New proposed tax on income from interest/dividends

[mark500]

There is also a proposed 2.9% tax assessment on income from interest, dividend, annuities, royalties, and rents, applying to individuals who make more than $200,000 annually and families that make more than $250,000.

Obama Endorses New Medicare Tax, More Drugmaker Fees (Update1) - BusinessWeek

Obamas plan includes the above.
Perhaps tax deferred invesmtments will become more popular for higher income people.

 

[FIREd]

Yes, the party is over for the "rich". I think that tax-deferred investments are already popular with high income earners, but there are limits on how much money can be sheltered in such investments and high income earners can exceed these limits very quickly. It sounds like the only way to avoid getting hosed by the coming tax hikes is to minimize your income to stay below the $200K/$250K income limit. That's why we have maximized our ordinary income in 2009 and doing it again in 2010 (cashing in boat loads of stock options) in hope that we can stay below the limit starting in 2011.

 

[ziggy29]

If taxes increase on dividends and interest, all that will do is drive down the tax-free yields to the point where it roughly the equivalent to a taxable investment in the highest brackets.

 

[JPatrick]

. It sounds like the only way to avoid getting hosed by the coming tax hikes is to minimize your income to stay below the $200K/$250K income limit.

Well put..Avoid success and the nasty income that usually follows.
A great way to grow an economy

 

[Gone4Good]

Unfair, unfair, unfair!

Now the poor hedge fund manager making $500K in "carried interest" will have to pay ~$69,000 in taxes (14%) compared with the $62K (12%) he pays now. Meanwhile the W-2 worker still pays $140K (28%).

I can see why people would be upset.


The bigger news here is that "Obamacare" is back! The bill released today is designed to be the compromise legislation between the Senate and the House health care reform legislation. The idea seems to be to pass the Senate bill and then pass a compromise piece of legislation like this one through the reconciliation process, thereby avoiding the 60 vote requirement in the Senate. The new taxes mentioned fill some revenue holes opened up by lowering the Senate's tax on "Cadillac" insurance plans.

 

[MasterBlaster]

Unfair, unfair, unfair!

Now the poor hedge fund manager making $500K in "carried interest" will have to pay ~$69,000 in taxes (14%) compared with the $62K (12%) he pays now. Meanwhile the W-2 worker still pays $140K (28%).

I can see why people would be upset.

here's how you should look at it...

carried interest aside... By discouraging investment and capital formation the proposed tax will discourage business formation and employment. We, as a nation, will be less prosperous because of it.

 

[Texas Proud]

Some people are assuming that this tax will not apply to tax exempt interest... I am not so sure they might not tax it all...


If they legally can.... does anyone know the law on why interest is not taxed? Is it a court case or just legislation?

 

[Bikerdude]

Some people are assuming that this tax will not apply to tax exempt interest... I am not so sure they might not tax it all...


If they legally can.... does anyone know the law on why interest is not taxed? Is it a court case or just legislation?

I think its a way for the lawmakers to get you to put your money where they want it.

 

[Gone4Good]

here's how you should look at it...

Thank you for informing me how I should look at. As it turns out I'm already well aware of the Republican talking points that say all taxes destroy the economy.

But I'm also aware that massive differences in tax rates for various activities create perverse incentives of their own . . . like our system's currently egregious bias in favor of capital over labor. And I'm aware that favorable rates for certain types of activities distort markets by directing resources to tax advantaged strategies rather than to their best economic purpose. And I'm also aware that magnitude matters in the sense that a small increase in the rate owed on already massively tax advantaged income is not going to result in the world ending disincentives claimed.

 

[Independent]

here's how you should look at it...

carried interest aside... By discouraging investment and capital formation the proposed tax will discourage business formation and employment. We, as a nation, will be less prosperous because of it.

This would make sense if we can figure out who "we" are. If all the benefits of investment and capital formation go to the very top of the income ladder, then the rest of us would prefer that they pick up more of the tax tab. Since we've seen widening income gaps over the last 30 years, it seems that is a plausible result.

The IRS just released their report on the 400 highest income families in 2007. Average income was $345 million, mostly from dividends and capital gains, average tax rate was 16.6%. I don't think the rest of us would see anything negative if that rate were 30% instead. http://www.irs.gov/pub/irs-soi/07intop400.pdf

 

[Gone4Good]

here's yet another point that you are probably also ignorant of:

capital is mobile, labor is much less so. .

Insults are the sign of a weak mind trying to express it self forcefully.

But aside from that, nearly any high value job can now be done from anywhere on the planet . . . even things like surgery. And workers can always choose not to work, but I guess you only pull that argument out when it suits your purpose.

 

[MasterBlaster]

Insults are the sign of a weak mind trying to express it self forcefully.

But aside from that, nearly any high value job can now be done from anywhere on the planet . . . even things like surgery. And workers can always choose not to work, but I guess you only pull that argument out when it suits your purpose.

Your weak mind was the one that published the rant.

You want others money and get all indignant when other disagree with you.

 

[theloneranger]

Eliminate the IRS and institute the VAT.
Even the underground economy and illegal economy cannot avoid taxes that must be paid when money is spend.

 

[haha]

Eliminate the IRS and institute the VAT.
Even the underground economy and illegal economy cannot avoid taxes that must be paid when money is spend.

As best I know, this has never happened. What does happen is that a VAT is enacted, in addition to unchanged income taxes. The pols can always spend any excess.

One thng no one will ever do is actually cut taxes meaningfully. Only worldwide breakdown and a complete wiping of the slate could possibly produce that.

Ha

 

[JPatrick]

Unfair, unfair, unfair!

Now the poor hedge fund manager making $500K in "carried interest" will have to pay ~$69,000 in taxes (14%) compared with the $62K (12%) he pays now. Meanwhile the W-2 worker still pays $140K (28%).




.

Why is it that some people define a financially successful individual as a hedge fund fund manager dripping with ill gotten gains. Sure they have found a slick way to beat the tax code (currently legal by the way) so why not fix the code and not punish the poor guy who busted his butt for 30 years building a bait shop empire (yup, I really know someone who exceeds the Obama threshold of being stinkin rich by pushing bait.) He employs a boatload of people and spreads his wealth around better than the government ever could.
It is also interesting to note that you never hear of more than one tax increase at a time. I guess it is like cockroaches, if you think you only have one it doesn't feel so bad. Could there be more?? Nah

 

[Gumby]

The personalized sniping on this thread is getting out of hand. Cool it down or Porky makes an appearance.

 

[Gone4Good]

Why is it that some people define a financially successful individual as a hedge fund fund manager dripping with ill gotten gains.

I don't believe I tried to define anything. All I did was point out an example of how the current tax code massively favors "passive" income over "earned" income. In the example of mine you cite, both the hedge fund manager and the miscellaneous worker with W-2 income earn the same amount, $500K, and are therefore equally successful.

But for some reason our tax code believes the work of the hedge fund manager is deserving of a subsidized tax rate. Meanwhile your bait shop owner, who is probably generating self employment income at the "earned" income tax rate (plus social security tax), pays much more. Maybe twice as much. Applying the medicare tax to passive income in the same way as it is already applied to earned income is one small step toward fixing the current distortion in our tax code, so I don't see that as an entirely bad thing. Although a complete re-write of the code would be better, that isn't going to happen.

Considering the massive difference in tax treatment maybe your bait shop owner would be better off selling his business and investing the proceeds in stocks and muni bonds . . . talk about perverse incentives.

 

[JPatrick]

And here I thought this was a thread about:
There is also a proposed 2.9% tax assessment on income from interest, dividend, annuities, royalties, and rents, applying to individuals who make more than $200,000 annually and families that make more than $250,000.

 

[mark500]

See Churchill quote below.

In any case, other tax deferred investements are life insurance and annuities, but they have their drawbacks. I suspect some will take advantage of 529s now, and not for education.

 

[FinanceGeek]

Does anybody know if the medicare tax would apply to capital gains?

Thinking that this could alter investor preference for c.g. over dividends, and perhaps even firm's earnings retention policy.

Guess its good I have managed to accrue so many years of loss carry forwards, the value of which seems destined to go only straight up!

 

[bobbee25]

A good comment on taxing the rich

Bar Tabs and Tax Cuts « Consider the Evidence

 

[jdw_fire]

and digging a little deeper you can find this Taxes at the Top « Consider the Evidence which as a summary says

To sum up: The effective tax rate on the incomes of the top 1% of Americans is substantially lower now (31%) than it was in the late 1970s (37%) and in the mid-1990s (36%). When the rate is higher, the federal government tends to collect a larger share of the national economy in taxes. And the experience of the past several decades suggests that higher rates have had no adverse impact on growth of the economy.
This evidence is by no means conclusive. But it lends credence to progressive hopes that a somewhat higher rate of taxation on the richest Americans would not only be fairer but also enhance the government’s ability to provide valuable services and benefits.

 

[MasterBlaster]

To sum up: The effective tax rate on the incomes of the top 1% of Americans is substantially lower now (31%) than it was in the late 1970s (37%) and in the mid-1990s (36%). When the rate is higher, the federal government tends to collect a larger share of the national economy in taxes. And the experience of the past several decades suggests that higher rates have had no adverse impact on growth of the economy.
This evidence is by no means conclusive. But it lends credence to progressive hopes that a somewhat higher rate of taxation on the richest Americans would not only be fairer but also enhance the government’s ability to provide valuable services and benefits.

The real question is... What exactly is the shape of the Laffer curve (taxation versus government take). At what taxation level do diminished returns start.

The quoted item above fails to explain the Reagan-era prosperity. In that case lower tax rates are widely seen as jump starting the economy.

 

[audreyh1]

Yes, the party is over for the "rich". I think that tax-deferred investments are already popular with high income earners, but there are limits on how much money can be sheltered in such investments and high income earners can exceed these limits very quickly. It sounds like the only way to avoid getting hosed by the coming tax hikes is to minimize your income to stay below the $200K/$250K income limit. That's why we have maximized our ordinary income in 2009 and doing it again in 2010 (cashing in boat loads of stock options) in hope that we can stay below the limit starting in 2011.

That is essentially what we are doing. We can easily stay below the $250K married couple limit from what our investments throw off in terms of interest and dividends. But we still have some unrealized gains that I need to take this year, stock prices permitting, and sometimes that throws us above the threshold (and also makes us pay extra in terms of AMT).

The other huge motivator is the expectation of the capital gains rate to reset from 15% back to 20%, and for dividends to lose their qualified tax status (15%).

Basically we are trying to position ourselves for lower annual income 2011 and onwards.

Audrey

 

[audreyh1]

The real question is... What exactly is the shape of the Laffer curve (taxation versus government take). At what taxation level do diminished returns start.

The quoted item above fails to explain the Reagan-era prosperity. In that case lower tax rates are widely seen as jump starting the economy.

Just to point out that the Clinton era was very prosperous as well, even though taxes increased during the Bush Sr and Clinton presidencies.

Whereas the aggressive tax cuts failed to generate similar prosperity during the Bush Jr. administration.

So I suspect it's just not that simple!

And more muddying details.....

And late in the Reagan era capital gains tax rates were increased from 20% to 28% as part of the 1986 "tax reform act" overhaul to match the new lowered top marginal tax rate. Later CG rate was lowered back to 20% in 1997 under Clinton.

Audrey