Democrats' latest tax proposal

Great Debates
301

The thing about wealth taxes on property vs. investments is that investments tend to be more liquid. Sure, property values are stable, but that tax has to come out of some other form of liquidity, it’s impractical to sell the granite countertops to make the property tax payment. OTOH this is not a problem with liquid instruments such as stocks or bonds. Sure, your tax base will rise and fall with the fortunes of the economy, but isn’t that the case already?

Not that your property tax isn’t a good addition to the mix, but why limit your wealth taxes to property values?

302

Generally speaking those whose property values rise relative to others probably have rising incomes also, and thus can afford it. You also don’t want a run on the market when wealth taxes come due. Plus, I’d expect a major market crash on the day that is chosen to evaluate wealth, because in some sense it benefits everyone to be poorer on that day.
There are also practicality issues. It is not hard to generate a report when an asset is sold. It would be much harder to trace everyone’s holdings. And a lot more reason to park money in overseas banks.

The Times today had an interesting example. Say you have a Chinese worker with some small amount of property on one hand. On the other you have a recent grad of medical school, with a six figure income but tons of student debt. The Med student has less wealth than the worker. Does that make sense?

303

You guys are talking about investment risk in terms of stocks and bonds. But the riskiest investment you can make is starting a small business. And this is one where capital losses will not offset capital gains, because if your business succeeds and you sell it, you will have no capital losses to offset the gain. That doesn’t change the fact that you had maybe a 1/10 chance of success.

Again, let’s say 10 people start 10 small businesses. Each one invests $100,000. 9 out of 10 fail, but the one that succeeds turns his investment into $1.1 million dollars ($1 million profit). As you can see, when you run through all the possible outcomes, the overall profit is $0 (a total of $1 million invested, and $1 million in profit). If the tax is efficient, no one in this group would be taxed because as a group they show no profit. Any tax would therefore start depleting their resources rather than taking a piece of the gains, which is what a tax should do.

Now consider the same scenario, only it’s one person who invested $100,000 and has exactly the same expectation of profit, but much higher risk. So he invests and is successful, and he pays 35% on 1 million dollars, or $350,000. So now an investment that would be breakeven if played out infinite times is taxed and the investment goes from breakeven to a negative expectation. And the investment stays negative expectation even if the expected profit goes up to $350,000 before tax.

This is why capital gains taxes hit small business investment hard. Another effect on small business is that many small businessmen turn their capital gains into new business investment. As a rule, you want the people with a proven track record of success to be the ones taking on the valuable but risky ventures. That’s a dead-weight loss due to taxation.

It’s called capitalism for a reason. Taxing capital and redistributing it to people who consume rather than invest is not a long-term panacea for the economy. Rather, it’s more like eating your own seed corn. You might get a few more calories for a while, but then you start running into diminishing returns as the tax base gets smaller and the financial needs of government greater. Eventually, someone’s paying for it all.

TAANSTAAFL. The most dangerous trend I’ve seen this year is the Democrat’s new-found love of voodoo economics, embracing the idea that you can have a permanent state of ‘middle out’ economics where you tax the capital of the supply side and give it to people to consume more, and somehow this improves the economy and creates jobs, which pays for the spending, which means it’s all free - just a perpetual conveyer belt of resources away from the supply side to the demand side - sort of a turbocharger for the economy.

As a political tool, it’s brilliant. You get to claim that giving money to your constituents will actually grow the economy through a magic multiplier that never goes away regardless of the underlying state of the economy.

Politically, brilliant. Economically, rubbish. That’s a bad combination.

304

Obama has dropped the plan to tax 529 accounts, as “it has become a distraction.”

305

Seems silly to me to consider investors as a group so that the guy who hits it big can avoid taxes because of the ones that lost money. As Sam presents it, these investors are bold adventurers who gladly invest tens if not hundreds of thousands of dollars and ignore the 90% probability that they will lose everything, but the prospect of being taxed on what they get should it pan out is so horrifying that they won’t invest at all. So they have no fear of losing 100% of their own assets but are scared shitless at being taxed on their profits.

We’ve tried supply side economics. It failed. The income gap is widening, the wealth gap is widening. The Republican ideal is to keep cutting taxes on the rich in hopes that some of it will trickle down to the great unwashed. It’s bullshit and Republicans know it. They don’t care. Their purpose in life is to maximize the wealth gap. If they can get the rubes to vote against their own economic self-interest by making them believe in the supply side fairy, great. If the voodoo economic fairy doesn’t work, they can always fall back on racism, xenophobia, and fundamentalist Christian doctrine to sell their snake oil.

306

I don’t have a WSJ account, can someone summarize how eliminating the tax benefits of 529 accounts is ‘educational tax relief’? Is it just that the revenue generated from taxing those funds would be used to offset expenses somewhere else?

307

I can dig the details tonight, although sometimes you can access their articles from Google. The idea was to remove tax advantage from 529 plans to pay for a different sort of benefit.

308

I guess none of the articles I’ve read or radio stories I’ve heard really go into enough detail then about what the ‘different sort of benefit’ would be. I mean on the surface, taxing 529s seems like the stupidest idea ever (not to mention the fact that that revenue would quickly dwindle to zero when no one ever uses a 529 again) but if the alternative was equally beneficial then I’d like to know about it before I make a decision on what I think about the proposal. I guess the issue is moot now, though.

309

They weren’t going to eliminate the 529 benefit, just narrow it. And 529s are overwhelmingly used by upper middle class households. But as it stands John Boehner actually seems to be endorsing the new no-change-to-529 education plan so apparently it was worth dropping.

310

The “different sort of benefit” mentioned in the WSJ article is an expansion of the American Opportunity Tax Credit. Currently, it maxes out at $2,500 per student per year.

311

Well, to start off- most small businessmen dont sell their successful business- they operate it and leave it to their heirs. Over decades their business will bring them in a steady stream of income that well exceeds 10X.

Next those nine (the number is actually 80%, not 90%) “fails” all get to deduct their 100000 as a Loss ($3000 a year, yes, but it can offset other gains). Thus, Tax-wise, the “net” is 0. 1 MM invested, 1 MM profit, 1MM losses.

312

Ah, I get it now. Eliminate the tax benefit for folks that can afford to invest in 529 and use it to expand the tax benefit for <$160k households.

313

Elon Musk levered the capital from his first business to start Paypal. He used the profit from Paypal to start SpaceX and Tesla.

The world would be a poorer place if Musk and his investors didn’t have the capital to make that happen. And Musk is just one of thousands of entrepreneurs who re-invest their profits in new ventures. Silicon Valley was built on venture capital - people who made it big with their own company, then sold it and used the money to invest in other companies showing promise. The airline industry is very risky in terms of profitability, and exists because of private capital investment.

Any plan to tax capital and distribute it for consumption diminishes the capacity of a capitalist country to innovate and engage in risky investment with potentially great returns. The safe stuff gets funded, the future becomes compromised. Innovation is throttled and investment capital moves to safe investments with low returns.

I think you’re missing the point. Let me try a better example. Instead of 10 different people, let’s say it’s one person who attempts to start a business every 10 years. The first time he fails. So he goes to work, saves his money for 10 years, and tries again. He fails and loses it all. So he saves for 10 more years, tries again, and succeeds, tripling his investment. He earns back enough to just pay for those failed attempts in the past. But because of the time delay between attempts, the rules prevent him from using those old capital losses to offset his gains. So now he gets taxed 35% on his profit, despite the fact that over his lifetime he never actually earned a nickel from his investments. Does that seem fair to you?

Most small businesses are under-capitalized, and are often a one-shot deal. I started a company in my 20’s, poured everything I had into it, and ran it for 9 years - never earning much more than minimum wage because I reinvested everything into it. Eventually I had to shut it down. Where exactly was I going to get any funds to invest in anything that could give me capital gains that I could offset with those losses? When small businesses fail and their capital loss is realized, the owner is usually broke and will not be making any more capital gains.

You guys seem to equate anything having to do with business with rich people. The vast majority of businesses in North America are restaurants, corner grocers, small shops, private contractors in the construction field, etc. Often they are sole proprieterships or family-owned businesses. Most of them hang on the edge of profitability, and as a group they are under-capitalized and struggle to survive.

This is not a group of people busy playing the stock market like a casino who didn’t ‘deserve’ their gains - they’re people busting their asses to provide the goods and services you take for granted. Heavily taxing them when they do succeed is offensive and it’s also destructive to the economy.

314

Is encouraging investment a legitimate function of government?

315

Not discouraging is not necessarily the same as encouraging.

316

Pretty much. I’m still not sure of the details: “A White House official said the 529 proposal was“a very small component of the president’s overall plan to deliver $50 billion in education tax cuts for middle-class families. We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.”” So the 529 change is out, but I don’t have a clear picture of the rest.

Pubs in the House are considering expansion of 529 plans. http://blogs.wsj.com/totalreturn/2015/01/28/529-plans-for-college-whats-up-next-in-washington/ I’m not seeing much other than “The bill would also allow withdrawn funds to be redeposited in a 529 plan if a college issues a refund of qualified expenses, such as in the case of a student who withdraws from school due to illness.”

317

Here is a table showing maximum long term capital gains tax rates back to the '50s.
It only goes up to 2009 but the 2013 rate is 15% except for the highest bracket, where it is 20%.

So, Silicon Valley was built at a time when the capital gains tax rate was higher than today. And I sincerely doubt that Musk would not invest if the tax rate were 5% higher. That is not the way those guys roll. I don’t recall seeing many VC stories in the Murky News where anyone was worried about capital gains. Yeah, in general they hate taxes - but they keep on investing.

Think of the impact of adding five feet to the base paths on baseball. If you were going for singles, you’d get affected. If however you were the kind of batter who either struck out or hit a home run, it wouldn’t matter much at all to you.

318

Whoa there… a run on the market is a very different thing than a run on banks. It’s much better to have a few people incrementally dump a few shares of equities rather than dump entire properties on the market to pay a wealth tax.

I saw that article and I really didn’t find it that interesting. Yes, a med student with six-figure debt is poorer than any person on the planet with a penny to their name. But at some point that med student will catch up and surpass the rest of us. That’s when they should be taxed, and not before. At least IMO.

319

This seems like the dumbest plan ever. The 529 is accessible to anybody who has any savings at all. You don’t need a fancy accountant, you don’t need any exorbitant miniumum… if you can save even $50 a month for college, then you can benefit from a 529. If not, you can benefit from a Pell grant or any of the other zillion federal aid programs. If people can’t save $50 a month for college, I would humbly suggest this is a worthy but entirely different problem that needs to be solved.

320

CPA here. The real long term capital gains rate for members of the highest marginal bracket is 23.8%, not 20%. Lay people do not seem to understand that the new 3.8% Net Investment Income tax (passed in the same package by the democrats that raised the base capital gains rate on the highest marginal bracket taxpayers starting with the 2013 tax year) is an additional capital gains tax on all capital sales. Every long term sale of capital investments that qualifys for the capital gains rates will also be hit with the NIIT for higher bracket taxpayers. The Democrats were pretty smart to pass that tax as a separate tax instead of tacking it on to the regular capital gains rate, as most people mistakenly believe the long term max rate is 20% when that is not true in practice. Furthermore, the NIIT also affects way more people. People that have adjusted gross incomes of over 200,000 (single) or 250,000 (joint) will get hit with that additional tax on capital gains, which means that many middle class taxpayers or small business owners who have a one time investment sale will really be paying 18.8% for their long term gains instead of 15%, while those in the 39.6% bracket get hit with a 23.8% rate on long term gains.
The Net Investment Income Tax ends up being a backdoor increase in capital gains rates that most people are still unaware of. It is a genius move politically for the democrats as they do not get as much flack for passing a tax that most Americans do not know about or how it works and do not have to get flack for raising capital gains rates further. In the future, if the Democrats are able to get back legislative power, it would not surprise me if all future adjustments to capital gains rates were run through the NIIT instead of the base rate to provide them cover politically since it has worked so well.