Representative David Camp Proposed Tax Overhaul

[BUnit1701]

On top of that, wouldn't it be better if people held less of a mortgage and used that money elsewhere in the economy? Less money tied up in the banking industry and less money lost due to interest. Sounds good to me. Too many people don't realize it is cheaper to not have a mortgage and just pay taxes than to have a mortgage, paying interest and getting a small percantage back from tax deductions. But then again, the people in this country are not very good at math.

...

So, your alternative is save up $300,000 and pay cash for the house? What world are you living in?

 

[ivwshane]

At least as presented in the article, you'd be wrong.

Fair enough. Does this tax proposal treat capital gain taxes as regular income? The article didn't use the words "capital gains", so I don't want to assume that's what they were referring to.

It seems that this plan isn't really a republican plan so much as it is a plan proposed by a republican. It also seems to have more (albeit not much) support from dems than repubs. So I'd say this is dead in the water.

If capital gains are treated like normal income then this plan is indeed a happy change and a nice surprise!

 

[Matt1970]

Good to see GOP is on top of important issues facing the country, like the rich not being rich enough, and the working poor not being poor enough.

Right, like when unemployment was 10% the focus of Liberals was a bill that wouldn't kick in for 3 years and cost people more money. Two thumbs up.

 

[Zorba]

Good to see GOP is on top of important issues facing the country, like the rich not being rich enough, and the working poor not being poor enough.

Which part of the plan are you specifically referring to? Or did you just read to the point you saw it was proposed by a republican?

 

[glenn1]

Fair enough. Does this tax proposal treat capital gain taxes as regular income? The article didn't use the words "capital gains", so I don't want to assume that's what they were referring to.

It seems that this plan isn't really a republican plan so much as it is a plan proposed by a republican. It also seems to have more (albeit not much) support from dems than repubs. So I'd say this is dead in the water.

If capital gains are treated like normal income then this plan is indeed a happy change and a nice surprise!

Adjust any capital gains for inflation and you have a deal. Honestly, all non earned forms of income (whether investment or passive income) should be inflation adjusted since that's what the lower rate really compensates for.

 

[ivwshane]

Adjust any capital gains for inflation and you have a deal. Honestly, all non earned forms of income (whether investment or passive income) should be inflation adjusted since that's what the lower rate really compensates for.

What do you mean? Have the tax rate on CP be tied to a certain percentage based on the current value of today's dollar? So higher inflation equals a lower rate?

 

[Anarchist420]

10% wouldn't come close to covering the bills though.

it could bring in the same amount of revenue that the current income tax brings in.

 

[Fern]

The real hidden gem here in this plan is the false revenue neutral idea.

Consider a typical 47 year old single man no children making $50k. With standard deduction and personal exemption he pays $6125 in tax in 2013.

But he chooses to put 10% in a tax deferred plan (401k, IRA, or similar). His taxible income goes down and now pays $4875. But there is a future tax when he withdraws it in 20 years in retirement. If it grew 8% a year and tax rates stay the same, then he'd owe $2330 in future taxes.

As regards the $2,330 tax amount it appears you failed to consider the standard deduction and personal exemption.

Now consider the "revenue neutral" plan. 9.75% of $50k with no deductions is the same $4875 in tax. Sounds great. Lower rates and revenue neutral. Except for one thing. He misses 20 years of tax deffered investment growth and the government loses that future $2330 in tax ($1171 in today's dollars). Because the plan conveniently ignores future taxes, this plan is far far from being revenue nuetral! In the long term it bankrupts the US for lower taxes now.

1. Where did you get the 9.75% rate from?

2. No, he doesn't miss 20 yrs of tax deferred investment growth. Annual investment earnings in a Roth IRA are not taxed.

It looks to me like you arrived at the 9.75% rate yourself, but by doing so you've failed to take into account the additional revenue generated by reducing pretax contribution levels for retirement plans. And a dollar today is worth a heckuva lot more than a dollar in 20 yrs. Furthermore, that additional amount taxed as result of reduced contribution levels is sure to be taxed at a higher rate (you're still working and have income) than any taxable amount withdrawn when you're retired 20 yrs later.

You also failed to consider the changes to the corporate side of things.

Your analysis is too simple to be meaningful.

Fern

 

[Fern]

IMO, the MOST important part of tax reform is that for businesses/corporation. This article doesn't address it all.

Not helpful.

Fern

 

[Fern]

Poor don't have houses: no benefit.
Upper lower class: not enough interest to get past the standard deduction: no benefit.
Middle class: average mortgage balance is $150k, 30 year rate now is 4.34%, even if in 25% tax bracket and can get over standard deduction: $1627 benefit.
Wealthy: $500k mortgage and 39.6% bracket: $8593 benefit.

See how it benefits most those who need it least.

The despised earned income credit ( ie welfare) caps out at $3250 for the poor with one child. The wealthy get 2.6 times this amount in this one deduction!

Re: Bolded. Nope, itemized deductions such as mortgage interest are phased out for high income types.

Fern

 

[Fern]

I never understood why people were so gung-ho on mortgage interest deduction. Its like they don't realize they aren't gaining anything because the "saved" money is going to the mortgage company, not their own bank account. Second, the perceived benefit is factored into the purchase price, i.e., reflected in the higher price of the home than would have otherwise been, which comes back to the whole, "its tax deductible" perception.

I disagree.

Home values are down and nothing changed with regard to the deduction for mortgage interest for the vast majority of people.

Too many other things affect a homes price, interest rates being the primary item.

Fern

 

[Fern]

I didn't notice anything about 401ks, it did say contribution limits to traditional IRAs would be cut in half, which I do not agree with. Am I missing something about 401ks?
-snip-

The article seems to say that contribution limits will be cut in half.

Fern

 

[dullard]

As regards the $2,330 tax amount it appears you failed to consider the standard deduction and personal exemption.

Please before speaking again, show your calculations (otherwise you may just show your ignorance!).

The $5000 would grow to $23,305 in 20 years. If that was that was the only retirement income, then yes deductions and exemptions would kick in and taxes would be quite low. But, virtually all people have social security, pensions, company matches, and/or other years of retirement contributions. In reality, a person contributing $5000 a year would have $252k after 20 years (much more if that person's contributions go up with inflation or if that person saved at any point before age 47). Tax depends on withdrawal rate. The person probably wouldn't withdraw all $252k at once, but most likely he wouldn't be withdrawing just the growth from one single contribution either.

The point is still the same, even if he paid just $1 in tax in retirement then any revenue neutral plans are excluding this $1.

1. Where did you get the 9.75% rate from?
I made it up for this example for this one person to be revenue neutral. The tax rate was never given. It could be far higher. It just is pointless to argue a revenue neutral tax rate for an example if that example isn't revenue neutral. 9.75% is the revenue neutral rate for this example. If the politicians had guts to give actual specific rates (paired with actual specific cuts), then I'd use them instead. This article just said the rate for many would be "less than 25%".

2. No, he doesn't miss 20 yrs of tax deferred investment growth. Annual investment earnings in a Roth IRA are not taxed.
Who said Roth? I said 401k or IRA in a tax deferred plan because it is tax deferred plans that were to be paird back. Please reread.

And a dollar today is worth a heckuva lot more than a dollar in 20 yrs. Furthermore, that additional amount taxed as result of reduced contribution levels is sure to be taxed at a higher rate (you're still working and have income) than any taxable amount withdrawn when you're retired 20 yrs later.
I posted it also in today's dollars ($2330 in 20 years is $1171) but you apparently misread my post that you decided to bash anyways. I also included a person in the 25% tax bracket while working and put him in a probably unrealistically low 10% bracket in retirement ($2330 is 10% of $23305). But of course you missed that also.

Your analysis is too simple to be meaningful.
Thank you for your opinion. Seeing that you missed many key details, I suspect that it is your mind which is too simple instead. Or if your mind isn't simple, then please post examples that are revenue neutral short term, include people contributing to tax-deferred retirement plans, include reductions in tax deferred account deductions, and what the effect is on long term taxes collected. If you are capable of doing that, then I'll gladly read every word and analyze it here publically without bias.

 

[dullard]

Re: Bolded. Nope, itemized deductions such as mortgage interest are phased out for high income types.

They are somewhat phased out. But to get a $500k mortgage, your income does not even need to come close to the $300k level where the phase out starts to kick in. You may be close to having a point if I gave a $1M mortgage example. But a $500k mortgage is very much right in the lines of what I posted.

Would you prefer that I post 33% bracket instead?
Wealthy: $500k mortgage, 33% bracket: $1761 saved.
Wealthier: $700k mortgage, 33% bracket: $10024 saved.
Even Wealthier: $1M mortgage, 33% bracket: $14322 saved. (And that is possible with someone under the $300k income limit where deduction limits kick in).

 

[glenn1]

What do you mean? Have the tax rate on CP be tied to a certain percentage based on the current value of today's dollar? So higher inflation equals a lower rate?

No, it means you tax only the true investment gain after inflation has been accounted for.

For example, consider the following scenarios:

(1) Wall Street trader Harry Balls buys 100 shares of a hot technology stock for $100,000, and sells it exactly one year + one day later for $125,000.


(2) Blue Collar worker Joe Blow buys a $100,000 fixer-up home for himself and his family to live in. Twenty years later, with the kids having moved off to college and Joe sells the house for $125,000 and uses the proceeds to buy a house closer to his grandchildren.

In these scenarios, both Harry and Joe have a $25,000 capital gain they need to pay an taxes on (sale price of $125,000 less the cost basis of $100,000). Each stroke a $3,750 check to the IRS ($25,000 x .15 = $3,750) based on current rates on capital gains.

However, you've not accounted for the inflationary effects on their respective "investments". Joe's house didn't have that much of a true gain in value, rather inflation caused housing prices to go up in general. To buy the same house Joe paid $100k for 20 years ago, someone now needs to pay $120k today (the replacement cost of his house). Therefore the true investment gain on the property isn't $25,000, it's $5,000 since that accurately accounts for and excludes the last 20 years of inflation.

We've been accounting for inflation via an artificially low 15% rate for years. However, taxing people on "capital gains" that don't exist in reality once you account for inflation is stupid policy on its face. It distorts the incentives to hold investments for the long term, and disadvantages the "little guys" who aren't picking and selling investments on how they can minimize the tax impacts while minimizing the effects of inflation on their gain.

Thus my proposal to tax the true, inflation adjusted gain of an investment at normal income rates, rather than the non-inflation adjusted "gain" at the lower 15% rate.

 

[ElFenix]

I disagree.

Home values are down and nothing changed with regard to the deduction for mortgage interest for the vast majority of people.

Too many other things affect a homes price, interest rates being the primary item.

Fern

you need to think through this again.

 

[ivwshane]

No, it means you tax only the true investment gain after inflation has been accounted for.

For example, consider the following scenarios:

(1) Wall Street trader Harry Balls buys 100 shares of a hot technology stock for $100,000, and sells it exactly one year + one day later for $125,000.


(2) Blue Collar worker Joe Blow buys a $100,000 fixer-up home for himself and his family to live in. Twenty years later, with the kids having moved off to college and Joe sells the house for $125,000 and uses the proceeds to buy a house closer to his grandchildren.

In these scenarios, both Harry and Joe have a $25,000 capital gain they need to pay an taxes on (sale price of $125,000 less the cost basis of $100,000). Each stroke a $3,750 check to the IRS ($25,000 x .15 = $3,750) based on current rates on capital gains.

However, you've not accounted for the inflationary effects on their respective "investments". Joe's house didn't have that much of a true gain in value, rather inflation caused housing prices to go up in general. To buy the same house Joe paid $100k for 20 years ago, someone now needs to pay $120k today (the replacement cost of his house). Therefore the true investment gain on the property isn't $25,000, it's $5,000 since that accurately accounts for and excludes the last 20 years of inflation.

We've been accounting for inflation via an artificially low 15% rate for years. However, taxing people on "capital gains" that don't exist in reality once you account for inflation is stupid policy on its face. It distorts the incentives to hold investments for the long term, and disadvantages the "little guys" who aren't picking and selling investments on how they can minimize the tax impacts while minimizing the effects of inflation on their gain.

Thus my proposal to tax the true, inflation adjusted gain of an investment at normal income rates, rather than the non-inflation adjusted "gain" at the lower 15% rate.

Ah, thanks, I get it and I understand your point and I can agree with it. You are basically not trying to penalize the long term investors whose gains aren't what they seem to be, especially after you calculate the sell price in terms of the dollar value at the time of the initial purchase.

The only issue I see is the record keeping required in order to calculate the inflation effect. A mortgage would be easy to handle, it's a one time purchase but keeping records of stock purchases, that were most likely bought at different times, would be a lot of work. Not impossible to deal with but it's an area of concern and one that could easily lead to fraudulent behavior.

 

[Fern]

Please before speaking again, show your calculations (otherwise you may just show your ignorance!).

The $5000 would grow to $23,305 in 20 years. If that was that was the only retirement income, then yes deductions and exemptions would kick in and taxes would be quite low. But, virtually all people have social security, pensions, company matches, and/or other years of retirement contributions. In reality, a person contributing $5000 a year would have $252k after 20 years (much more if that person's contributions go up with inflation or if that person saved at any point before age 47). Tax depends on withdrawal rate. The person probably wouldn't withdraw all $252k at once, but most likely he wouldn't be withdrawing just the growth from one single contribution either.

The point is still the same, even if he paid just $1 in tax in retirement then any revenue neutral plans are excluding this $1.

I didn't make a calculation.

I knew the $5K would grow to $23K (the fed govt provides a free investment calc proggie, I used it)

You took 10% of the $23K

So, basically, you're now saying you have all other kinds of unstated assumptions?

2. No, he doesn't miss 20 yrs of tax deferred investment growth. Annual investment earnings in a Roth IRA are not taxed.
Who said Roth? I said 401k or IRA in a tax deferred plan because it is tax deferred plans that were to be paird back. Please reread.

You didn't specify any plan. That part of your analysis was under the new plan. The new plan in the article mentioned Roth IRAs.

Your analysis is too simple to be meaningful.
Thank you for your opinion. Seeing that you missed many key details,

You didn't even mention any "key details".

I suspect that it is your mind which is too simple instead. Or if your mind isn't simple, then please post examples that are revenue neutral short term, include people contributing to tax-deferred retirement plans, include reductions in tax deferred account deductions, and what the effect is on long term taxes collected. If you are capable of doing that, then I'll gladly read every word and analyze it here publically without bias.

The gigantic glaring problem in your analysis is that "revenue neutral" doesn't mean the tax law change is revenue neutral for EACH individual taxpayer.

Instead it means the tax law changes in totality are revenue neutral to the federal govt.

Some taxpayers will pay less in income taxes, others will pay more. Plucking one taxpayer as example and extrapolating that to all taxpayers and the new plan as a whole is fallacious.

So, yeah, it's too simplistic.

The article is far too short on specifics for any conclusions to be reasonably drawn from it.

Fern

 

[fskimospy]

Also, quick thing to note. This plan is not actually revenue neutral in a macro sense.

To achieve revenue neutrality over a ten year time span it relies on one time income from several policies, revenues that would not be repeated. That means in the following decades this plan would be net negative for revenues.

That being said, this is at least (broadly) a positive plan to put forward and a good starting point for negotiations. I hope something comes of it.