The other thing that doesn’t really encourage long term investment is that “long-term” only means a year now.
It has been different at other times. I would personally suggest a 10 year, 5 year, 1 year, and less than one year as having different rates.
Maybe even have a 20 year that’s really nice, taxed at a low rate, and you get to adjust the cost basis by inflation.
But one year just isn’t really a “long-term” investment.
A realised capital gain is income, and it’s taxed as income. What it’s not is Form 1040 Line 1 income listed as “Wages, salaries, tips, etc.”. It’s taxed differently and at a different rate. You can argue that the different tax treatment is unfair, but it’s still taxed and however you want to term different income tax subsets, the capital gains tax is an income tax.
Unrealised capital gain is also income (the clue is in the word gain) and does result in wealth increases, but is generally not taxable income, because it’s not spendable income. I don’t think unrealised capital gains should be taxable. However, that doesn’t seem to be the issue the OP is talking about since he’s contrasting effective tax rates for the wealthy against everybody else.
You buy shares for $300,000. You sell the shares one year later for $400,000. You’ve made a profit of $100,000. That profit is classed as a short-term capital gain, and is taxed the same as a salary. That profit is income.
You buy shares for $300,000. You sell the shares five years later for $400,000. You’ve made a profit of $100,000. That profit is classed as a long-term capital gain, and is taxed differently. That profit is still income, and the capital gains tax is still an income tax.
You buy shares for $300,000. You still have the shares five years later and they’re worth $400,000. You haven’t made a cash profit, but you’ve made a paper profit. That paper profit is an unrealised capital gain of $100,000, which is not taxable. Relevant to your wealth increase, that gain is considered income. It’s not the same as wages, and it’s not spendable, which is why some people don’t consider it income. But if you’re actually accounting for your revenues and expenses, and how it affects you’re wealth, then you’re very much going to consider it income. Income is not the same as cash flow.
Change your times to “less than one year later.” and “more than one year later.” It’s not 1 year 5 year anymore.
But, here’s the thing, just because it is “unrealized” doesn’t mean that it cannot be utilized. You don’t have to pay tax on your investment in order to use it as collateral for a loan. With current interest rates, someone who can put up that sort of collateral is pretty much getting to cash in their investment, as they can borrow against a significant percentage of it at interest rates lower than inflation.
So, it is actually still spendable, it is investable into other ventures and companies. It can be used to buy luxuries or real estate.
Just because they haven’t sold it doesn’t mean that it isn’t still treatable pretty much the same as a liquid asset.
As far as the one-year rule goes, I double-checked against Investopedia.
- Short-term capital gains are treated as ordinary income on assets held for one year or less.
The five-year period wasn’t meant to correspond to anything in particular other than being sufficiently long-term.
That article also agrees that capital gains are a form of income.
Capital gains tax is paid on income that derives from the sale or exchange of an asset such as a stock or property that’s categorized as a capital asset.
Income Tax vs. Capital Gains Tax: Differences.
As for using their capital as collateral for a loan, I agree that that’s an advantage the rich have, but why should that advantage be taxable? They still have to pay back the loan. I’d be more worried about loans coming through a corporation they have a significant stake in, but I think the tax authorities have been cracking down on those.
That’s the way it works now. It can be changed. I’m not advocating for a wealth tax but it would not be any more complicated than the current system, just different.
Fair enough, just wanted to clarify, as there was a time when there was a 5 year.
The way you phrased it made it sound like “about a year”, as opposed to exactly one year on the mark. No reason why anyone would do that, unless they are so desperate for the money they can’t wait just one more day to reduce their tax substiantially.
Yes, they are a form of income, but they are not taxed as income. They are taxes as capital gains.
Because their borrowing ability increases with the increase in their asset worth.
But they can do that off of their realized gains from the investments that they make with that loaned money, or even with a new loan collateralized against the investments that they made.
Let’s say I have an asset that is worth $1,000,000, that I originally purchased for $500,000 ten years ago(which is a 7.5% rate of return, not too amazing, as just putting it into an S&P 500 index fund should get you close to 10%). I can use that asset as collateral to borrow probably 75% of that as a ten year 1-2% interest loan, so I now have $750,000 to play with. I keep about $100,000 to pay the interest, $150,000 for personal use, and invest $500,000 into an asset or index fund that, over the next 10 years, grows to $1,000,000. I can now borrow $750,000 against that new asset, pay off the previous loan, and also borrow another $750,000 to buy more index funds.
This is simplified a bit, as there would be several sets of loans and investments going at any given time, and I’m just talking about one at a time.
None of that is ever taxed a penny. Not until it is “realized”, which, if they spend any of this on financial planners, will never actually happen either, as it will be gifted and offset. It’s possible that, if they are very very wealthy, after they die, their estate may pay some tax, but Republicans are fighting tooth and nail to eliminate that again.
Of course if the asset depreciates, you could be in trouble if the bank demands additional collateral.
This is true. Which is why people like Trump look at the stock market as if it’s the economy. Because to them, it is.
In any case, prudent wealthy people would not be keeping all of their assets in such a round robin hot potato game, and would have reserves for when there is a contraction or correction in the market. And they would always be terrified to hear of a margin call from their broker.
But they would be keeping some running that way, because that is the engine that drives their increase in wealth.
They don’t have to do anything to “earn” it, just sign some things from time to time and cash some checks.
I haven’t heard anyone mention 1031 transfers. It is how most real estate and developers make most of their money. Something like 70-80% of today’s millionaires got that way through real estate. Speculation or development.
Currently that money can just be kept snowballing buying bigger and better investments. How would a wealth tax track that? Worth when bought vs sold?
No, this is not true. Capital gains are not taxed as income. They are taxed as capital gains, which is a different (and substantially lower) rate than income tax rates.
Let’s just try to clear up some basics:
Do you understand capital gains are taxed differently than income?
Do you understand that capital gains are taxed at a lower percentage than income?
If we can agree on a common set of facts then we can discuss opinions like:
Good point. I had heard of that term, but didn’t really look into it before.
But yeah, that’s an even better investment tax avoidance maneuver than using assets as collateral rather than realizing them.
However, that would still be caught up in my proposed federal property tax.
I’d prefer no one had to pay over 25% of their income to taxes. The statistics I’ve heard state most of the “rich” already pay more than that.
If 25% tax isn’t enough for the wealthy, how much is? 40%? 50%?
To this one, I say yes.
However, not always, and actually not usually.
I do think that if you have an asset for 10 or more years, then it should be taxed at a different rate than other assets or income. 20 years an even better rate. This encourages long term investments.
Calling “long term” as a year and a day is a joke, though.
We used to have 90%.
And, to clarify, what do you mean by taxes? Just US Federal income taxes, or taxes in general.
If taxes in general, then most of the middle class and even much of the less than middle class pay over 25%.
Who’s we?
I was talking about taxes in general but my point was how much do dopers feel is enough? Should the tax rate keep increasing the wealthier a person gets or should there be an upper limit?
We, as in the United States.
Okay, in taxes in general, most people already pay well over 25%. The wealthy generally pay less.
You didn’t ask, you stated that you think that no one should pay more than that. Then you asked if that wasn’t enough, what is?
Well, the answer to that, is what we need to tax in order to fund the government.
I have no problem with a tax rate of 90% on someone making hundreds of millions a year, if that is what is needed to pay for the things that we need to do.
I see no reason why those who get the most benefit out of living in this country shouldn’t pay the most.
The upper limit I would say would be 100%. I don’t think that you should pay more in Federal income taxes than you make, even on the margin. But other than that, yes, the entire idea of a progressive tax system is that the tax rate keeps increasing the wealthier a person gets.
But now we’re finding our way back to the original topic of this thread.
Maybe. Maybe they’re paying something like that.
But we don’t know.
We’re only using the effective tax rate (see the original post) – that I would argue is somewhere between deceptive and willfully fraudulent.
But the likely truth is that we have absolutely no idea what the real percentage is that’s paid by upper income earners.
And – again: helping to support my point – most conversations about Cap Gains and Marginal Rates are next to irrelevant until and unless we know how they actually effect people’s Real Tax Rate, defined (by me) as:
[total $ paid] / [total dollars made]
That’s the dashboard gauge that we ought to be watching while we tinker around under the hood.
But we can’t. Seemingly, this most obvious of statistics/metrics … doesn’t exist.
And it’s surely an incredibly simple metric to determine. I mean … ridiculously simple.
I said I’d prefer no one had to pay more than 25%. If our country was doing great financially I’d be fine with billionaires paying a 25% tax. Practically speaking, I don’t have a problem with taxes increasing based on wealth but I do think it should have an upper limit. I think we are mostly in agreement except my upper limit is 50%.
Out of curiosity k9bfriender, are you saying that if you made hundreds of millions you wouldn’t mind paying a 90% tax?
I don’t find “fair share” to be a terribly useful basis for tax policy, in part because getting two people to agree on “fair” is next to impossible, outside of taxing a third party more.
I would prefer the government not borrow excessively (yes, another deliciously imprecise word.) So unless I’m going to advocate for substantial spending cuts, that money has to come from somewhere. While skin in the game might be desirable, see blood, stones, etc.
I’ve seen conflicting reports on what Biden proposes. I’ve seen that hell raise marginal rates for people making over $400k/year. Or just the top marginal rate. Regardless, this seems too high to me. Assuming that’s married-filing-jointly (I don’t recall seeing this specified), we make a hell of a lot less than that and for sure could afford to pay more taxes. I don’t mind having to work less to earn my next dollar. But we won’t suffer if, say, the current 24% or 32% MFJ brackets get a higher rate. And that’s living in a pricy area.
The full proposed changes, with some analysis, are here:
That might be better as it’s own thread.