Democrats' latest tax proposal

Yeah? And what about risk? The difference is that income is pretty much guaranteed. Capital gains come from riskier investments. If you’re going to tax them the same, you are biasing the market against investment.

When considering investments under conditions of risk, you have to look at expectation, not the profit if you’re right. An investment that loses $20,000 four times out of five but gains $100,000 if it comes in has an expected return of $20,000 ((4 X -20,000) + (1 X 100,000)). The problem is that if it does come in, the government tax is based on the $100,000. Any tax over 20% of that value turns the expectation negative.

Now, we have various ways to carry losses forward that compensates in part for that, but the point to my other example is when the risk is high even carrying losses forward doesn’t compensate for the fact that the tax does not price risk. And in the case of a small investor investing in only one business (his own or a family members), There will never be a loss to carry forward as there’s only the single investment. But the expectation doesn’t change, so the tax distorts the equation and pushes the investor away from investing in the risky venture.

As for carrying forward losses - when the left talks about rich people who paid no taxes in a given year, they rarely look at why, but loss carry-forward is a big reason - especially after a recession where many capital losses were incurred. You would expect average effective tax rates to go down afterwards as profits are offset by previous losses for tax purposes. As they should be.

Do you believe Congress with never pass another tax increase?

And what about it? Losses are tax deductible.

Only as an offset against gains, and only for a limited number of years.

Boo hoo.

The risk inherent in any investment is reflected in the yield.

Tax policy should have other concerns.

I can only hope that they won’t.

Do you believe that the OP’s, thread-related, Democrat’s latest tax proposal be able to get enough votes to passed into law?

Depends on what Republicans want to get done. If the don’t give on this tax plan, they will have to give on something else, if they want anything to get signed. Watch what he proposes tonight; those will be the bargaining chips. Maybe they won’t deal on a tax increase; but they have to deal on something. We’ll see if they really want to govern.

What is certain is, Republicans cannot simply stonewall on everything the President wants. If they do, our newly froggy President will veto everything they pass, and they will take the heat. He doesn’t have to get re-elected, and many of the things he is proposing are very popular. Voting against them will make fine campaign ads.

Oh well, that settles it then. No more thinking required. When in doubt, just sneer.

Seems to me that advocating a tax policy to encourage investments that fail 80% of the time is lunacy. If your expected return is negative, don’t do it.

Did you read what I wrote? Or perhaps you read it and didn’t understand?

Expected value has nothing to do with how often you fail. Expected value is determined by adding up the losses of the failures and the gains of the successes.

If you lose $100 80% of the time, but gain $500 the other 20%, your expectation is $100. But if we ignore that and tax capital gains as income, at 35% tax you would pay $165 in tax when you do hit the 20% chance, and your expectation including tax would then be -$65. The tax would stop you from making an otherwise profitable investment.

And you deduct your losses in those years you lose so Uncle Sam is joining you in the risk. As I said, trivial differences in capital gains tax don’t have any impact whatsoever in job creation.

Still not understanding what I wrote, I see. There are many cases where carrying losses forward will not compensate. The obvious one is when you’re making only one investment. Say, in your friend’s idea for a restaurant. In that case, you may have a significant chance of failure, but a high reward if you succeed.

Since you don’t have any other capital investments, if you lose everything there’s nothing to deduct it against, and the government sure as hell isn’t going to compensate you. But if you survive and get paid out, your capital gains would be taxed as if you never faced any risk of loss at all. In that case, the capital gains tax would act as a barrier to investment.

Carry-forward also doesn’t work when the investment time period is long. And even when you can carry forward losses, the nature of investment under risk means that you won’t be wholly compensated for it. See my earlier post where I actually did the math for you.

This is one reason why Canada set its capital gains rate to be half of the marginal rate of income tax. The two are not the same, don’t share the same risk, and should not be taxed at the same rate. Certainly the capital gains tax should never be higher than the marginal income tax at the same level of income.

You have a cite for this?

In my 25 years as an engineer I have been laid off several times; I feel like there is quite a bit of risk in all of my employment and education decisions. One time (in 2009) I was paid minimum wage for a year as it seemed preferable to being unemployed (I also had some equity I wanted to protect). At the end of the year I was on the street going through my saving at a remarkable rate and did not find a job until most of it was gone. I had to start from scratch at the age of 42 building up my retirement savings again. I know several other people that had basically the same experience during the last several years and I know some petroleum engineers that had similar experiences in the 80s.

Meanwhile, if I was Donald Trump, I could have just declared bankruptcy, borrowed some money, and built up my fortune again. Hell, all of the financiers seem to have rode out the great recession pretty well, much better than I and many other people on main street.

So I ask again, do you have any kind of numbers to back up your assertion that investing capital is more risky than investing in a career.

How about this: I spent about ~$200,000 in cash (not opportunity costs) on my education (1987-1994 for a BS and MS in EE/Optics) and over the 20 years since I have an average of ~$70,000 dollars a year factoring in the times I have been laid off or making minimum wage (I am probably being generous here). So 70k *20 = 1.4 million, or a return of 600% over twenty years neglecting the 30+% I paid in taxes. Good stuff (if I did my math right), more than I thought. Note, I would bet that my return on investment here is higher than average, but who knows.

According to this site (the first result from my google search of “average stock market return 1994-2014” ), it says if I had invested the $200,000 in the S&P500 I would have walked away with 1.15 million pre -tax, a return of 473% pre-tax. Better yet, if I had bought a home in the Bay area instead, I would of had a return of 733% pre-tax. With these last two options, I could have supplemented my investment gains by working for an average of 30k per year which seems to be about the median for a high school graduate over those 20 year. I would have also paid a lower tax rate.

Anyway, the point remains that I would like you to back up your contention. I know several people who have lived off capital gains over this time frame, and I feel that they have done as well as I if not better. So let’s see some analysis that quantifies how much riskier it is on average to be an investor than a laborer. I am really curious.

Obama made some wonderful campaign promises. However, Obama’s proposals haven’t reached the point of becoming bills that Congress can actually vote on. What Obama now needs to do is learn how to reach a meaningful compromise with the members of Congress. New bills still have to be written, or the parties can try to reintroduce the same bills that failed to make it to the floor for a vote. Or the parties can refuse to work together. Just like they have for the last six years.

The Democrats had their majority years but the voters have changed their minds and have put the Republican and Tea Party in the majority. What you call stonewalling, I call a refusal to participate in bad legislation. Either way, the voters rejected the Obama method of governing and are looking for something that’s more effective.

No, you can’t always deduct your losses. And how would a doubling of the tax rate be “trivial”?

As someone who invested in securities while making $7.50/h, I’m glad what meager returns I made weren’t further diluted by being taxed as income. Not everyone with capital gains is rich.

We can’t make policy to deal with a vanishingly rare case. Also, the increase is only for families that make 500k.

Or in other words, you’ve got to break a few eggs to make an omelette, hmm?

The only problem is that it really sucks to be the egg.

If you are working for $7.50 an hour you are already the broken egg.