Thanks Dan.

Duke, Bbauska, there's an easy question and a hard question. The easy question: should (some) very wealthy people, many of whom don't work at all to make their income pay less in taxes on that income (as a percentage) as working people who work very hard to make their money? The answer is no. That's a very easy question that nearly everyone in America can agree on. Yet, that's the system we have today.

Regarding what the rate should be, that's a very hard question and it depends on national priorities. I don't know what those priorities are and it would be something that our legislators would need to set in consultation with their constituencies, with the understanding that spending should roughly equal income. To look at only one side of the equation (e.g. you have X amount, how are you going to spend it?) is an absurd way to frame the question.

Purple wrote:In other news - back to the thread's topic - the Obama campaign has released a new online ad responding to Mitt's latest release of his 2011 tax return. WATCH

Fair? Unfair? Factual? False?

If I invest in a global energy mutual fund, should I be criticized if it places 4% of its assets in Gazprom (which is controlled primarily by the Russian government, who Romney says is our #1 strategic enemy)?

Most of that stuff is crap. So he bet against the dollar and had International investments, so what? He's an investor and that's what investors do. It's like saying that Jimmy Carter grew peanuts. Nothing to see here, move along.

Stashing money overseas and that Swiss bank account, though, that's the thing that raises flags, or at least it does to my little mind. There's not much reason to do that other than to avoid paying taxes or hide money from creditors. There are risks to keeping your money overseas, (e.g. international crises cause countries to free assets of other nations or residents of other nations.) Usually, you want to keep your cash at home. What I'd really like to hear from PwC is why he keeps (kept?) a Swiss bank account and accounts in the Cayman Islands. What's the rationale? Where did the money come from? Did it originate from overseas investments or did he move it there? There may be a reason that's legit, but if you've got a red flag that you don't explain, that raises legitimate questions.

Geo,
I hope you are understanding the frustration of conservatives. All that is heard in the rich have to pay more. Yet the deficits are larger than ever! How much do we to increase taxes to get the deficit down to zero? Or should we do both reduction of budget, and increasing of taxes? Both sides tell the other to take the hit. The size of govt has increased, and it is more than capable of a reduction.

bbauska wrote:Geo, I hope you are understanding the frustration of conservatives. All that is heard in the rich have to pay more. Yet the deficits are larger than ever!

Brad, the rich pay less now than anytime in our lifetimes (the poor do too, BTW), and spending is very high. It's not a shock that the deficits are larger than ever. That's math.

danivon wrote:Additionally, it does seem less than equitable that unearned income (capital gains) is taxed at a lower rate than earned income (wages). Someone makes an effort to work or build up a business and has to pay 33%, but someone making little actual effort pays half that?

Because it's not just rich people who make capital gains. What to raise the taxes on capital gains income, say goodbye to grannies 401K because that is a capital gains. Want to sell your house, consider the extra amount of taxes to be taken out because that is a capital gains. My parents, who are by no means wealthy - solidly middle class, were lucky enough to purchase a vacation home. After owning it for 10 years they decided to sell it. They got spanked on capital gains taxes.

So once again Dan. what is fair? What are the unintended consquences?

geojanes wrote:Duke, Bbauska, there's an easy question and a hard question. The easy question: should (some) very wealthy people, many of whom don't work at all to make their income pay less in taxes on that income (as a percentage) as working people who work very hard to make their money? The answer is no. That's a very easy question that nearly everyone in America can agree on. Yet, that's the system we have today.

I worry less about the percentage and more about the total dollar amount.

geojanes wrote:Regarding what the rate should be, that's a very hard question and it depends on national priorities. I don't know what those priorities are and it would be something that our legislators would need to set in consultation with their constituencies, with the understanding that spending should roughly equal income. To look at only one side of the equation (e.g. you have X amount, how are you going to spend it?) is an absurd way to frame the question.

And yet once again lacking any kind of answer then it's not fair.

I'll say this for Redscape - it makes me look stuff up.

I'll first make one comment about the philosophy capital gains taxation, then reveal the findings of my complicated in-depth research into comparative international tax practices.

Let's say I buy some shares of stock as an investment. I'm taking a risk; I might win or lose. If I lose, will the government reimburse me for part of my loss? Of course not. So why should I pay maximum-rate tax when I win? Investing is already an iffy proposition - there's a good chance, particularly with certain kinds of investments, that one will lose. When one considers an investment one seeks to weigh the chances of loss versus gain. If gains are taxed, they have to be that much greater than possible losses to justify the investment. Tax the possible gains enough and the odds involved in the investment becomes too lop-sided to justify the risk. In short: the higher the rate of CG tax, the less overall investment activity there will be. In a capitalist society, or even modern socialist ones, private investment activity is essential to economic health. The more the better. Ergo, the lower the CG tax rate the better.

Can you think of other reasons it would make sense to tax CGs less than ordinary income?

Now let's look at a bunch of countries and compare their CG tax rates to their mean income tax rates, as revealed by Wikipedia HERE and HERE. I'll just compare a handful of advanced industrialized nations.

USA: 15% CG for most people, 0% CG if you're in the two lowest income tax brackets. I don't know how that works if you've got a billion in CG and nothing in ordinary income. Mean IT: 28%.

Canada: half of CGs get taxed at your individual tax rate (i.e. you pay half as much in taxes on CGs as you do on ordinary income). Mean IT rate is 32% so mean CG tax rate would be 16%.

Denmark: CGs at 28% up to DKK 48,300 (roughly US $8,000), 42% on amounts in excess of that. Mean IT rate: 42%.

France: 34.5% on CGs, 50% on income.

Germany: 28% on CGs versus 52% on income.

Japan: 20% versus 27%. It seems that various complex provisions make the full 20% rate on CG rare.

Norway: 28% versus 37%.

Sweden: 30% versus 48%.

Switzerland: 0% on CGs, 29% mean IT rate.

UK: 18% or 28% on CGs depending on income tax bracket; 34% mean IT rate.

Summary: the USA seems to be more or less in line with most peer nations in terms of the relative rates, with CG taxes being roughly between half and three-fourths of ITs. (In an absolute sense, US individual taxes are lower than in peer nations, but US corporate tax rates are the highest of anyone.) In most nations, gains made from sale of primary residence are exempt; not in the USA. This makes the effective CG tax in the US higher than otherwise, since for most people the sale of their home is the largest CG they'll ever realize.

Very few countries tax CGs at the normal IT rates. The idea that it should be done for reasons of "fairness" is obviously not one that's appealed to very many advanced nations. There's gotta' be a reason. The one I advanced is probably the main one.

Archduke Russell John wrote:Because it's not just rich people who make capital gains. What to raise the taxes on capital gains income, say goodbye to grannies 401K because that is a capital gains.

As Purple has found, those on low incomes don't pay as much in Capital Gains because there's an allowance (generally it will be that income below the IT limit from capital gains is exempt, but over that limit will be taxed).

A 401K is tax deferred on income. Withdrawals are taxed as income, not capital gains. 401k accrual of any kind is untaxed until withdrawal. Changing the CGT rate would not affect 401k tax liability, and neither do I think it should. Granny would be fine.

Want to sell your house, consider the extra amount of taxes to be taken out because that is a capital gains. My parents, who are by no means wealthy - solidly middle class, were lucky enough to purchase a vacation home. After owning it for 10 years they decided to sell it. They got spanked on capital gains taxes.

I would change the US law if it does not exempt primary residence (ie: a first home, that has to be one you live in), but second homes that appreciate in value for no reason other than the 'market'. That's a capital gain. If your parents' holiday home doubled in value, if improvements they made could not be offset, if there is no 'taper' or accounting for inflation, and if the rate at the time was 20%, then they were 'spanked' for 10% of the sale price. Probably less if I am wrong on the conditions above.

So once again Dan. what is fair? What are the unintended consquences?

Just because you parents had to pay some, does not make it unfair. They were taxed at zero on the value they paid for it, so were not being penalised or robbed of earned money - no 'double jeopardy' there. Tax on unearned income does not seem to be to be less 'fair' than tax on income earned through work. The latter is always claimed to be detrimental to the 'work ethic'.

geojanes wrote:Duke, Bbauska, there's an easy question and a hard question. The easy question: should (some) very wealthy people, many of whom don't work at all to make their income pay less in taxes on that income (as a percentage) as working people who work very hard to make their money? The answer is no. That's a very easy question that nearly everyone in America can agree on. Yet, that's the system we have today.

I worry less about the percentage and more about the total dollar amount.

Why? A $10,000 tax bill will be very hard for someone on just above minimum wage, but chickenfeed for a millionaire. Ability to pay is a key component in tax policy.

On the risk/reward question, I can see the argument. However, what is often forgotten is the following:

a) for an asset risk (eg. shares, property) the maximum loss is the initial purchase price and perhaps some interim charge/maintenance. However, the maximum profit is more than 2x that amount, because in theory it is limitless.
b) while it is true that the state does not compensate losing investors in general, there are various ways that the government helps reduce the risks or the losses. For example, a limited liability company means that owners are not liable for debt above the value of theır stock, should it go bankrupt. Savings in banks are underwritten by the government, so that if the bank falls, savers get up to a certain amount back. Regulation and oversight mean the the risk of investments should be lower, keeping silly risks out of the market and looking out for dodgy practices etc.

purple

I might win or lose. If I lose, will the government reimburse me for part of my loss?

Do you not get to write one years Capital investment losses off against future Capital investment profits?
On the other hand, if someone is out of work for a period of time, and their income from labour goes down, they don't get to write that years lost income off against next years income when they have renewed employment and increased income and tax rate....

One small problem with your comparison Purple is that it is tax rates. Not effective taxation rate. That is the levels and types of deductions from either income or taxation aren't included in the comparison.
The goal of simplifing the tax code, usually espoused by conservatives is laudable. However, identifying how one is going to simplify the code is important to know. And that is another piece of information Romney isn't willing to share with voters...

The fundamental thing shown by taxation rates is that capital is valued over labour. This creates natural opposition between those providing the capital and those providing the labour. As George Carlin put it " I pay you just enough so you won't quit and find another job, and you work just hard enough so I won't fire you".
Where labour and capital have formed a more symbiotic relationship generally there is less labour strife. (And it is claimed by some, a happier populace.). Where a company ties compensation of labour to end of year performance in employees bonuses.... productivity is usually higher...

The great canard about capital gains is that the lower capital gains tax is supposed to generate more investment and therefore greater employment. However, when Bush lowered the capital gains there was little to no effect on employment. Part of this, is course the fact that much capital gains are made from international investment that has nothing to do with domestic investment...
To be able to say that CG truly generate more domestic business activity and employment, one would offer a lower CG only on domestic investment.... But that ain't the way ot works is it?
That money made for Gaz Prom and the Chinese companies, would be taxed at a normal rate, making American investment more attractive.
I haven't heard anyone making this distinction, and frankly unless one makes this distinction the entire arguement that capital creates jobs in the US is false. It might just, as some cheeky protestors signs say, create jobs in China.

Purple wrote:Let's say I buy some shares of stock as an investment. I'm taking a risk; I might win or lose. If I lose, will the government reimburse me for part of my loss? Of course not. So why should I pay maximum-rate tax when I win?

...
In most nations, gains made from sale of primary residence are exempt; not in the USA. This makes the effective CG tax in the US higher than otherwise, since for most people the sale of their home is the largest CG they'll ever realize.

Busy day today, so I'm just going to address these few issues: first, you can deduct capital losses. Your absolute loss is limited to 3K per year, but you can carry that forward if you have more, and you can use losses to offset realized capital gains.

Second, in the US you can exempt up to 500k in gains from the sale of your home. That was changed in the 1990s and some say that was one of the contributing elements housing crisis 10 years later.

Finally, capital gains are only taxed if they are realized. So imagine you start Microsoft. You go public and you keep 10% of the company and it's eventually worth $200 Billion. You have an asset that's worth $20,000,000,000 and you've paid zero taxes on that wealth, because it has never been realized. You may be earning hundreds of millions of dollars a year in dividends off of wealth that was never realized, and so never taxed. If you're Mark Zuckerberg, and your stock doesn't pay dividends, you take out loans using your stock as collateral, which isn't income and so you both have your money and you don't pay taxes on your gains.

It just seems so clear that work, having a job, getting up going to work in the morning and contributing to society is more important than collecting dividends or buying and selling stock, and the tax code should reflect such values.

So, that gives me a (c) - that losses in capital can be offset against gains to provide tax credits, some of which can be rolled over into another year.

I wasn't sure if that applied in the USA. I spent time to check my hunch on 401k exemption, and did not have more to spare on researching that, or how much liability would apply to a first home / primary residence. I doubt many American couples are living in a home worth 500 thousand bucks more than they paid for it (250 for a single adult in the household).

Purple wrote:UK: 18% or 28% on CGs depending on income tax bracket; 34% mean IT rate.

Basically it works like this:

Taxable capital gains (there is an allowance) are compared with your taxable income. If you are in the basic income tax bracket (paying 20% on income), then CGT will be at 18%. Any capital gains over that (so, for some people on the higher rate of income tax all of their taxable gains) are taxed at 28%.

In recent years there has been something of a 'race to the bottom' between countries around the world, reducing capital gains and corporation tax rates to encourage investment. The problem is that the effect lasts only as long as it takes another country to do the same thing, with the net result being that the very rich get to pick and choose and play countries off each other, and those countries chase diminishing returns.

Besides, the fact that most countries tax capital gains at a lower rate than 'mean income tax' does not mean that it is any fairer. Mean income tax rates are themselves perturbed by a small number of people at the very top.

I don't really understand why anybody would use a mean for income tax rates as if it was expected to signify anything. The mean that Purple quoted for the UK was 34%, a rate which precisely nobody actually pays on their income.

the rationalization is that captial gains are lower because it encourages inbvestment and therefore benefits everyone.

Never really happened that way though...

Meanwhile, Troy Kravitz and Len Burman of the Urban Institute have shown that, over the past 50 years, there’s no correlation between the top capital gains tax rate and U.S. economic growth — even if you allow for a lag of up to five years. “Moreover,” they add, “any effect is likely small as capital gains realizations have averaged about 3 percent of GDP since 1960 and have never been more than 7.5 percent.”

source: http://www.washingtonpost.com/blogs/ezr ... _blog.html

Warren Buffett, for one, claimed that the tax rate on investment income doesn’t make much of a difference to actual investors: “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

If the tax rate on CG doesn't really affect long term investment decisions or growth, then whats the rationale for a lower rate?

danivon wrote:A 401K is tax deferred on income. Withdrawals are taxed as income, not capital gains. 401k accrual of any kind is untaxed until withdrawal. Changing the CGT rate would not affect 401k tax liability, and neither do I think it should. Granny would be fine.

you are correct. That is what I get for relying on a memory of a 7 year old class instead of looking it up.

danivon wrote:Just because you parents had to pay some, does not make it unfair.

Says you. I and others say it is unfair. That is pretty much my point. The concept of fairness is subjective.

danivon wrote:Why? A $10,000 tax bill will be very hard for someone on just above minimum wage, but chickenfeed for a millionaire. Ability to pay is a key component in tax policy.

Because a millionaire doesn't pay $10,000. He pays $3,000,000.

By the way, according to our Turbotax printout we paid an effective tax rate for 2011 of 8.9%. We ain't rich.

Archduke Russell John wrote:

danivon wrote:Just because you parents had to pay some, does not make it unfair.

Says you. I and others say it is unfair. That is pretty much my point. The concept of fairness is subjective.

So, because you don't want to take an objective view, it can't be viewed objectively?

If my argument was that I object to a tax simply because my folks had to pay some, I'd expect to be laughed out of town. No one 'likes' taxes, but it's not like they are some big surprise, or that they are levied arbitrarily (such that another holiday home sold for the same profit was not taxed). That would be unfair.

Archduke Russell John wrote:

danivon wrote:Why? A $10,000 tax bill will be very hard for someone on just above minimum wage, but chickenfeed for a millionaire. Ability to pay is a key component in tax policy.

Because a millionaire doesn't pay $10,000. He pays $3,000,000.

Firstly, I was responding to you saying how the 'dollar amount' was important, not the rate, so I was showing how the same amount makes a difference to different people. Moving the goalposts is so tiresome.

Secondly, a millionaire is not going to be paying three times his income in taxes. I think you meant $300,000

Thirdly, a lot of millionaires pay a lot less, simply because they can defray liabilities and are more likely to have income as capital gains.

Fourthly, I'm not actually to worried about a millionaire with a 30% tax bill, as they are still on an income of $700,000 in that year. I don't know about you, but I wouldn't feel too hard done by if it were me.

By the way, according to our Turbotax printout we paid an effective tax rate for 2011 of 8.9%. We ain't rich.

I guess not, if you were out of work for much of that year. What kind of tax rate were you paying in a year when you were fully employed?