Extending Tax Cuts, Why Can't the Politicians Compromise?

[Fern]

-snip-
Oh, and capital gains should be taxed as ordinary income. Why the fuck should your capital be taxed less than my labor?

Bull.

You've got to realize inflation exists. If it didn't, OK, tax LT cap gains like any other income.

But when considering inflation, if the asset is held long enough it's possible you actually lost money but are stuck paying tax on 'phantom income' that is nothing but inflation. How is that remotely OK?

As I've said before, other countries require that long term asset sales be adjusted for inflation. Then you take the adjusted gain and hit it with regular rates. That's the proper way to do it.

Our gov simply doesn't want to deal with that complexity and so simply gives a lower rate on LT cap gains.

Fern

 

[LegendKiller]

*facepalm*

I've done this exercise before. It doesn't even include local/city tax.

Your Pay Check Results

Bi-weekly Gross Pay
$11,538.46

Federal Withholding
$3,162.91

Social Security
$715.38

Medicare
$167.31

Kentucky
$674.36


Net Pay
$6,818.50

Calculation Based On

Tax Year
2010

Gross Pay
$300,000.00

Pay Frequency
Bi-weekly

Federal Filing Status
Single

# of Federal Exemptions
1

Additional Federal W/H
$0.00

Gosh. Living on almost 15k/month is just...impossible.

That's not even including mortgage interest deductions, family deductions, other tax deductions...etc.

 

[Tom]

OK, so you're fine with me taking 5-8 thousand dollars extra out of your bank account every year for your fair share? The bush tax cuts were much more than just the tax tables, I've outlined them many times before and even instructed people what they need to do this year to avoid the massive obama tax hikes and I'm not repeating them. You can google the changes that are outside of just the fed tax rates.

vast majority of those the Democrats want to extend, if you mean what I think you mean.

If the tax rate goes back to Clinton/Gingrich levels, in order to owe $8k I'd have to be making about $400k; when I get there I doubt I'll be happy to pay the extra, but I won't want to tear the country down over it.

 

[IndyColtsFan]

It's a common misconception about graduated income tax that whatever tax bracket your highest income is in is the tax rate you pay.

THAT IS NOT CORRECT. Only the income above that bracket threshold is taxed at that rate. Because of that the highr the income a person has the higher their ACTUAL TAX RATE is. So a person making 250k doesn't pay the same percentage overall, as someone making 10 million.

The person making 10 million has a lot more income taxed at the highest rate, that means his overall tax rate is closer to that higher percentage.

What you're missing is that it entirely depends on how the money is made. If I am a multi-millionaire, I can forgo an income and live off of dividends, etc. If my entire "income" of $10 million is off of investments, what effective rate am I paying?

That's my point. My understanding is that these are capital gains and are taxed differently than income. The people on the left in here keep saying that the average effective rate paid by the top 1% is like 17%. If that isn't true, fine, but I am using their figures and clearly, that figure doesn't match what you're saying above when you say that they would be paying closer to the percentage reflected in the highest bracket in which their income falls. The discrepancy? The majority of their income is from -- you guessed it -- capital gains.

 

[Engineer]

Bull.

You've got to realize inflation exists. If it didn't, OK, tax LT cap gains like any other income.

But when considering inflation, if the asset is held long enough it's possible you actually lost money but are stuck paying tax on 'phantom income' that is nothing but inflation. How is that remotely OK?

As I've said before, other countries require that long term asset sales be adjusted for inflation. Then you take the adjusted gain and hit it with regular rates. That's the proper way to do it.

Our gov simply doesn't want to deal with that complexity and so simply gives a lower rate on LT cap gains.

Fern

Sorry, don't agree. Why should my interest on CD's be taxed at full marginal rate? My savings accounts? I have inflation throughout the year and my labor is taxed. Don't buy that argument one bit.

 

[BoberFett]

nobody can cut spending drastically unless we are going to be a different country.

That's actually what some of us would like. It would be far preferable to be a different country than one which wastes trillions of dollars annually.

 

[BoberFett]

Sorry, don't agree. Why should my interest on CD's be taxed at full marginal rate? My savings accounts? I have inflation throughout the year and my labor is taxed. Don't buy that argument one bit.

So when somebody sells an asset that they held for 30 years, so stock in a company, if that asset doubled in value they should be taxed on it even though inflation doubled twice during that same time period?

I agree that capital gains should be taxed exactly the same as normal income, but it does need to take into account the length of time over which the capital gain occurred. If you don't, you'll absolutely destroy any and all long term investment because the only thing worth holding is short term.

 

[Fern]

Sorry, don't agree. Why should my interest on CD's be taxed at full marginal rate? My savings accounts? I have inflation throughout the year and my labor is taxed. Don't buy that argument one bit.

Damn man, you've got to be kidding.

Inflation over a year, or even a part of a year is negligiable.

I've owned my commercial building over 15 years now.

Using this inflation calculator, for every $100,000 paid in 1994 you'd need $143,000 now to break even on inflation.

In other words, if I bought a $100,000 building back then and sold it for $143k I wouldn't have a gain, but I'd be paying tax on the inflation of $43K

The calculator:

http://www.westegg.com/inflation/

What this means is that nobody would buy LT assets. Just put your money in a CD or bond and take the interest income and roll it over every year. You'd be fusking nuts to invest in any LT assets.

Fern

 

[Engineer]

So when somebody sells an asset that they held for 30 years, so stock in a company, if that asset doubled in value they should be taxed on it even though inflation doubled twice during that same time period?

I agree that capital gains should be taxed exactly the same as normal income, but it does need to take into account the length of time over which the capital gain occurred. If you don't, you'll absolutely destroy any and all long term investment because the only thing worth holding is short term.

Since tax tables/rates are indexed over time, I don't see why not. My interest earned isn't subject to some sort of inflation, not to mention that my interest is forced to be applied each year (instead of paid out at end of term) forcing me pay taxes on it as I go (exception: US Savings Bonds which suck anyway).

As for stocks as investments, I wouldn't mind a lower capital gains rate on NEW issued stock (IPO's or new stock issued for more capital). The trading of stocks back and forth for profit is just that...doesn't help anyone but the people selling for a profit.

By the way, when writing off a stock loss, does it write off at the lower capital gains rates or does it write off as ordinary income (I don't know so serious question)?

 

[Tom]

What you're missing is that it entirely depends on how the money is made. If I am a multi-millionaire, I can forgo an income and live off of dividends, etc. If my entire "income" of $10 million is off of investments, what effective rate am I paying?

That's my point. My understanding is that these are capital gains and are taxed differently than income. The people on the left in here keep saying that the average effective rate paid by the top 1% is like 17%. If that isn't true, fine, but I am using their figures and clearly, that figure doesn't match what you're saying above when you say that they would be paying closer to the percentage reflected in the highest bracket in which their income falls. The discrepancy? The majority of their income is from -- you guessed it -- capital gains.

Oh I agree with you there, I was only talking about the income tax rate. I admit I haven't considered all the issues regarding capital gains; as FERN points out there's the matter of inflation.

But I don't see why inflation is a factor with captial gains, and not wages. Seems like inflation affects everything so why should capital gains get special consideration ?

 

[Fern]

Since tax tables/rates are indexed over time, I don't see why not.
-snip-

That's only for 'bracket creep'. It doesn't address inflation accumulated over a long period of time.

Fern

 

[Fern]

-snip-
By the way, when writing off a stock loss, does it write off at the lower capital gains rates or does it write off as ordinary income (I don't know so serious question)?

First, people need to understand LT and ST cap gains are treated seperately.

If you have a LT cap loss, first you net it with any LT cap gains (effectively meaning the deduction is also at the low rate).

If there are no LT cap gains to be offset, you get to deduct a maximum of $3,000 for any year. The rest is carried over into future years.

Fern

 

[Engineer]

First, people need to understand LT and ST cap gains are treated seperately.

If you have a LT cap loss, first you net it with any LT cap gains (effectively meaning the deduction is also at the low rate).

If there are no LT cap gains to be offset, you get to deduct a maximum of $3,000 for any year. The rest is carried over into future years.

Fern

I know about the limit (sadly, I'm living it every year for quite some time) and I know about ST/LT but do you get to only deduct 10% or 15% of does the entire $3,000 go against full marginal rate (long term gains)? If so, why?

 

[Fern]

-snip-
But I don't see why inflation is a factor with captial gains, and not wages. Seems like inflation affects everything so why should capital gains get special consideration ?

How the hell is inflation a factor in wages?

You work a month and get paid then. What kind of inflation is there in a month?

An annual inflation rate of 3% works out to about 2 tenths of 1 percent per month. Who cares? (and since you've got to average that rate between the work for the first day of the month and the last day it's only about half of .002)

Hold a LT assets for many years and that 3% annual is a big Effin deal. In my post above I've shown that it works out to about 43% ($43k/$100k) over the last 15 yrs.

Fern

 

[Tom]

Damn man, you've got to be kidding.

Inflation over a year, or even a part of a year is negligiable.

I've owned my commercial building over 15 years now.

Using this inflation calculator, for every $100,000 paid in 1994 you'd need $143,000 now to break even on inflation.

In other words, if I bought a $100,000 building back then and sold it for $143k I wouldn't have a gain, but I'd be paying tax on the inflation of $43K

The calculator:

http://www.westegg.com/inflation/

What this means is that nobody would buy LT assets. Just put your money in a CD or bond and take the interest income and roll it over every year. You'd be fusking nuts to invest in any LT assets.

Fern

Actually, using tax policy to favor one kind of investment over another distorts the market. Take away the tax advantage and LT assets would appreciate at whatever value the market sets. With the tax advantage we've apperently way over built commercial real estate.

By favoring real estate investment in the tax system you depress investment in more growth oriented investments.

Also, what about depreciation benefits ? I don't know if that's a factor in commercial real estate, but it is in other LT investments like machinery.

 

[Fern]

I know about the limit (sadly, I'm living it every year for quite some time) and I know about ST/LT but do you get to only deduct 10% or 15% of does the entire $3,000 go against full marginal rate (long term gains)? If so, why?

Yeah.

The $3,000 LT cap loss is added in with teh rest of the (regular) income.

IDK, it's another tax law without any real theory behind it. Why is the standard deduction $XXX, and personal exemptions $YY? Who knows?

I suppose taht because you have actually money, you do deserve a deduction. The gov is too lazy to set up a seperate tax calc so that LT cap losses in excess of LT cap gains would calculate a tax deduction of 15%. Then use that to offset the the 'regular' tax.

Of course, if they did that they'd have to let you deduct the whole loss.

It probably works out in Uncle Sam's favor to just let people take a limited $3,000 loss. Jeebus, in years like 1987, 2000 and 2007 the gov probably would have had a huge hit to tax revenues if they allowed the full deduction of LT cap losses if even at the low rate.

Fern

 

[Fern]

Actually, using tax policy to favor one kind of investment over another distorts the market. Take away the tax advantage and LT assets would appreciate at whatever value the market sets. With the tax advantage we've apperently way over built commercial real estate.

By favoring real estate investment in the tax system you depress investment in more growth oriented investments.

Also, what about depreciation benefits ? I don't know if that's a factor in commercial real estate, but it is in other LT investments like machinery.

Aaaarg!

It's not a favor under tax policy. It IS our government being lazy and taking a short cut. They should be indexing LT assets for inflation. Indexing for inflation IS a level playing field. It's just that their 'short cut' is confusing people. Think of the low LT cap gains as the same thing as adjusting for inflation.

Yes, commercial real estate is "trade ot business" property treated quite similarly to eqip and machinery. The difference is eqip & machinery is written off faster (shorter lifetime for depreciation) and they are eligible for section 179 deduction (entire cost written off in year of purchase).

Also, any amount attributed to the underlying land cannot be depreciated or written off in any way. Just the building.

Fern

 

[Tom]

How the hell is inflation a factor in wages?

You work a month and get paid then. What kind of inflation is there in a month?

An annual inflation rate of 3% works out to about 2 tenths of 1 percent per month. Who cares? (and since you've got to average that rate between the work for the first day of the month and the last day it's only about half of .002)

Hold a LT assets for many years and that 3% annual is a big Effin deal. In my post above I've shown that it works out to about 43% ($43k/$100k) over the last 15 yrs.

Fern

Most people work for 30 years, not one month. So inflation has exactly the same effect on wages as it does on capital assets.

Of course, the market takes care of valuations and the effect inflation has on those values, that is called capitalism.

What you are asking for is some kind of government protection from inflation for capital asset holders, which of course does exist in the form of a lower capital gains rate..

but isn't that socialism ?

 

[Tom]

Aaaarg!

It's not a favor under tax policy. It IS our government being lazy and taking a short cut. They should be indexing LT assets for inflation. Indexing for inflation IS a level playing field. It's just that their 'short cut' is confusing people. Think of the low LT cap gains as the same thing as adjusting for inflation.

Yes, commercial real estate is "trade ot business" property treated quite similarly to eqip and machinery. The difference is eqip & machinery is written off faster (shorter lifetime for depreciation) and they are eligible for section 179 deduction (entire cost written off in year of purchase).

Also, any amount attributed to the underlying land cannot be depreciated or written off in any way. Just the building.

Fern

So you favor indexing all forms of taxation for inflation ? Seems pretty complicated, why not let the free market deal with it ?

 

[wirelessenabled]

The obama proposed tax hikes affect me and I can guarantee you it will impact our spending. The change in dividends alone will significantly change how I invest as well as capital gains.

When the government takes that money it's money not being used in our economy. It's just a terribly stupid idea to massively increase taxes the way Obama wants to.

So let's see Spidey, you have over $250K in income and the <$10K (4%) in additional tax is going to affect your spending/investing? Tell me about it. Are you stoooopid or do you just come across that way?

 

[Jhhnn]

Damn man, you've got to be kidding.

Inflation over a year, or even a part of a year is negligiable.

I've owned my commercial building over 15 years now.

Using this inflation calculator, for every $100,000 paid in 1994 you'd need $143,000 now to break even on inflation.

In other words, if I bought a $100,000 building back then and sold it for $143k I wouldn't have a gain, but I'd be paying tax on the inflation of $43K

The calculator:

http://www.westegg.com/inflation/

What this means is that nobody would buy LT assets. Just put your money in a CD or bond and take the interest income and roll it over every year. You'd be fusking nuts to invest in any LT assets.

Fern

Your "if" scenario is a false dichotomy, Fern, because you ignore the fact that commercial property generates income all the while, and ignore the fact that the property likely wasn't bought for cash at all. How would your theoretical investor make out if he'd put 20% down? Let's face it, he didn't really risk more than his downpayment and his credit rating... often just his corporate credit rating. You act as if the property were raw land, bought with cash, generating no income at all. There's still an advantage to owning the property vs leasing it at a rate that would naturally be higher than payments, as well. The guy who owns the property won't lease it at a rate that won't make him money... well, unless he's desperate. And rents generally increase with inflation even as payments remain constant.

If you'd bought the property in 2005 vs 1995, you'd be horribly screwed regardless of the tax structure, anyway...