Is it fair?

[Siddhartha]

For someone who makes their money primarily from investments (e.g. capital gains) to pay an effective 15% tax rate vs. someone who works a steady job for a living and has to pay at a much higher rate (25-35%)?

I ask all of you. Is this fair? Especially if said person is making over a million dollars a year in income from these investments.

All I know is the Republicans are pushing tax plans that reduce taxes for the wealthiest and increase taxes for the poor, working and middles classes. The Republicans probably think it is fair...

 

[spidey07]

Absolutely it's fair. You want to incent capital investment.

Is it fair that 47% don't even pay federal tax and/or even get money back without paying a dime? Now THAT is what isn't fair.

 

[Linflas]

Absolutely it's fair. You want to incent capital investment.

Is it fair that 47% don't even pay federal tax and/or even get money back without paying a dime? Now THAT is what isn't fair.

Wait until they get it to 51% comrade.

 

[spidey07]

Wait until they get it to 51% comrade.

That will be the end of our country, and we're pretty dang close now.

 

[cybrsage]

All I know is the Republicans are pushing tax plans that reduce taxes for the wealthiest and increase taxes for the poor, working and middles classes. The Republicans probably think it is fair...

Do you have a link to these tax increases on the poor the Republicans are pushing for? Last I saw, the Republicans pushed for tax reductions on EVERYONE (with the understanding it is impossible to reduce a 0% tax to a lower number than 0%).

 

[Matt1970]

So lets who gets what.

Corporation makes a cool Million.

$350,000 to fed, $90,000 to state leaves corporation with $560,000 which gets paid to stock holders if not re-invested in the business.
(now lets use 35% Capital Gains Tax)
Of that, $196,000 to fed and $40,000 to state.
Of that cool million, the fed got their hands on $544,000 and the state got $130,000.

That's not taking into account any taxes collected off employee salaries, sales and property taxes.

 

[MomentsofSanity]

So lets who gets what.

Corporation makes a cool Million.

$350,000 to fed, $90,000 to state leaves corporation with $560,000 which gets paid to stock holders if not re-invested in the business.
(now lets use 35% Capital Gains Tax)
Of that, $196,000 to fed and $40,000 to state.
Of that cool million, the fed got their hands on $544,000 and the state got $130,000.

That's not taking into account any taxes collected off employee salaries, sales and property taxes.

So many inaccuracies from what the reality is. Business don't pay 35%. More than half of the Fortune 500 paid under 20% 2008-2010. 30 had negative effective rates. They averaged an effective tax rate of -6.7%. Over $10B paid out to those 30.

Companies don't pay 100% dividend payout ratio. Not even close. In the 80's it was an average of 38.6%. In the 90's it dropped to 23.2%.

Might need to rework those numbers.

 

[CPA]

waaaa, waaaa, waaaa...life's not fair!!! /stomp feet/....government make if fair!!! /sniffle/

 

[spidey07]

waaaa, waaaa, waaaa...life's not fair!!! /stomp feet/....government make if fair!!! /sniffle/

Go occupy a high dividend paying stock and then you can complain.

 

[the DRIZZLE]

Trot out the "double taxation" boogeyman, pretend it really matters-

http://rajivsethi.blogspot.com/2012/01/double-taxation.html

It's hogwash.

That argument is only half correct. From the perspective of an investor, double taxation doesn't really matter for the reasons the author discussed. However, from the perspective of the company raising capital it absolutely does matter because it raises their cost of capital. That has real economic implications so it's disingenuous to ignore the double taxation issue.

 

[Siddhartha]

Do you have a link to these tax increases on the poor the Republicans are pushing for? Last I saw, the Republicans pushed for tax reductions on EVERYONE (with the understanding it is impossible to reduce a 0% tax to a lower number than 0%).

http://online.wsj.com/article/SB10001424052970203750404577171300032471184.html

http://www.washingtonpost.com/polit...onomic-plans/2011/10/25/gIQAxsVyGM_story.html

I have seen a lot of support in the GOP for flat tax systems and consumption tax plans. Which benefit the wealthiest.

 

[Anarchist420]

When you do your taxes this year, calculate your effective tax rate. VERY, VERY few people actually pay even 15% tax on their income.

EDIT: I advocate shifting to The Fair Tax. This fixes many problems.

The FairTax is more progressive than the income tax, at least it would be at first (I say "at first", because after awhile lobbyists would win out on what purchases should get rebates and which shouldn't). Some people get money back and don't pay anything. No federal taxes would be ideal, but I could handle just going back to import tariffs ranging from 5-25% (but not an average ad valorem rate of more than 1/10), having an export tax of 5%, while keeping the excise taxes we have (but repealing all taxes on firearms and reducing the gas tax). I'd be okay with high excise taxes on the NFL and NBA sports tickets (since they get so much money from the Federal government and since they abuse IP). The States could fill in the rest.

Do you have a link to these tax increases on the poor the Republicans are pushing for? Last I saw, the Republicans pushed for tax reductions on EVERYONE (with the understanding it is impossible to reduce a 0% tax to a lower number than 0%).

They advocate taking away deductions. I don't have a link but Dr. Fleming (who is probably the most devout Obama-hating Republican in Congress) has advocated taking away deductions and reducing the rate. He (or the person who runs his facebook page) told me that when I suggested only personal deductions for all medical expenses. If there are no deductions and the tax brackets range from 5% to 23% (or even 20%), that's way too much from both ends and too much money will be going into the government coffers. If someone makes 20k and is income taxed on all of it at 7% and then FICA taxed at 5.65%, then that's ridiculous. Taxing all income at 10% is too high as well. The only other thing I can think of that is the somewhat the same across the board is a 5.5% sales tax (or VAT) on non-used tangible goods. Since it would include food, that alone would be about 30-40% the revenue the Federal government currently steals and 30% of what it currently gets is plenty.

I'd rather have higher marginal rates, have all medical expenses be personally tax-free, have double FICA tax deductions, and have the ability to take out savings to pay down debts tax free. It's the corporate marginal tax rate that should be heavily reduced and that should not have deductions for health care.

So lets who gets what.

Corporation makes a cool Million.

$350,000 to fed, $90,000 to state leaves corporation with $560,000 which gets paid to stock holders if not re-invested in the business.
(now lets use 35% Capital Gains Tax)
Of that, $196,000 to fed and $40,000 to state.
Of that cool million, the fed got their hands on $544,000 and the state got $130,000.

That's not taking into account any taxes collected off employee salaries, sales and property taxes.

pretty much this. Warren Buffet likely pays close to 50% of his earnings in Federal taxes once the 35% corporate tax is figured in.

Anyway, I'm glad I wasn't the first poster to point out that fairness is subjective. I'd have to say that whatever the gives the Federal government the least revenue is the fairest since the Federal government isn't a person.

 

[JS80]

Risk capital - fair
Carried interest - not fair

/thread

 

[JS80]

So many inaccuracies from what the reality is. Business don't pay 35%. More than half of the Fortune 500 paid under 20% 2008-2010. 30 had negative effective rates. They averaged an effective tax rate of -6.7%. Over $10B paid out to those 30.

Companies don't pay 100% dividend payout ratio. Not even close. In the 80's it was an average of 38.6%. In the 90's it dropped to 23.2%.

Might need to rework those numbers.

Ignorance is strong with this one, and the rest of you.

 

[soulcougher73]

I think it should be taxed higher than regular income since it is "extra" money they had to invest in the first place. Or at worst taxed as the same rate as income.

 

[highland145]

I think it should be taxed higher than regular income since it is "extra" money they had to invest in the first place. Or at worst taxed as the same rate as income.

Same for retirement accounts?

 

[Fern]

That argument is only half correct. From the perspective of an investor, double taxation doesn't really matter for the reasons the author discussed. However, from the perspective of the company raising capital it absolutely does matter because it raises their cost of capital. That has real economic implications so it's disingenuous to ignore the double taxation issue.

I'd say the "half correct" part has flaws. In his example he completely glossed over the market capitalization rate. That rate is going to change when you go from no income tax to a 35% income tax and he completely ignored it. Then there's a problem with (possibly) adjusting the growth rate for income taxes.

Fern

 

[halik]

Risk capital - fair
Carried interest - not fair

/thread

Diz. My career track includes carried interest comp under which I face no risk in buying the partnership equity. Taxing the proceeds at cap gains doen't make sense fundamentally.

 

[Fern]

So many inaccuracies from what the reality is. Business don't pay 35%. More than half of the Fortune 500 paid under 20% 2008-2010. 30 had negative effective rates. They averaged an effective tax rate of -6.7%. Over $10B paid out to those 30.
-snip-

Uhhh, no.

Fortune 500 only publish their (GAAP) financials. Income tax is NOT calculated on GAAP income, it's calculated on taxable income. GAAP income =/= tax income.

You'd need to see their taxable income to determine the effective tax rates.

Then there's a whole pile of other complicated factors involved (e.g., Net OL carryovers etc.)

IIRC, depending on the industry most companies pay between 30-35%. Those companies with the lower 30% generally have things such as tax credits (such as GE for producing 'green' appliances) to keep their rate below 35%.

Fern

 

[halik]

Absolutely it's fair. You want to incent capital investment.

Is it fair that 47% don't even pay federal tax and/or even get money back without paying a dime? Now THAT is what isn't fair.

Carried Interest by definition doesn't include any capital investment; you're essentially getting grandfathered into the partnership equity.

 

[halik]

Uhhh, no.

Fortune 500 only publish their (GAAP) financials. Income tax is NOT calculated on GAAP income, it's calculated on taxable income. GAAP income =/= tax income.

You'd need to see their taxable income to determine the effective tax rates.

Then there's a whole pile of other complicated factors involved (e.g., Net OL carryovers etc.)

IIRC, depending on the industry most companies pay between 30-35%. Those companies with the lower 30% generally have things such as tax credits (such as GE for producing 'green' appliances) to keep their rate below 35%.

Fern

The difference between a tax expense and tax payable from the tax book is just timing (aside from the permanent differences on tax-advantaged stuff)

 

[Fern]

Diz. My career track includes carried interest comp under which I face no risk in buying the partnership equity. Taxing the proceeds at cap gains doen't make sense fundamentally.

Carried interest is a true 'loophole'. I.e., an unintentional consequence of tax law. In particular, the carried interest provision is the result of two separate tax laws working in conjunction. At the time of drafting, Congress did not foresee that the two rules would be combined to produce that result. Tax professionals figured it out and the courts affirmed it. Congress has yet to fix it. From some information I have seen about it, the fix may not be easy. The problem is how to keep the law as originally intended, yet carve out carried interest to prevent fund managers from using. I don't believe they've figured out how to do that yet.

Fern

 

[Fern]

Carried Interest by definition doesn't include any capital investment
-snip-

Yes it does.

Most fund managers 'have skin in the game'. A portion of their carried interest will be due to that. Many of us have no problem with that portion (due from their own capital invested).

Fern

 

[Fern]

Diz. My career track includes carried interest comp under which I face no risk in buying the partnership equity. Taxing the proceeds at cap gains doen't make sense fundamentally.

How can you claim to face no risk in buying partnership equity?

I do not see how you can preclude the possibility of some unfortunate future event wiping out, or at least diminishing, the equity in the firm.

Edit: E.g., Arthur Anderson. Partners who all purchased their equity had a total loss. I realize that was an accounting firm and they had no carried interest, but it serves to illustrate that equity can be lost. There was perhaps a more on point example (if carried interest need be involved) with the rogue British traders who wiped out his firm some years ago.

Fern

 

[Fern]

For someone who makes their money primarily from investments (e.g. capital gains) to pay an effective 15% tax rate vs. someone who works a steady job for a living and has to pay at a much higher rate (25-35%)?

I ask all of you. Is this fair? Especially if said person is making over a million dollars a year in income from these investments.

There are numerous reasons that can cited.

As has been noted already, the laborer has no risk. Those who invest capital could, and often do, lose all or a substantial amount of capital invested.

When the investor makes a profit it is taxed. When he loses all his money it is not deductible (losses can be offset against gains, otherwise the deduction limit on cap losses is $3,000 per year no matter if you lost $1 million. I have personally see an investor who lost his fortune and will not live long enough to take the total losses at only $3,000 per year even thought he was a relatively young man.)

Double tax may or may not be relevant, it depends upon the vehicle. An investor in a C corp certainly faces double tax and dividends that enjoy the 15% certainly come from C corps. 'Dividends from any other source are taxed at regular rates.

Unlike wages paid to an employee, a C corp cannot deduct dividends paid for tax purposes. Thus the 'dividend' amount has been taxed once at the corporate level, then taxed again when distributed to shareholder. the effective rate of tax on that income is therefore 35% + (15% x 65%) = 44.75%

LTCG, depending upon the length of the holding period, carry an element of inflation. Inflation is not income, therefore it should not be hit with a tax, at least not under an income taxation scheme.

Fern