What should the capital gains tax be?

[brickbacon]

@Damuri_Ajashi

The only difference between those two situations is the interposition of a corporation. That is why it is called double taxation without a hint of duplicity or irony.

It’s not the only difference. The interposition of a corporation has many consequences including limited liability (in most cases). That “tax” you are paying is completely voluntary in the above scenario, for which it would only make sense if you wanted the benefits that come with incorporation. Not to mention that there are many ways corporations can reduce their tax burden.

In more general examples with large publicly held corporations, the capital gains are probably based on a variety of factors beyond profits.

[Sitnam]

@Martin_Hyde

I think we should encourage investment and savings among lower income and middle class people. In terms of raw revenue virtually no capital gains tax is collected by low AGI households (the amount is so low as to be irrelevant.) Meanwhile vast amounts of income tax aren’t collected on high AGI households since a huge portion of their income is in the form of cap gains taxed at a lower rate. And yet having to deal with cap gains taxes is something that adds a lot of complexity to a middle income person’s tax returns, and makes investing and saving more complex for people who have less access to financial advisers.

My proposal would be households with AGI up to $200,000 pay no taxes on capital gains, interest, or dividend payments unless those income sources are greater than 50% of their AGI, at which point they will have to pay regular income. [I regret that last stipulation, but I feel entrepreneurial freelancers and contractors might find a way to make all their income technically dividends or something and avoid paying any tax otherwise.]

For households above $200,000 I’d say all cap gains other than those on tax-free municipal bonds simply be taxed as ordinary income, at the current schedule.

Households above $1,000,000 AGI I’d phase out muni tax free status, and add a new, higher top income tax rate.

I like the idea of not only easing tax burden on poor people trying to invest like wealthy people, but incentivizing knowledgable financial brainpower in helping poor people.

[WillFarnaby]

How much should I extort money from peaceful human beings?

0%

[Hector_St_Clare]

For all capital gains above a certain level, I’d happily say 100%.

[Critical1]

@Desert_Nomad

Capital gains (and all other income) should be taxed at zero. I would also suggest that all other embedded taxes be eliminated (gas tax, taxes on phones etc).

Instead, there should be a single national sales tax as well as state sales taxes. Taxing consumption simply makes more sense. It would also put all the taxes in a single place so people would really see and feel what we are paying in tax.

Sales tax is regressive as hell and affects the poorest the most.

[DrDeth]

@Ruken

I’d like to read more. Please cite your source.

For which?

[DrDeth]

@Damuri_Ajashi

The attack on the estate tax was an entirely different thing. It was the heirs to the mars family fortune (along with several other heirs of several other fortunes) trying to buy congress to lower their tax bills.

Some of the push to eliminate taxes on capital gains falls into this category as well and most of the arguments are not fantastic but they can be made in good faith. The attempt to repeal the estate tax was a propaganda campaign that used lies to convince the average American that the estate tax would somehow affect anyone who died.

The “double-taxed” part is the big lie for capital gains. Along with, usually the “investing” part as most of it is just gambling on the stock market which really doesnt “invest” in anything but stock.

[Chronos]

Of course adding a new corporate layer should increase total taxes. Money is taxed whenever it’s transferred from one entity to another. If you choose to create a new entity to transfer your money through, then you’ll need an additional transfer, and that additional transaction will be taxed. And if that’s a problem for you, then why did you ever choose to create that layer?

[Damuri_Ajashi]

@brickbacon

It’s not the only difference. The interposition of a corporation has many consequences including limited liability (in most cases). That “tax” you are paying is completely voluntary in the above scenario, for which it would only make sense if you wanted the benefits that come with incorporation. Not to mention that there are many ways corporations can reduce their tax burden.

In more general examples with large publicly held corporations, the capital gains are probably based on a variety of factors beyond profits.

There are plenty of ways to limit liability these days without adopting a corporate form.

There are very few ways that corporations can reduce their taxes that are not available to a sole proprietorship.

All those capital gains reflect an increase in value (and perhaps some speculative foam).

[Damuri_Ajashi]

@DrDeth

The “double-taxed” part is the big lie for capital gains.

YOu keep saying this but repeating this as if they were true with no proof (like you are doing) is how a big lie actually works. The double taxation is there, you may not give a shit about it or you may not find it convincing for very valid reasons, but it is there.

Along with, usually the “investing” part as most of it is just gambling on the stock market which really doesnt “invest” in anything but stock.

You have to own a stock for a year to take advantage of capital gains preferences. I suppose you could call that a gamble but in the aggregate, the people who are paying capital gains taxes are investing in the market. The capital markets are there for very good reasons. They provide liquidity that makes investors feel more confident in their ability to sell their investment and that is good for everyone. Without capital markets we would still be relying on dynastic accumulations of wealth or governments to finance large projects.

[Damuri_Ajashi]

@Chronos

Of course adding a new corporate layer should increase total taxes. Money is taxed whenever it’s transferred from one entity to another. If you choose to create a new entity to transfer your money through, then you’ll need an additional transfer, and that additional transaction will be taxed. And if that’s a problem for you, then why did you ever choose to create that layer?

Partnerships don’t pay an extra layer of tax. S Corporations don’t pay an extra layer of tax. Trusts don’t pay an extra layer of tax. REITs and RICs don’t pay an extra layer of tax.

We create the corporate layer for many of the reasons we create these non tax creating layers. I have no problems with double taxation but I do recognize that there is double taxation going on.

[Damuri_Ajashi]

@Ruken

Double taxation is more of an argument (and a valid one IMO) for lower rate for transferring assets out of your C-corp. I’m not really seeing how that translates to cap gains, but am interested in hearing that fleshed out.

We repealed general utilities doctrine a long time ago.

By not indexing to inflation, we are taxing losses .

The same could be said for all investment from debt to stock to gold coins.

Why not let people amortize their college education over the course of their lifetime?

[Damuri_Ajashi]

@Sitnam

I like the idea of not only easing tax burden on poor people trying to invest like wealthy people, but incentivizing knowledgable financial brainpower in helping poor people.

If you earn less than $50,000/year and you are paying taxes on your investments, then you are doing it wrong. There are so many avenues for tax free or tax deferred investing that its hard to see how most people under that income level would ever have to worry about capital gains on stock investments at all.

[brickbacon]

@Damuri_Ajashi

There are plenty of ways to limit liability these days without adopting a corporate form.

True, but irrelevant. The point is that incorporation has advantages and disadvantages, and paying the tax is part of the essentially the payment for those benefits if you want to distribute profits as dividends.

The problem with the point you are making is that when people use the term, “double taxation”, they are not using literally. Doing so would make no sense given all income is taxed multiple times at multiple levels. For example, I pay my maid with money that will eventually be taxed multiple times as it makes it’s way through the system. What they are doing is making a rhetorical (political) point to emphasize the supposed unfairness of corporate income taxes. That’s why your explanation isn’t particularly compelling. Because you are ignoring the benefit principle that undergirds all taxes to some extent.

[Damuri_Ajashi]

@brickbacon

True, but irrelevant. The point is that incorporation has advantages and disadvantages, and paying the tax is part of the essentially the payment for those benefits if you want to distribute profits as dividends.

I disagree with your first sentence and agree with your second.

The problem with the point you are making is that when people use the term, “double taxation”, they are not using literally. Doing so would make no sense given all income is taxed multiple times at multiple levels. For example, I pay my maid with money that will eventually be taxed multiple times as it makes it’s way through the system. What they are doing is making a rhetorical (political) point to emphasize the supposed unfairness of corporate income taxes. That’s why your explanation isn’t particularly compelling. Because you are ignoring the benefit principle that undergirds all taxes to some extent.

I don’t think so. You are not paying your maid because she owns you and is entitled to your earnings whether she owns you directly or through a corporation. You are paying her because she has earned that money.

Corporate taxation is a tax that is imposed solely because your business is formed as a corporation rather than a LLC.

I don’t think corporate taxes are unfair. I simply recognize that it is double taxation, double taxation doesn’t bother me, why does it bother you so much that you are willing to twist and turn to avoid the characterization?

[brickbacon]

[QUOTE=Damuri Ajash483150]
Corporate taxation is a tax that is imposed solely because your business is formed as a corporation rather than a LLC.
[/QUOTE]

Yes, and for the benefit of being a corporation, you pay a tax.

@Damuri_Ajashi

I don’t think corporate taxes are unfair. I simply recognize that it is double taxation, double taxation doesn’t bother me, why does it bother you so much that you are willing to twist and turn to avoid the characterization?

Because it’s not political phrase rather than a technical one. Again, money is taxed twice all the time. If you reject the maid example, let’s just look at a simpler example of me paying a plethora of taxes (eg. sales tax) with after tax money that I earned working. There is no way around the issue that when people say, “double-taxation”, they don’t generally care that money is taxed multiple times all the time. They are almost always referring to a small subset of the above which tend to hurt rich people. So I am not rejecting the strict accuracy of the phrase, but rather the political implication. Kinda like “pro-abortion” or “death tax”.

[DagNation]

I would argue that there should be social insurance (SSI and Medicare) tax on capital gains as well as whatever income tax is applied.

A single person who makes $5,000 in a year pays 15.3% to Payroll taxes before anything else happens. A person who makes $5,000 a year really feels the effect of the $765 tax. Note, the employee pays 7.65% and the employer pays 7.65%, so in this example the wage earner only sees $382.50 deducted on the paystub, but the employer paid that much too.

I would also argue that the cap on the tax at around $115,000 of income per wage earner should be removed.

I don’t want to derail this thread to talk about SSI and Medicare tax levels, but my point is that there is already a 15.3% free ride for cap gains. Another way to put that is: wage earners are double taxed at the federal level* on wages, while money earned as “rent” **are only taxed once. Put that way, it seems like parity on the income tax level but not at the social tax level may be an unreasonable benefit for people who sit around and let rent roll in. And they are complaining that the current setup is unfair?!?

*state taxes also exist, but vary a lot, and could be called another “triple” taxation… but I don’t want to go there…
**from the ownership of property or other means of production or limited liability investments or loans etc.
Also…

Inflation indexing
If CG taxes were close to income taxes, inflation indexing the cost basis is reasonable. I would want there to be one official government defined inflation rate that things like this tax adjustment and SSI adjustments are tied to, so that most sides in any debate will see both benefits and costs from pushing the rate one way or the other.

Home vs other real estate
There is a $250K per taxpayer exemption(deduction?) for selling a home - great, but other real estate is just an investment like a bond or whatever. This is already largely done in the existing tax code. The 250K should be indexed to inflation, and other tweaks would improve it as well, but I am not prepared to talk about that detail now.

Taxation of untaxed wealth after death.
When wealth is passed down that has not been taxed (i.e. stock bought for $x, valued at many times $x at death, but not sold or “realized”) it is just revalued - given a basis at the current value. I do not want to make the heirs sell 40% of the land they own, but it should still have a basis of 2 cents per acre that great great great grandpa paid for it back in 1650, and should be taxed as such when it sells (adjusted for inflation, if the CG tax rate is similar to earned income). An exemption for the first $1 or $5 million might be a good idea just to avoid bugging farmers, etc.

One last thing, it has amused me that “earned income” is taxed more than “unearned income” in most cases. You would think that the names of the income would tell you that the tax rates should be reversed.

Socialist Dag

[Damuri_Ajashi]

@brickbacon

Yes, and for the benefit of being a corporation, you pay a tax.

And what benefit does corporate form provide that LLC form does not? The only one I can think of is that the markets are currently set up to sell corporate stock and other forms of ownership interests are not as familiar to investors and therefore not as desirable when going public.

Because it’s not political phrase rather than a technical one.

No its not a political phrase.

Whoever told you that is trying to fool you into thinking its like the phrase death tax. Its not. The phrase double taxation is commonly understood among tax professionals to mean one of two things. Taxation of the same income by two jurisdictions without setoffs or credits for taxes paid in the other jurisdiction or taxation of corporate income at the corporate level as well as when it is paid out to shareholders in the form of dividends. To the extent that stock value is the present value of all expected future dividends, capital gains are a form of double taxation.

Again, money is taxed twice all the time.

You keep saying that but this is entirely different from taxing your income when you earn it from your employer and then taxing your maid’s income when she earns it from you. This is me taxing the gains from your business when it is earned and then taxing it again when you pull it out of the corporation and put it in your pocket.

If you reject the maid example, let’s just look at a simpler example of me paying a plethora of taxes (eg. sales tax) with after tax money that I earned working.

Once again not on point. One is taxing income and the other is taxing consumption.

There is no way around the issue that when people say, “double-taxation”, they don’t generally care that money is taxed multiple times all the time.

Not money. Income. A SINGLE item of income is being taxed twice on route from being earned to ending up in the wallet of the shareholder.

They are almost always referring to a small subset of the above which tend to hurt rich people. So I am not rejecting the strict accuracy of the phrase, but rather the political implication. Kinda like “pro-abortion” or “death tax”.

pro-abortion and death tax are political terms. Double taxation is a tax concept that exists in apolitical contexts.

[Damuri_Ajashi]

@DagNation

I would argue that there should be social insurance (SSI and Medicare) tax on capital gains as well as whatever income tax is applied.

A single person who makes $5,000 in a year pays 15.3% to Payroll taxes before anything else happens. A person who makes $5,000 a year really feels the effect of the $765 tax. Note, the employee pays 7.65% and the employer pays 7.65%, so in this example the wage earner only sees $382.50 deducted on the paystub, but the employer paid that much too.

I would also argue that the cap on the tax at around $115,000 of income per wage earner should be removed.

I don’t want to derail this thread to talk about SSI and Medicare tax levels, but my point is that there is already a 15.3% free ride for cap gains. Another way to put that is: wage earners are double taxed at the federal level* on wages, while money earned as “rent” **are only taxed once. Put that way, it seems like parity on the income tax level but not at the social tax level may be an unreasonable benefit for people who sit around and let rent roll in. And they are complaining that the current setup is unfair?!?

*state taxes also exist, but vary a lot, and could be called another “triple” taxation… but I don’t want to go there…
**from the ownership of property or other means of production or limited liability investments or loans etc.
Also…

That is not double taxation so much as it is an exacerbation of the rate difference between earned income and capital gains. I can see getting rid of the capital gains preference but I have some trouble with SSI/medicare taxation of investment income for several reasons. SSI/medicare are supposed to be (at least at some theoretical level) taxes that pay for your benefits. What about corporations that earn investment income, do they pay social security as well? What about foreign investors who never step foot on US soil but have US investment income? DO they pay as well? I think we can include more things in earned income (like carried interest income) but I’m not sure that your proposal makes sense.

I am totally on board with getting rid of the cap. Sure we would end up paying some people a million dollars a month in social security benefits but they will have paid in more than enough money to fund that payout in the future.

Inflation indexing
If CG taxes were close to income taxes, inflation indexing the cost basis is reasonable. I would want there to be one official government defined inflation rate that things like this tax adjustment and SSI adjustments are tied to, so that most sides in any debate will see both benefits and costs from pushing the rate one way or the other.

Its not just that the math is hard, its that you would be affecting things like interest payments. If I earn 5% in interest in a 2% inflation world, why shouldn’t I be taxed on the 3% of real interest? Now the bank paying me the interest gets to deduct interest it pays to me. Does that deductions go down to 3%? Because I can assure you that the person deducting the interest is feeling all 5% of that interest payment.

Or do we let the bank deduct 5% while only requiring a 3 % accretion of income. That would gut our ability to collect taxes of any sort from anyone with two bank accounts and a business.

Home vs other real estate
There is a $250K per taxpayer exemption(deduction?) for selling a home - great, but other real estate is just an investment like a bond or whatever. This is already largely done in the existing tax code. The 250K should be indexed to inflation, and other tweaks would improve it as well, but I am not prepared to talk about that detail now.

Its a giveaway, why should a giveaway be indexed to inflation? This effectively makes the first $500K of GAIN a married couple’s home exempt from tax. THen they can buy another home and use the exemption all over again.

Taxation of untaxed wealth after death.
When wealth is passed down that has not been taxed (i.e. stock bought for $x, valued at many times $x at death, but not sold or “realized”) it is just revalued - given a basis at the current value. I do not want to make the heirs sell 40% of the land they own, but it should still have a basis of 2 cents per acre that great great great grandpa paid for it back in 1650, and should be taxed as such when it sells (adjusted for inflation, if the CG tax rate is similar to earned income). An exemption for the first $1 or $5 million might be a good idea just to avoid bugging farmers, etc.

I can agree with that but then the estate tax becomes a wealth tax. There is no more pretense that it is a proxy for the income tax at death that provides rough justice to assets that are going to be difficult to correctly assess.

One last thing, it has amused me that “earned income” is taxed more than “unearned income” in most cases. You would think that the names of the income would tell you that the tax rates should be reversed.

Socialist Dag

Yeah, I agree this has always confused me as well. People act as if we tax investment income, the wealthy will just stick their money under their mattresses out of spite or something. The most they can do is demand higher returns but they won’t necessarily get it. After all, low risk adjusted returns are better than no risk adjusted returns.

[Fear_Itself]

@Damuri_Ajashi

A SINGLE item of income is being taxed twice on route from being earned to ending up in the wallet of the shareholder.

The corporation’s income is not the shareholder’s income. It’s like saying the money spent by the government is the taxpayer’s money. It isn’t. It is the governments money.