVAC for added comfort, there may be a different number of people in the house, the weather changed, the utility rates changed. So if I don't see it in my bill, that doesn't mean the insulation didn't help. But if you manage to take all that into account, you should see the benefit. But it can be difficult to parse that out.

Until we find a way to do that, I'll go with the logic and examples we see in the open market, where companies do cut prices when their costs are reduced (my gasoline example) for one.

-ERD50

What companies did with the cash they gained from the tax reduction is difficult question to answer. We’ll probably have a data based analysis in another year or so. In the meantime we can conclude a couple of things. They certainly didn’t pass it on to consumers or employees. Any CEO doing that would soon be looking for work. There was also no sudden bump up or down in inflation or wage growth. Some of it may have been used for capital investment. So far, it looks like the bulk of it is sitting on balance sheets.