But the tax rate impacts all investments equally; the returns on all investments, high risk and low, will be reduced by the same amount. Thought experiment: You have $100,000 invested. The capital gains tax goes from 15% to 25%. Do you reallocate to lower risk investments (with lower return), or higher risk investments (with higher return)?
Lower risk. If I don’t, the expected returns no longer justify my level of risk. Yes, this will lower my returns even more.
OK. Second part of the experiment: The investment instruments you took your money out of; the risk remains the same, but the price goes down. This creates opportunity for someone else to benefit from your risk avoidance.
My point is, raising the tax rate does not reduce market-wide investment in high risk instruments, because their value increases when the price drops, and the market adjusts accordingly.
Yes, if the price goes down, the expected yield goes up. Everyone has a different risk tolerance. To sell a security, someone has to think it’s a good enough deal to be willing to buy it.
The price dropping is the market adjusting accordingly. Price is a function of supply and demand.
Keep in mind that many risky investments, often the ones I really want rich people to be making, are not publicly traded (v.s. re: relatives’ businesses, VCs, etc.) There may be little market to adjust. That’s where most of my changes in behavior would occur, with a minor cascade at the margins of securities, bonds, and cash.
Again, it doesn’t mean a rate change is a bad idea.
Read my lips*: $100K gain. See that word? “Gain” as in “Capital Gain” (which is what we are talking about). If you have a $100K Capital Gain and a $200K Capital loss you pay NO TAX AT ALL on that $100K gain, since it’s *all *offset by that $200K Capital loss .
You know dude, I am a qualified Forensic Accountant. My Bro was a IRS agent for 20 years. I know what the fuck I am talking about.
This is what you were responding to:
“They will have a gain somewhere, but it’s the timing. You have to pay taxes on your income now, not in the future, and the offset would lower the taxes now. Yes, in the future, eventually, at some point, the offset will be realized, but that doesn’t help me now if I am faced with a lot of taxes, does it?”
The “income now” - see that word? Does that mean “gain” to you?
You seem to be stuck on dividends for some reason, which I don’t quite get. Because they very clearly are income, and if you are paid a dividend you have money to pay the tax even if you also have capital losses. Is your proposal that taxpayers should be able to offset dividend income with capital losses? That’s probably not a very big tax expenditure, but I’m not even sure it would help very many people. Why would I want to offset something taxed at 15% now when I could offset $3k per year taxed at 25%+? I guess if you had really large non-qualified dividends, but I would think that’s a pretty small case. Hell, to get your proposed $100k in dividend income you’d need something like $5M invested (based on the average dividend yield for S&P 500 companies).
Anyway, back to the 529 proposal now dropped. This just shows how impossible the dream of cutting tax rates by removing deductions is going to be. The 529 tax-free gains were like $2B per year of tax expenditure. And it was going to be replaced by an expansion of a tax credit that was massively better for almost every middle class family (one-for-one credit for education expenses up to like $5k per year for incomes under $160k).
Not to mention now you wouldn’t be forced to use specific state-run plans for your education investments. About the only people losing out on this deal were wealthy folks using this as a tax-avoidance account and investment companies that liked the fees they get from families having no choice but to use their state’s 529 plan for the tax break.
And STILL it got yanked.
The mortgage interest deduction, for example, is almost 50x larger and effects vastly more people (for vastly larger sums of money). This battle just shows me that there is no chance in hell of significant tax reform in the near (or even moderate) future.
No- but the word “Gain” in “They will have a gain somewhere.…” does. And in my responses I used the word “gain”. Not to mention- that’s what we’re talking about here.
As in “they will have a capital gain some time in future years”. You just don’t read what you respond to, do you?
Yes, and* then that capital gain is offset.*
Some time in the future. Yet the income tax I have to pay NOW, and the capital loss is the loss I have NOW.
Great- so if NOW you have both a capital gain and a capital loss, they are offset!
“Income” does not equal “capital gain”. You refuse to understand. Deliberately. I’m done.
A letter to the editor in the WSJ today argues that low capital gains tax rates are to blame for stagnant wages. http://www.wsj.com/articles/government-disincentives-mean-fewer-jobs-are-created-letters-to-the-editor-1422816359
I am not prepared to address this argument one way or another, but thought it might be of interest to the grumpypants (myself included) who were participating in this thread.