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Potential Change to Cap Gains Tax Calculation
Old 07-31-2018, 11:12 AM   #1
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Potential Change to Cap Gains Tax Calculation

Sounds like cap gains calculation would be adjusted to account for inflation (eg reduction in the gain). This Bloomberg 6 min Bloomberg clip does a very poor job of describing the proposal. Seems to contain a major blunder wrt the effect on 401k plans.

Mnuchin Mulls New Capital Gains Tax Cut Aimed at the Rich https://www.bloomberg.com/news/audio...ed-at-the-rich

Maybe someone can post a link to NYT story referenced in the audio clip.
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Old 07-31-2018, 11:26 AM   #2
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This is the one I read this morning: https://www.nytimes.com/2018/07/30/u...cuts-rich.html
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Old 07-31-2018, 11:34 AM   #3
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This is the key takeaway from the NYT article
Quote:
Steven Mnuchin, the Treasury secretary, said in an interview on the sidelines of the Group of 20 summit meeting in Argentina this month that his department was studying whether it could use its regulatory powers to allow Americans to account for inflation in determining capital gains tax liabilities. The Treasury Department could change the definition of “cost” for calculating capital gains, allowing taxpayers to adjust the initial value of an asset, such as a home or a share of stock, for inflation when it sells.

“If it can’t get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we’ll consider that,” Mr. Mnuchin said, emphasizing that he had not concluded whether the Treasury Department had the authority to act alone. “We are studying that internally, and we are also studying the economic costs and the impact on growth.”
So, not a proposal, just an idea, no way to know if it is being given serious consideration.
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Old 07-31-2018, 11:35 AM   #4
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Someone on TV pointed out that this is a tax law change and has to go through Congress..


If they did it, it would go to court and be overturned...
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Old 07-31-2018, 11:57 AM   #5
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WSJ had a piece on this a few weeks ago. They made it sound like Trump could pull the trigger on his own.
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Old 07-31-2018, 12:31 PM   #6
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Originally Posted by MichaelB View Post
This is the key takeaway from the NYT article

So, not a proposal, just an idea, no way to know if it is being given serious consideration.
IIRC this has been bandied about a few times over the years. Can't cite it, just rings a bell.

Nice thought though, especially as we have long held real estate (like over 50 years) and some RE that hasn't been sold in a century and a half...just deed transfers.
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Old 07-31-2018, 01:25 PM   #7
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WSJ had a piece on this a few weeks ago. They made it sound like Trump could pull the trigger on his own.
That's what I heard this morning too.
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Old 07-31-2018, 01:42 PM   #8
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Another article can be found on MarketWatch.

Quote:
A move being contemplated by the Trump administration to let Americans account for inflation in determining their capital gains tax liabilities would overwhelmingly benefit the wealthy.

A study released in the spring from the University of Pennsylvania’s business school shows the top 0.1% of earners, in particular, would reap more than 60% of the tax cut, according to the school’s model.

The middle class, by contrast, gets a mere 0.1%.
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Old 07-31-2018, 02:00 PM   #9
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Originally Posted by ChiliPepr View Post
Another article can be found on MarketWatch.
Quote:
A move being contemplated by the Trump administration to let Americans account for inflation in determining their capital gains tax liabilities would overwhelmingly benefit the wealthy.

A study released in the spring from the University of Pennsylvania’s business school shows the top 0.1% of earners, in particular, would reap more than 60% of the tax cut, according to the school’s model.

The middle class, by contrast, gets a mere 0.1%
I read the article and they never mentioned this: One reason lower income individuals receive little benefit from a CG tax decrease is that they are already paying at the 0% rate. Things like this make me question the motivations of the author.


One rationale often used to justify lower CG tax rates (compared to income from wages) is that CGs are not indexed for inflation, so at least some of the gains are not truly gains. If this is the reason (to the extent these things have "reasons"), then if CGs are indexed for inflation, it would be logically consistent to then tax them at the same rate as the indiviidual's earned income.
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Old 07-31-2018, 02:01 PM   #10
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Are discussions about potential tax law changes permitted here?
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Old 07-31-2018, 02:09 PM   #11
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Originally Posted by samclem View Post
I read the article and they never mentioned this: One reason lower income individuals receive little benefit from a CG tax decrease is that they are already paying at the 0% rate.
....and a clueless populace takes the bait.
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Old 07-31-2018, 02:12 PM   #12
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Are discussions about potential tax law changes permitted here?


Proposed laws, regulations or policies that impact ER have been discussed here for years, and there's no reason that can't continue (as long as the focus is on ER, the interactions remains civil, and the stereotypical social commentary and partisan stuff is left outside, etc.)
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Old 07-31-2018, 02:26 PM   #13
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Quote:
Originally Posted by samclem View Post
I read the article and they never mentioned this: One reason lower income individuals receive little benefit from a CG tax decrease is that they are already paying at the 0% rate. Things like this make me question the motivations of the author.

One rationale often used to justify lower CG tax rates (compared to income from wages) is that CGs are not indexed for inflation, so at least some of the gains are not truly gains. If this is the reason (to the extent these things have "reasons"), then if CGs are indexed for inflation, it would be logically consistent to then tax them at the same rate as the indiviidual's earned income.
Notwithstanding the motivations or the author, many individuals do hold equities and other assets that could be subject to cap gains tax, but are not, because they are either in a pension fund or a retirement account. This includes trillions of $US in equities. In both cases they will be taxed, but as income (when paid or withdrawn), not cap gains.

The fact that the same asset can be taxed at different rates among different taxpayers is probably one of the greatest contributors to complexity in our code.
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Old 07-31-2018, 02:43 PM   #14
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Does anyone else think the Bloomberg analyst misspoke when he stated that pension and 401k plan participants would benefit from this?
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Old 07-31-2018, 02:52 PM   #15
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Originally Posted by jazz4cash View Post
Does anyone else think the Bloomberg analyst misspoke when he stated that pension and 401k plan participants would benefit from this?
Yes.
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Old 07-31-2018, 06:24 PM   #16
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Remember, people were fussing in the 1970s that federal income tax brackets weren't indexed for inflation ("bracket creep")

Indexing of the above happened, eventually.

So I don't see why indexing capital gains is so controversial.
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Old 07-31-2018, 07:20 PM   #17
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Remember, people were fussing in the 1970s that federal income tax brackets weren't indexed for inflation ("bracket creep")

Indexing of the above happened, eventually.

So I don't see why indexing capital gains is so controversial.



Because there is so much wiggle room in it.... the tax brackets are calculated by the gvmt, so no chance of anything going wrong...


Cost basis being what you paid for it is easy... why complicate matters by adding indexing... the lower tax rate is to compensate for inflation...
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Old 07-31-2018, 10:07 PM   #18
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While I like the idea of the entire Income Tax system being adjusted for inflation (not just cap gains), I do not like idea of the Executive Branch using its 'powers' to change laws and make laws. That is Congress' job. If they don't do it well, we can boot them and get new people. We are a Republic. The President is not a king or dictator. We don't need more laws made by un-elected bureaucrats even if the President thinks it's OK.

We would be opening a door to the same un-elected bureaucrats making other chagnes to our tax laws. That is very dangerous.
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Old 08-01-2018, 05:10 AM   #19
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So I don't see why indexing capital gains is so controversial.
I'm not sure the concept of "indexing capital gains" itself is causing much controversy.

More likely it's because of the economic class of the relatively few individuals who will reap virtually all of the benefits of the change.

And perhaps because of the expected increase to the deficit.

And also because of the question regarding which branch of the government is allowed to make this type of tax law change.
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Old 08-01-2018, 05:44 AM   #20
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I don't buy into the idea of indexing from a theory perspective. If you look at the components of what investors demand for equity returns, it includes an equity risk premium on top of a risk-free interest rate.... and the base component of the risk-free interest rate is expected inflation. So in theory, both bond investors and equity investors are paid for inflation... it is part of their return to maintain the purchasing power of their wealth.

If they indexed cost basis of equities for inflation, then that would mean that bond investors would pay ordinary tax rates on the inflation included in bond interest but equity investors would not pay any tax on inflation included in their equity return.... doesn't seem right.

Besides, it would make taxes much more complicated rather than less complicated and tax simplification is a stated goal of tax reform.
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