Capital Gains taxes should be higher

[BoberFett]

From wikipedia, short-term capital gains are taxed as normal income -- however, long-term has a flat 15% for the most part.

But long-term is defined as held for longer than one (1) year.

That's pithy, frankly. Long-term should be defined as five years or more, something along those liness

That would be reasonable. One year is probably too short.

 

[DCal430]

Well, most stock options aren't immediately sellable, but "vest" over the course of several years.

But you know it is very very easy to get the 15% flat rate for capital gains. Just hold onto the investment for longer than 1 year. That is it.

"Short-term" capital gains really should encompass the first five to ten years IMO.

I wanted point out stocks purchased using options that were issued bellow market value are subject to ordinary gains, no matter how long you hold on to them. The person in my example would be subject to ordinary gains on the difference between the option price and the stock price at the time of exercise.

Company issues option to buy stock at $10, stock is at $20 now.
5 years later the stock is now $60, you buy 1000 shared worth, you have to pay ordinary gains on $50,000, because the option was issued at below market value.
5 more years pass and the stock is now $110 and you sell it, you then pay capital gains on the additional $50,0000.

So you purchased it at $10 and held on to it for 10 years, you make $100K profit, $50K is subject to Ordinary Gains, and $50K is subject to capital gains.

 

[piasabird]

Most retirement systems are based on long term investments. This means raising tax rates on your retirement. Also a lot of the middle class also invest some of their discretionary funds in the stock market. This would also bring more taxes to people in their retirement who may be living off of their retirement plans. You need to think of the big picture. We live in a global economy, and we also have to fight for global investments. If the tax rate for capital gains increases, then less investments will be made in corporations chartered in the USA or physically located in the USA.

Fine if you want to tax people who receive millions in pay every year feel free. Even if rich people dont pay a lot of taxes, they do spend a lot of money. The problem is rich people dont have to live in the USA, they can move somewhere else and live there.

The real problem is not taxes it is a system where freeloaders are supported by the people that pay taxes. Our largest area of spending is medicair, social security, and the Military. In Medicair and Social Security are the free loaders. Grandparents use to be supported by their families.

Then there are the other people on social security who are not retired. Some of those are just free loaders and a few people who are truly disabled.

We need to kick all able bodied women that decided getting preagnant would solve their financial problems, off of welfare. They can get a job like all the married people who are raising their own children by themselves. They are government prostitutes.

 

[DCal430]

Low dividends tax is also stupid, income is income people and all should be taxed the same.


Stop the rich mans loop holes.

 

[cybrsage]

Most retirement systems are based on long term investments. This means raising tax rates on your retirement. Also a lot of the middle class also invest some of their discretionary funds in the stock market. This would also bring more taxes to people in their retirement who may be living off of their retirement plans. You need to think of the big picture. We live in a global economy, and we also have to fight for global investments. If the tax rate for capital gains increases, then less investments will be made in corporations chartered in the USA or physically located in the USA.

Fine if you want to tax people who receive millions in pay every year feel free. Even if rich people dont pay a lot of taxes, they do spend a lot of money. The problem is rich people dont have to live in the USA, they can move somewhere else and live there.

The real problem is not taxes it is a system where freeloaders are supported by the people that pay taxes. Our largest area of spending is medicair, social security, and the Military. In Medicair and Social Security are the free loaders. Grandparents use to be supported by their families.

Then there are the other people on social security who are not retired. Some of those are just free loaders and a few people who are truly disabled.

We need to kick all able bodied women that decided getting preagnant would solve their financial problems, off of welfare. They can get a job like all the married people who are raising their own children by themselves. They are government prostitutes.

You started out so good...then went into a rant.

 

[Slew Foot]

Treat all income the same, lower tax rates, eliminate all deductions, done.

Simplify the tax code and eliminate the loopholes.

 

[soundforbjt]

Wow, to hear the righties like spidey talk, it's amazing there was any investing ever in this country back when taxes were much higher.

 

[Anarchist420]

They need to eliminate capital gains taxes, especially on precious metals. CG taxes on gold give the Federal reserve a monopoly.

"Fair market value" is subjective.

 

[1prophet]

Greed is good. Greed is the prime, maybe only human motivator. Greed makes great people do great things that ordinary, non-greedy people can later enjoy in their insignificant lives.

That is one of the biggest lies perpetuated today and twisted as something good. Making money, being the best, getting to the top is not greed, greed is accomplishing those things by cheating, stealing, deception, obfuscation, lying because one compromises principles and ideals and then rationalizes their actions as just.

I met many people that accomplished those great things while being generous with their wealth and helping others because of their positive go getter mentality and boldness which allows them to move forward even when they face heavy resistance to their ideas while others fall by the wayside.

The reason most of those so called non greedy ordinary people not accomplishing those things in their so called insignificant lives is because of frog in the well syndrome, trapped flea syndrome, and the many psychological balls and chains that hold them back from being all they can be, not greed.

 

[Fern]

well, it depends, now doesn't it? Higher capital gains taxes might discourage investment. Higher marginal tax rates might discourage hard work and success also, no? You have to pick one evil to live with.

Far too simplistic, and therefore incorrect.

The relationship between the tax rates and encourage/discouragement is not linear. This is not in dispute.

E.g., you can raise tax rates on income incrementally and often see very little in the way of influence on taxpayer behavior. However, you can reach a point (a certain tax rate %) that will begin to substantially occur. While there is much disagreement among economists, many believe somewhere around 50% you will see a 'tipping point'. (IIRC, some peg it lower, others a bit higher.) The tipping point will different between wage income and cap gains. Cap gains can easily be deferred until a more favorable rate returns. Wage type income, not at all unless you can afford to be unemployed, or choose to forgo additional/marginal income. You cannot defer it, you can just lose/forgo it.

And there is no "choose one or the other'. They are two different types of income, with different characteristics.

I am writing this post in the wake of the Bain Capital ads. Bain was assisted in wrecking private companies by favorable capital gains IMO. lower cap. gains would have encouraged selling to Bain and it would have left Bain with more money to again "invest and wreck."

Bain Capital didn't "wreck" private companies. First there are two elements of Bain Capitals' business:

1. Venture Capital. Sometimes they invested in "private companies" (meaning they were closely owned corps), many other times they would be public companies (just not NYSE or NASDAQ). Depends on at what level did Bain enter (e.g., seed money level v mezzanine level). Here Bain would be providing capital to a young promising company. Wrecking these companies does nothing for Bain, they would lose their investment.

2. Private equity. Here they invest (sometimes sufficiently to gain control, sometimes not) in failing, but typically more mature companies, with the objective of turning them around for a profit. But I've never seen an instance where their objective was "wrecking" them. In the first place, that's clearly counter-intuitive. Secondly, the practice of wrecking for profit is an entirely different play. Under this method there is no attempt to turn around the company. Instead, they often want to break it up and sell off parts. The 'sum of the parts is greater than whole" thing. E.g., back in the 80's when Walt Disney Co. was doing poorly Kirk Kirkorian (sp?) attempted a hostile takeover of Disney with the intention of breaking it up and selling off the pieces (e.g., real estate etc) because their value was higher than all the stock combined. I think Saul Steinburg (sp?) tried the same thing.

BTW: It's highly questionable how much cap gain rates had to do with this. This was done (at least as far as Romney is concerned) before the Bush tax cuts. Moreover, Bain took a lot of profit out as dividends which were taxed as ordinary income then (even possibly now because I doubt they meet the definition of "qualified dividends" as required under tax law).

Fern

 

[Fern]

-snip-
I also support some kind of excessive salary tax, one that taxes a company when it gives too much compensation to one employee. Like a CEO who makes 10 million a year, while most of the workers are on minimum wage.

Something similar was tried and it failed. But they deny a deduction to the corporation for salary that is is excess of $1 million. I think it's still in the law.

But the fed govt really has little business deciding what is excess and what is not. It varies from industry-to-industry and company-to-company, that makes choosing a single arbitrary amount stupid. So, they have to take into facts and circumstances etc and there's an exception for performance based pay. The end result is a useless rule as far as I can tell.

Fern

 

[Fern]

Wow, to hear the righties like spidey talk, it's amazing there was any investing ever in this country back when taxes were much higher.

And yet, OTOH, Liberals complain loudly about the huge sums now invested and rail against the income of those managing those huge investment portfolio's.

So, yes, tax policy influences investment. Economists will tell you so.

Fern

 

[SamurAchzar]

That is one of the biggest lies perpetuated today and twisted as something good. Making money, being the best, getting to the top is not greed, greed is accomplishing those things by cheating, stealing, deception, obfuscation, lying because one compromises principles and ideals and then rationalizes their actions as just.

greed: a selfish and excessive desire for more of something (as money) than is needed

Says nothing of stealing and thieving. Nevertheless, how can you be all you can be in a society that places equality as the most important attribute?

 

[Fern]

Low dividends tax is also stupid, income is income people and all should be taxed the same.


Stop the rich mans loop holes.

Not that I necessarily agree entirely with the dividend tax scheme now in existence, I think it was established for two reasons:

1. You reduce the dividend rate you increase the value of the stock on the stock market. I.e., higher net investment return = higher investment asset value.

2. Corporations were playing a game. Instead of distributing excess as dividends they were holding on to it. By holding onto it the net worth of corporation increased (higher net assets) meaning the stock's value increased. Therefor investors could sell their stock for more income taxed at LTCG thus avoiding higher regular rates on dividends. I.e., it's too easy to convert dividends taxed at ordinary rates into LTCG taxed at lower rates.

There are other policy reasons (hostile takeovers are more likely with cash laden corps and nobody likes those, bad policy) but I think the two above are the primary reasons

Fern

 

[Anarchist420]

Something similar was tried and it failed. But they deny a deduction to the corporation for salary that is is excess of $1 million. I think it's still in the law.

But the fed govt really has little business deciding what is excess and what is not. It varies from industry-to-industry and company-to-company, that makes choosing a single arbitrary amount stupid. So, they have to take into facts and circumstances etc and there's an exception for performance based pay. The end result is useless rule as far as I can tell.

Fern

I agree. It's ridiculous that so many people don't realize we already have the most progressive tax system in the world. It's not possible to further reduce inequalities in wealth by raising the top marginal income tax rate. Some wealthy New Yorkers already pay half of their income in taxes.

Unless a global government collects its revenues in gold via a high real estate tax with a high exemption, then the rich can't be soaked until everyone has an equivalent amount of wealth. Of course, I don't advocate that, but most people who are pro-redistributionist don't even realize that taxing income to spend on the poor isn't going going to make the poor significantly richer.

 

[micrometers]

Far too simplistic, and therefore incorrect.

The relationship between the tax rates and encourage/discouragement is not linear. This is not in dispute.

E.g., you can raise tax rates on income incrementally and often see very little in the way of influence on taxpayer behavior. However, you can reach a point (a certain tax rate %) that will begin to substantially occur. While there is much disagreement among economists, many believe somewhere around 50% you will see a 'tipping point'. (IIRC, some peg it lower, others a bit higher.) The tipping point will different between wage income and cap gains. Cap gains can easily be deferred until a more favorable rate returns. Wage type income, not at all unless you can afford to be unemployed, or choose to forgo additional/marginal income. You cannot defer it, you can just lose/forgo it.

And there is no "choose one or the other'. They are two different types of income, with different characteristics.



Bain Capital didn't "wreck" private companies. First there are two elements of Bain Capitals' business:

1. Venture Capital. Sometimes they invested in "private companies" (meaning they were closely owned corps), many other times they would be public companies (just not NYSE or NASDAQ). Depends on at what level did Bain enter (e.g., seed money level v mezzanine level). Here Bain would be providing capital to a young promising company. Wrecking these companies does nothing for Bain, they would lose their investment.

2. Private equity. Here they invest (sometimes sufficiently to gain control, sometimes not) in failing, but typically more mature companies, with the objective of turning them around for a profit. But I've never seen an instance where their objective was "wrecking" them. In the first place, that's clearly counter-intuitive. Secondly, the practice of wrecking for profit is an entirely different play. Under this method there is no attempt to turn around the company. Instead, they often want to break it up and sell off parts. The 'sum of the parts is greater than whole" thing. E.g., back in the 80's when Walt Disney Co. was doing poorly Kirk Kirkorian (sp?) attempted a hostile takeover of Disney with the intention of breaking it up and selling off the pieces (e.g., real estate etc) because their value was higher than all the stock combined. I think Saul Steinburg (sp?) tried the same thing.

BTW: It's highly questionable how much cap gain rates had to do with this. This was done (at least as far as Romney is concerned) before the Bush tax cuts. Moreover, Bain took a lot of profit out as dividends which were taxed as ordinary income then (even possibly now because I doubt they meet the definition of "qualified dividends" as required under tax law).

Fern

1. you write that around 50% is the tipping point, no? Well, even with the Bush tax cuts there are also state and local taxes to contend with, which often add up to 15% on top of 33%, so yes you are looking at 50%. I'd rather raise taxes on capital gains than raise taxes on high earners, who often do work 80 hr weeks for the wage. I mean, 15% vs 33% is still quite a disparity.

2. I'm actually talking about the Gingrich/Clinton tax cut on capital gains in the 1990's, which dropped it to 15%. Cap. gains were actually on par with income taxes through the Reagan years until the Bush admin when the disparity arose.

If capital gains were higher, then the owners of the various businesses might not be so quick to sell to private equity like Bain because profit would be lower due to capital gains. If it were lower, they might have a harder time getting junk bond financing. The entire financial sector might have been tamed.

 

[micrometers]

Something similar was tried and it failed. But they deny a deduction to the corporation for salary that is is excess of $1 million. I think it's still in the law.

But the fed govt really has little business deciding what is excess and what is not. It varies from industry-to-industry and company-to-company, that makes choosing a single arbitrary amount stupid. So, they have to take into facts and circumstances etc and there's an exception for performance based pay. The end result is a useless rule as far as I can tell.

Fern

earlier there was a thread about some wildly overpaid CEO, who received like 50 million in compensation each year.

If you parsed it down, his salary was actually around a half million, but the rest was made up in stock, thus subject to capital gains taxes. So that is how they get around such restrictions -- by issuing capital gains tax advantaged stock options.

 

[Fern]

-snip-
If capital gains were higher, then the owners of the various businesses might not be so quick to sell to private equity like Bain because profit would be lower due to capital gains. If it were lower, they might have a harder time getting junk bond financing. The entire financial sector might have been tamed.

Uhhhh.. I don't think so.

Whether you're a start-up business or a troubled business the whole point of Bain's involvement is to get additional financing for business. The new start-up need capital to grow, the troubled business needs it to stay out of bankruptcy.

If Bain purchased the stock from the owners, the capital would NOT be in the business's accounts, it would be in the owners' hands. That's no help.

Instead, the corporation will issue shares to Bain, Bain will pay the corporation for it. That way the money in the business's account and available for it's use. I.e., the (previous) owners do not sell any stock to Bain.

Here's how it often works: The company has 10,000 shares of stock outstanding. Bain agrees to come in and they buy 10,001 shares from the corporation for $10 million. The company gets the $10 M.

The company now has 20,001 shrs of stock outstanding and Bain owns 10,001 giving them little more 50% so they now have control.

Fern

 

[Fern]

earlier there was a thread about some wildly overpaid CEO, who received like 50 million in compensation each year.

If you parsed it down, his salary was actually around a half million, but the rest was made up in stock, thus subject to capital gains taxes. So that is how they get around such restrictions -- by issuing capital gains tax advantaged stock options.

Exactly.

The stock options are considered performanced based pay, an exemption from the compensation limit.

Fern

 

[micrometers]

Exactly.

The stock options are considered performanced based pay, an exemption from the compensation limit.

Fern

then ending the tax preference for capital gains would go a long way towards ending excess executive compensation.

They would find other ways, I'm sure, but still, this is a little glaring IMO.

 

[Fern]

then ending the tax preference for capital gains would go a long way towards ending excess executive compensation.

They would find other ways, I'm sure, but still, this is a little glaring IMO.

I don't see how.

Business use stock options for several reasons, not the least among them:

1. It doesn't cost the business anything. They can issue new stock freely and it's tax free for them.

2. It's an end-around the compensation limit.

If anything, higher taxes would just encourage the business to issue even more stock options to make up for the extra tax on the CEO's side.

They would probably also stop using ISO stock option plans. ISO stock options plans are the ones where the execs get LT cap gain treatment. However, under ISO rules the business gets no deduction for the execs' S.O. compensation. All businesses would switch to (non-ISO) S.O. plans that, while currently denying LTCG treatment for the exec, give the company a tax deduction for the S.O.'s. The business could give bigger S.O. amounts and come out way ahead with the deduction now reducing their income taxes.

Income tax is tricky, you 'push a button here' and find out 'one pops out there' unintentionally. The Law of Unintended Consequences is mighty powerful in tax law.

Fern

 

[micrometers]

I don't see how.

Business use stock options for several reasons, not the least among them:

1. It doesn't cost the business anything. They can issue new stock freely and it's tax free for them.

2. It's an end-around the compensation limit.

If anything, higher taxes would just encourage the business to issue even more stock options to make up for the extra tax on the CEO's side.

They would probably also stop using ISO stock option plans. ISO stock options plans are the ones where the execs get LT cap gain treatment. However, under ISO rules the business gets no deduction for the execs' S.O. compensation. All businesses would switch to (non-ISO) S.O. plans that, while currently denying LTCG treatment for the exec, give the company a tax deduction for the S.O.'s. The business could give bigger S.O. amounts and come out way ahead with the deduction now reducing their income taxes.

Income tax is tricky, you 'push a button here' and find out 'one pops out there' unintentionally. The Law of Unintended Consequences is mighty powerful in tax law.

Fern

but the more stock they issue, the more expensive it is to the company. Yes, tax laws are tricky and have unintended consequences. That is why things such as a capital gains tax preferential advantage has ended up doing what no one really intended: padding the pay of top executives.

 

[bfdd]

Steve Jobs actually cancelled some community programs when he got to Apple, as far as I know. It is said (by Woz as well) he was deeply influenced by Ayn Rand ideas.

Yet Steve Jobs left us a much better world. He did more for any of us than what we did for him. The personal wealth he has accumulated is in orders of magnitude smaller than his day to day impact on humanity. That applies to the Google guys as well.
Point being, if he wasn't greedy, and retired, the world would have been a worse place.

Greed is good. Greed is the prime, maybe only human motivator. Greed makes great people do great things that ordinary, non-greedy people can later enjoy in their insignificant lives.

Or he was a selfish idiot who created a religion and idiots like you follow it without seeing what truly was going on. Please spare me the non-sense that the world is a better place because of the Apple religion. Steve was a salesman, nothing more.

 

[Fern]

but the more stock they issue, the more expensive it is to the company. Yes, tax laws are tricky and have unintended consequences. That is why things such as a capital gains tax preferential advantage has ended up doing what no one really intended: padding the pay of top executives.

Not sure what you mean by "expensive".

It's their stock, they can just print it out like a memo.

However, it will reduce their income on their financial statement. But an increase in cost of additional S.O. would be offset, partly or wholly, by a decrease in income tax expense.

Yes, preferential LT cap gain rates do have the effect of driving up exec compensation, at least theoretically. The preferential rates increase the value of stock, which in turn increases the value of the options, thus increasing execs comp.

Fern

 

[First]

Well managed and manipulated higher tax rates simply don't significantly affect business investment/entrepreneurship. The whole argument is flawed from the beginning.

http://www.2pctsolution.com/?p=578