I never said you shouldn’t get a return on your investment; I just said you shouldn’t call it work, any more than the guy risking nickels in a slot machine 8 hours a day in Vegas is working. Look at it this way; if you spend time and effort managing your investments, and you end up losing all your money, is it work? I say no, because you did nothing to expand the economy.
And that’s absolutely ridiculous. If you think investing is the equivalent of throwing nickels in a slot machine, and it does nothing to expand the economy, then I’m not sure what to tell you, other than to go read some books on investment. Certainly an amateur investor throwing his money on ‘hot tips’ or buying stocks based on hunches is just gambling, but institutional investors and money managers and serious semi-pro investors work their asses off, and their work collectively moves capital from low-value use to higher-value use, and this most certainly expands the economy.
I’m not aware of anyone ever turning down a promotion because of the tax issue - even back in the days of higher taxes. For one thing, in every promotion case I’ve been involved with, the person being promoted is already doing the work. (You don’t promote someone and hope they can handle it.) So, the extra money comes, at the beginning, for no more time on the job. It then sneaks up on you.
But the same tax increase will also reduce his take home pay even if he doesn’t get the raise (unless he is at the edge of some steep bracket) so you are understating the benefit of the increase. The impact of getting a raise (naturally or from a promotion) that makes you jump brackets has been mentioned for a long time. People do it since they know their next raise will be within the bracket.
What you are discussing is effectively equivalent to the marriage penalty, though the incremental costs of a spousal income is even higher.
BTW, we should remember that municipal bond funds returns are not fixed, but will vary with the tax rate. An increase in taxes, which reduces the effective return of taxable gains, will cause a reduction in the rate of return in municipal bond funds, since that investment becomes more valuable in protecting money from taxes.
Only when they guess correctly. When they don’t, how does that expand the economy?
You’re missing the point - the point is not to debate these specific examples - the examples were offered to illustrate marginal cases - those in which the decision to work harder is already very close.
Let me give you one that’s very common: A person is working in a $45,000/yr job. There are higher paying jobs in the company, but they require a master’s degree. A master’s degree is two to four years of hard work, plus maybe $20,000 in tuition fees. Is it worth going for the masters? Let’s say the masters will bring in $20,000 per year more, but it’s all in the next tax bracket. The bracket is currently 35%. So the masters would be worth $14,000 per year in take home pay. If the tax rate is 40%, the Masters is only worth $12,000 per year.
Every person who pegged the cost of the masters degree at between $12,000 and $14,000 would have their decision changed from going to school and becoming more productive to forgetting about it and staying in a lower productivity job.
Again, don’t take this too literally - no one does that specific calculation, because part of the cost is intangible - hard work, more responsibility, maybe longer working hours in the new job - balanced against personal satisfaction and the chance of being promoted even higher. So no one does the math - but they still internalize the decision. If you don’t believe that, think of the case where a job requires a masters but pays exactly the same as the current job. Clearly, very few people are going to get a masters to go for that job. On the other hand, if a masters paid half a million per year, everyone who was capable would be doing it. So somewhere on that continuum people drop out of contention, and they do so when the marginal value of the job no longer exceeds the marginal cost of doing the job. If you reduce the marginal value of the job, more people will fall off on the margin. This is basic economics.
[QUOTE=Shodan]
To pay for this, he will [ul][li] Raise the top tax rate from 35% to 40%[/li][li] Raise the small business tax rate from 38% to 55%[/li][li] Raise the capital gains tax from 15% to 28%[/li][li] Raise the dividends tax from 15% to 40%/ul](Bloomberg Politics - Bloomberg)[/li][/QUOTE]
Um, I only see two of those in your cite - the top bracket hike and the capital gains hike. Do you have a cite for the others? Also, note that the article says that the plan is to raise the capital gains tax to perhaps as high as the Reagan rate (28%). Also all of the versions I’ve heard discussed only raise the rate on marginal capital gains for high-income earners. From here it seems pretty obvious he’s targeting somewhere between 20 and 25%
Why are you assuming that investment is a guess? Or that they will guess wrong as often as they guess right? Do you even know what venture capitalists and other large investors do?
The “next tax bracket” would have to be income over $357,700 if single or filing jointly (for tax year 2008). How could this apply to your hypothetical $45,000/yr worker? The people who are affected by this increase just don’t have to make that sort of decision… these are the top 2% of wage-earners.
The top wage earners will use more of the various shelters available, the key one being deferred compensation - where they can put away their money (which is then often invested in company stock) before taxes. When they withdraw it, it will be after retirement and taxed at a lower rate.
They will also go hunting all other tax beneficial options, and firms will hire people to set up more of them:
- deferred comp plans
- 401k plans (already done, admittedly)
- Exec retirement plans of other types
- Ability to take options instead of cash, thereby deferring the tax hit as well.
Argh. Let me repeat: DON’T TAKE THE EXAMPLE LITERALLY. I’m trying to illustrate a principle. Feel free to replace the numbers with 25% and 28%. But it doesn’t even have to be a bracket jump. if you’re already in the 28% bracket, the same logic applies. Or I could concoct an example for someone making $357,000 per year.
The basic point is - there are always people on the margin. In the case of people considering investing their time and/or money for financial reward, any tax which reduces the size of that award will cause the people who were on the margin of the decision to decide not to invest.
I was recently reading an article where it was mentioned that the %age of the yearly income used to paid taxes is higher the wealthier you are (as one would expect) but only up to a certain point, above which the richer you are the lower your tax rate is. I don’t remember the exact figure, but it applied to the wealthiest 5% or something similar. It was figures for France, but I suspect it’s the same in other countries.
OK, then. I don’t know if it’s correct, but the argument makes sense.
Inasmuch as I co-founded a company that spent $5 million of VC money, yeah, I think I do.
Money is RELATIVE. It doesn’t matter how much you have, just how much everyone else does. If you make one person rich, he might work less. If you make a whole country rich, they’ll work just the same. If you double taxes on everyone, they’ll also continue as they were. If we put on huge taxes on the rich but no taxes on the middle class so that once you pass $100k/year it becomes a lot more difficult to earn more… that will be a big discouragement. It will affect incentives. But if you tax everyone across the board… no change in incentives. It’s a broken theory that claims to prove otherwise.
[QUOTE]
[ul][li] Raise the top tax rate from 35% to 40%[/li][li] Raise the small business tax rate from 38% to 55%[/li][li] Raise the capital gains tax from 15% to 28%[/li][li] Raise the dividends tax from 15% to 40%[/ul][/li][/QUOTE]
Seriously? He wants to hit small businesses that hard? That makes no sense… they’re the most egalitarian and productivity-boosting thing in the economy. Also, you shouldn’t tax dividens. Taxing capital gains but not taxing dividens realigns the stock market with the real world instead of making it like gambling on baseball cards.
You are ignoring other probably more important factors in any decision like this. I don’t know if the person in your example quits work to get the Masters or does it at night. If the latter, what is the cost in stress of doing this? I knew plenty of people who did this, and they worked a lot harder at it than I did in grad school. What is the payoff period you are assuming? If it is one or two years, the Masters is almost certainly not worth it. Over a career the increased earnings more than overwhelms the bracket creep problem. What is the psychic benefit of doing this, both in increased prestige in the company and in personal satisfaction. I’ve never calculated how long it took me to get the earnings I gave up to get a PhD, but it was probably a decade easily.
In making investment decisions, the tax rate is clearly very important. In making personal decisions the uncertainty in the valuation of the options more than overwhelms it. At low income levels, the impact of the tax rate is not very great. At higher levels, the decreased incremental value of each dollar reduces the impact of the higher tax rate on decisions, which is the whole point of a progressive tax.
Heh. If Sam knows any VCs who come even close to guessing right 50% of the time, that’s where I want to invest my money!
I’ve got an investment advisor who works very hard, and has been pretty good, but who leverages his hard work over many clients. Many months I make significantly more from my investments than my daughter does from working with a trivial amount of effort and not all that much cost. When you have money, you make more money.
I’ll offer a sample size of one - concern over rollback of the capital gains cuts caused us to decide to move a large portion of our assets into Obama-tax-proof (Federal and State tax-free, and AMT-free) municipal bonds instead of mutual funds.
And of course they were very, very good bonds…
I don’t know how that impacts the economy - I can’t imagine it’s that negative, after all, the bonds directly benefit a university, school district, and a city - but my broker tells me that ever since Obama started talking about his tax plan, demand for tax-free bonds has really shot up.
HaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHaHa. Oh man, tears in my eye from that one. Thank you, I needed my spirits lifted.
Municipal bonds are not comparable to stocks because they have far less volatility and if insured are fairly damn safe. At our tax rate we’re getting from 7.89% to 8.45% (effective gross) return on our municipal bonds - with principal and interest (to the call date or maturity) insured. What other insured investment that returns that much? No snark intended, I’m curious, is there any in the US?
Yes, it’s not a Tax increase so much as a rollback to the pre-GWB days. Sounds Ok to me in principal, but the devil’s in the details, no doubt.