Capital Gains tax and tax on investment interest

[NickTheCage]

why is money being taxed twice a problem? i could sorta understand if the same entity was being taxed twice on the same money, but if two different entities are paying taxes (the company and then the investor) why would that be considered unacceptable?

Because it isn't the govts money?

Anyhow you're now going to get into a philosophical/ideological discussion. Double taxation is good business for the Treasury and one can't have this conversation without considering this point.

When something is income to individual Y the principle of tax law makes it available as an expense to person X. Your income is taxable to you but the company you work for gets to offset revenues by expensing it. The effect is that the the Treasury ends up neutral: $1000 of income to you is $1000 of expense to someone else.

Cap gain and Interest Income are different as they are taxed to you but no other individual entity expenses it. The Treasury ends up +15% (today’s rate), obviously not neutral. If they decided to give deductions to some entity off your tax on gains/interest to balance the equation, things would equilibrate. Taxing gains/interest w/out a deduction is simply a tax on investment activity. They get away with it because the capital gains tax rate is relatively low. It won’t be raised because if you raise it too much, and individuals restructure their behavior, the Treasury will have less gains realized, but more off-setting expenses and we can't starve the Treasury, can we?

[bootsywannabe]

why is money being taxed twice a problem? i could sorta understand if the same entity was being taxed twice on the same money, but if two different entities are paying taxes (the company and then the investor) why would that be considered unacceptable?

Would it be a problem if it were your money getting taxed twice?

[toxigal]

Would it be a problem if it were your money getting taxed twice?

my money isn't being taxed twice. the companies money is being taxed and then i'm being taxed. until it is given to me, it isn't my money.

[jdhill]

my money isn't being taxed twice. the companies money is being taxed and then i'm being taxed. until it is given to me, it isn't my money.

that's not quite right. You're implying that you are a shareholder. in that event, the money really is yours, only it's not available to you on demand. The concept of incorporation creates protections and limitations, but as a shareholder, you have a claim on your share of that money. Buy a controlling interest, and you can vote 100% distribution of retained and current earnings.

Think of it this way, many companies pay little/no dividends right? then why does stock price rise? It does so (largely) because of 2 factors. 1 - value of retained earnings, and 2 - present value of anticipated free cash flow. If that money were not really yours, without dividends, the stock price would not increase.

[bootsywannabe]

my money isn't being taxed twice. the companies money is being taxed and then i'm being taxed. until it is given to me, it isn't my money.

How about when your employer leaves the City and you have to start your own business? Will you mind then?

[toxigal]

How about when your employer leaves the City and you have to start your own business? Will you mind then?

huh? I don't work in the city, and even if i did why would i have to start my own business?

[toxigal]

that's not quite right. You're implying that you are a shareholder. in that event, the money really is yours, only it's not available to you on demand. The concept of incorporation creates protections and limitations, but as a shareholder, you have a claim on your share of that money. Buy a controlling interest, and you can vote 100% distribution of retained and current earnings.

Think of it this way, many companies pay little/no dividends right? then why does stock price rise? It does so (largely) because of 2 factors. 1 - value of retained earnings, and 2 - present value of anticipated free cash flow. If that money were not really yours, without dividends, the stock price would not increase.

once again i am confused and thus am confusing the issues. i absolutely understand that an individual is taxed twice on dividends (since they are shareholders who "own" a bit of the company.

Bootsy capital gains are taxed twice - once to the company, once to the individual. that is the one i'm most confused about. who is the company with respect to capital gains?

[Naveen]

once again i am confused and thus am confusing the issues. i absolutely understand that an individual is taxed twice on dividends (since they are shareholders who "own" a bit of the company.

Bootsy capital gains are taxed twice - once to the company, once to the individual. that is the one i'm most confused about. who is the company with respect to capital gains?

Capital gains taxes are not double taxation.

[jdhill]

once again i am confused and thus am confusing the issues. i absolutely understand that an individual is taxed twice on dividends (since they are shareholders who "own" a bit of the company.

Bootsy capital gains are taxed twice - once to the company, once to the individual. that is the one i'm most confused about. who is the company with respect to capital gains?

The company is a third party to the capital gain. A little bit like your home builder is to you when you save money by refinancing your mortgage. It does not represent double taxation. Consider this, you can realize a capital gain on a stock during a year in which the company had a massive loss and paid no taxes.

[bootsywannabe]

How come you pay taxes twice on that income then as a shareholder? If you are a shareholder in a corporation your income gets taxed twice. Once at the corporate level, and then again at the individual level. That's why arguments that Mitt only paid 15% are ridiculous. And in Philly you get taxed thrice on investment income.

[toxigal]

The company is a third party to the capital gain. A little bit like your home builder is to you when you save money by refinancing your mortgage. It does not represent double taxation. Consider this, you can realize a capital gain on a stock during a year in which the company had a massive loss and paid no taxes.

Capital gains taxes are not double taxation.

Ok. That makes sense to me.

so, in general (and i know it is very difficult to generalize on these things) what are the objections to taxing an individual on capital gains? i am working on the understanding that such a tax is not double taxation. It seems some people oppose a tax on them all together, and for those that don't the debate is about what level the tax should be?

i feel like i am getting close to having a basic level of competence on issues related to capital gains taxes

[bootsywannabe]

Well yes, after you work enough to save money to have investments, then you will understand why double taxation is annoying and counterproductive. Particularly when you are a shareholder in a corporation. Our state actually started out as a corporation, by the way.

If you have to clear a 70% profit just to break even, after taxes, there's not a whole crapload of incentive to take the risk and invest.

Just because you have never paid capital gains or dividends taxes doesn't mean the people who do pay them are evil. Nor does it mean they should pay their taxes twice on the same income. Anybody with a 401K or a pension plan is a shareholder in corporations. This affects all of us who work and save for the future.

Capital gains are in fact taxed twice. They are taxed at the corporate level, which you are a part of as a shareholder. They are taxed again after you receive this income as an individual. These are facts. They are indisputable.

[toxigal]

Just because you have never paid capital gains or dividends taxes doesn't mean the people who do pay them are evil. Nor does it mean they should pay their taxes twice on the same income. Anybody with a 401K or a pension plan is a shareholder in corporations. This affects all of us who work and save for the future.

I never said nor implied anyone who pays capital gains or dividends taxes are evil. quite the contrary, i highly respect those who do. I hope to some day have capital gains and divident income that i too hope to have capital gains and dividends that i have to pay taxes on. getting closer, just moved up a tax bracket!

Capital gains are in fact taxed twice. They are taxed at the corporate level, which you are a part of as a shareholder. They are taxed again after you receive this income as an individual. These are facts. They are indisputable.

I will let those who know more than me and say they are not subject to double taxation address this.

[Naveen]

Capital gains are in fact taxed twice. They are taxed at the corporate level, which you are a part of as a shareholder. They are taxed again after you receive this income as an individual. These are facts. They are indisputable.

I think you are confusing capital gains with dividends.

[toxigal]

I think you are confusing capital gains with dividends.

i'm going to be very simplistic here but hope i've got it right. when you sell a stock your profit is capital gains and no longer have the stock. when you get a payment because you are a shareholder, it is a dividend....and you still are a shareholder.

did i get it?

[Naveen]

i'm going to be very simplistic here but hope i've got it right. when you sell a stock your profit is capital gains and no longer have the stock. when you get a payment because you are a shareholder, it is a dividend....and you still are a shareholder.

did i get it?

Yep, you got it.

[StrangeTanks]

This is a pretty interesting thread. I'm not certain about the idea of double taxation. I mean, last time I checked we are routinely taxed multiple times on our income.

For example, you pay income tax when you earn your money, then pay sales tax when you spend it. Not to mention the myriad of confusing taxes that are billed to you from service providers such as cell phone companies and utilities.

One of my biggest problems with stock market investments however, and feel free to correct me. I feel that it is very much hurting the american economy overall. When you make money trading stocks on the market, there are no goods or services produced from that transaction, its basically just money that's going from one pocket into another. Of course the argument could be made that you own a small portion of a company which is producing a product, but as stated above, dividends are rare and that's not generally why stocks are traded.

[Naveen]

Of course the argument could be made that you own a small portion of a company which is producing a product, but as stated above, dividends are rare and that's not generally why stocks are traded.

The moment you are not collecting a dividend from ownership of a stock, that's the moment you are speculating*. The fact that this is simply how most of the market works now doesn't change the fact that it's speculation.

You're right to be worried.

* "Speculating" may not be the most accurate word for it; but you're definitely operating on the "greater fool" principle at that point.

[geoffrobinson]

A big difference to me between capital gains and income is risk. There is a risk with any investment that you normally don't think of with respect to income from a job. While I don't think a higher tax on capital gains would discourage the very rich from investing I do think it would have a negative effect on middle class investors who don't have much money to invest. I would probably just put more money into my house than the stock market if the capital gains rates were the same as income. Plus, capital gains are only taxed when they are realized, so I imagine the very rich would figure out ways to delay the realization indefinitely.

Plus, capital gains doesn't take into account inflation. If you hold something for quite some time, if the stock only holds steady relative to inflation the tax man still takes a good bit of that.

[geoffrobinson]

This is a pretty interesting thread. I'm not certain about the idea of double taxation. I mean, last time I checked we are routinely taxed multiple times on our income.

For example, you pay income tax when you earn your money, then pay sales tax when you spend it. Not to mention the myriad of confusing taxes that are billed to you from service providers such as cell phone companies and utilities.

One of my biggest problems with stock market investments however, and feel free to correct me. I feel that it is very much hurting the american economy overall. When you make money trading stocks on the market, there are no goods or services produced from that transaction, its basically just money that's going from one pocket into another. Of course the argument could be made that you own a small portion of a company which is producing a product, but as stated above, dividends are rare and that's not generally why stocks are traded.

I'm not in favor of passing it, but multiple-taxation is a reason many support the Fair Tax, which is essentially a VAT or a type of sales tax. A business will sell to another business and tax gets added to another and another and then to the customer, who gets a sales tax. So the amount of tax you pay is very much hidden from you.

Take beer for instance. Half of the price is tax. And then they charge you sales tax. They are taxing taxes. It's crazy.

It would be better to remove taxation throughout the system and put it at the end, where you can see it. The problem, as far as I can see it, is that it is too radical a change from what we have right now so it it would be hard to figure out how people would react to.

I would create a flat tax which exempts the first $30-50K of income, no dividend taxes, no corporate taxes, and make capital gains taxes just ordinary income. Let the accountants figure out something else to do with their lives.