Capital Gains tax and tax on investment interest

[StrangeTanks]

That would be AWESOME if they had no corporate taxes!!!!! I would run out immediately and start a c-corp!

[phillyaggie]

That would be AWESOME if they had no corporate taxes!!!!! I would run out immediately and start a c-corp!

And you'd be the sole proprietor?-- Well, that would be the S-corp, though, right? What would you pay yourself? And wouldn't you get taxed on that?

[eldondre]

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.

VAT taxes aren't really any clearer, there's no sign in Europe saying "this is 30% more expensive than in America because of the VAT." I don't disagree that simple and clear is generally better though ut I'd guess the government prefers the actual amount of taxation to be unclear, plus there'd be a whole series of winners and losers that would be losing their breaks.

And you'd be the sole proprietor?-- Well, that would be the S-corp, though, right? What would you pay yourself? And wouldn't you get taxed on that?

right but he wouldn't get taxed on money he didn't take out of the corporation. and would there really be any need for an s corp vs c corp? isn't that really a function of different tax rules?

[raider.adam]

VAT taxes aren't really any clearer, there's no sign in Europe saying "this is 30% more expensive than in America because of the VAT." I don't disagree that simple and clear is generally better though ut I'd guess the government prefers the actual amount of taxation to be unclear, plus there'd be a whole series of winners and losers that would be losing their breaks.

Initially I wasn't a large fan of the VAT (especially since when Democrats talk about it, it is as a new revenue stream, not a reform).

There is a tax reform guy named Bruce Bartlett. I read one of his books and then had the chance to meet and talk to him for a bit and he sold me on it. He said if you use the VAT to eliminate the corporate taxes, there are two big benefits to the economy.

First, it is much simpler for companies to track and handle their taxes and it will reroute much of the cost of doing business from accounting to other sectors (profits, research, investments, etc.)

Second, which is the big one, is that it helps with the import/export gap. Whether a company is located in the US or outside the US, their business is pretty much taxed at the same rate.

right but he wouldn't get taxed on money he didn't take out of the corporation. and would there really be any need for an s corp vs c corp? isn't that really a function of different tax rules?

Most businesses will be (and are) LLCs, not s or c corps.

[eldondre]

Initially I wasn't a large fan of the VAT (especially since when Democrats talk about it, it is as a new revenue stream, not a reform).

There is a tax reform guy named Bruce Bartlett. I read one of his books and then had the chance to meet and talk to him for a bit and he sold me on it. He said if you use the VAT to eliminate the corporate taxes, there are two big benefits to the economy.

First, it is much simpler for companies to track and handle their taxes and it will reroute much of the cost of doing business from accounting to other sectors (profits, research, investments, etc.)

Second, which is the big one, is that it helps with the import/export gap. Whether a company is located in the US or outside the US, their business is pretty much taxed at the same rate.
Most businesses will be (and are) LLCs, not s or c corps.

to be fair, eliminating corp income taxes itself would go a long way to reducing the trade deficit. the avg tax bill is, I think, around 12% despite there being a 35% rate...unfortunately only large companies take advantage of these and they have to make certain choices to get it (and few of them relate to employing people in production). I'd also add that LLC's may be the largest number of businesses but the same logic applies. In an LLC profits are not taxed except when they're passed through to the owners as income. that's exactly what I'm recomending here for C corp's...which would eliminate a large motivation for llc's.

I'd point out that eliminating the corp tax also vastly reduces the amount of accounting that needs to be done (as well as tax analysis) so that's not exactly an inherent advantage in the VAT, it's simply a function of tax simplification. it's my understanding that it's a substitute for the sales tax (which we do not have at a national level). I would be interested in how it would affect, say, PA if it were to adopt a VAT instead of a sales tax. I'd further point out that, as I understand it, the VAT is not applied to exports. one needs to understand that a VAT would cause a rise in prices which is fairly regressive.

However, as bread is considered a basic food, it is not subject to VAT whether it is warmed in the oven or served cold.
But bakers have pointed out there is no exact definition of bread.
For example, is a croissant considered a type of bread? Or a hot-cross bun?

http://www.dailymail.co.uk/news/arti...bject-VAT.html

[raider.adam]

to be fair, eliminating corp income taxes itself would go a long way to reducing the trade deficit. the avg tax bill is, I think, around 12% despite there being a 35% rate...unfortunately only large companies take advantage of these and they have to make certain choices to get it (and few of them relate to employing people in production). I'd also add that LLC's may be the largest number of businesses but the same logic applies. In an LLC profits are not taxed except when they're passed through to the owners as income. that's exactly what I'm recomending here for C corp's...which would eliminate a large motivation for llc's.

I'd point out that eliminating the corp tax also vastly reduces the amount of accounting that needs to be done (as well as tax analysis) so that's not exactly an inherent advantage in the VAT, it's simply a function of tax simplification. it's my understanding that it's a substitute for the sales tax (which we do not have at a national level). I would be interested in how it would affect, say, PA if it were to adopt a VAT instead of a sales tax. I'd further point out that, as I understand it, the VAT is not applied to exports. one needs to understand that a VAT would cause a rise in prices which is fairly regressive.


George Osborne's 'takeaway tax' provokes furious backlash over which savouries should be subject to VAT | Mail Online

I should have clarified the point about VAT and corporate taxes. His position is that the federal government would never eliminate the corporate taxes whereas there is a better chance of a bipartisan replacement of corp taxes with a VAT.

[NickTheCage]

Toxi .. some more of cap gains

The IGM Forum is a U-Chicago Booth School of Economics sponsored org that gauges the opinion of some of the most highly regarded economists on numerous issues. Their latest analysis focuses on the Taxation of Capital and Labor. As anyone can see the overwhelming opinion is that taxing gains anywhere near labor income is not part of a sound economic policy. This is a pretty universally held opinion that holds even when you factor in real world challenges .... something the class warfare politcos suitably never discuss.

Results here

Poll Results | IGM Forum



As economic policy Raising Cap Gains = BAD economic policy. That would also mean having 0% cap gain tax would be even better for the economy.

[Politburo]

As anyone can see the overwhelming opinion is that taxing gains anywhere near labor income is not part of a sound economic policy. This is a pretty universally held opinion that holds even when you factor in real world challenges

In what world is 36% an "overwhelming opinion"? More respondents were unsure or disagreed with the statement.

"real research" lulz.

[NickTheCage]

In what world is 36% an "overwhelming opinion"? More respondents were unsure or disagreed with the statement.

"real research" lulz.

36% agree to some extent and 13% disagree to some extent

Kinda sucks donkey dong not to have the argument on ur side when you tell people the contrary

[Politburo]

36% agree to some extent and 13% disagree to some extent

Yup. And yet you interpret this 36% as an "overwhelming" and "universally held opinion".

Amazing.

Kinda sucks donkey dong not to have the argument on ur side when you tell people the contrary

I'll have to take your word for it.

[NickTheCage]

Yup. And yet you interpret this 36% as an "overwhelming" and "universally held opinion".

Amazing.



I'll have to take your word for it.

Politburo again playing his favorite pastime (semantics) that does not cast doubt the way you would desire. It is clear to see the majorities opinion of the study. 36% agree > 13% disagreeing is pretty “overwhelming” of those that are certain of their opinion.

Per “universally held opinion” ..

Macro Economics is the school I would suppose you'd side with yourself unless you really are a closet Marxist. Te consensus is the established theoretical wisdom. The widespread theoretical wisdom in Macro-Eco is that the cap gains rate should always be low and today, lower than the income rate. It’s an idea that is supported by theory, and the majority of empirical work. The poll mirrors and points out that economists continue to grasp that existing wisdom.

Now you can put your head on your pillow, thumb in your mouth, and sleep soundly knowing that you don't need to take my word for it.

[Politburo]

Politburo again playing his favorite pastime (semantics) that does not cast doubt the way you would desire. It is clear to see the majorities opinion of the study. 36% agree > 13% disagreeing is pretty “overwhelming” of those that are certain of their opinion.

You made an argument from authority, and the source provided as the authority did not match your paraphrasing. Call it semantics all you want, 36% in an opinion poll is just not a majority opinion.

(As an aside, it is interesting to see the guy who two weeks ago was saying (paraphrase) 'you can make a poll say anything you want' turn around and use an opinion poll as the basis for his argument...)

Per “universally held opinion” ..

Macro Economics is the school I would suppose you'd side with yourself unless you really are a closet Marxist. Te consensus is the established theoretical wisdom. The widespread theoretical wisdom in Macro-Eco is that the cap gains rate should always be low and today, lower than the income rate. It’s an idea that is supported by theory, and the majority of empirical work. The poll mirrors and points out that economists continue to grasp that existing wisdom.

Now you can put your head on your pillow, thumb in your mouth, and sleep soundly knowing that you don't need to take my word for it.

It looks like I do have to take your word for it, since you have provided no further support of your argument aside from "because I said so". Oh wait, you called a commie. Now you've convinced me.

[NickTheCage]

I suppose you could think that tho I clearly stated I assume you side with the school of macroecon

[eldondre]

Politburo again playing his favorite pastime (semantics) that does not cast doubt the way you would desire. It is clear to see the majorities opinion of the study. 36% agree > 13% disagreeing is pretty “overwhelming” of those that are certain of their opinion.

Per “universally held opinion” ..

Macro Economics is the school I would suppose you'd side with yourself unless you really are a closet Marxist. Te consensus is the established theoretical wisdom. The widespread theoretical wisdom in Macro-Eco is that the cap gains rate should always be low and today, lower than the income rate. It’s an idea that is supported by theory, and the majority of empirical work. The poll mirrors and points out that economists continue to grasp that existing wisdom.

Now you can put your head on your pillow, thumb in your mouth, and sleep soundly knowing that you don't need to take my word for it.

there is no school of macroeconomics and certainly no universally accepted opinion about how the economy works...and generally accepted ideas are failing across the world. in fact, it is only with questioning accepted wisdom will we move forward. I'm not a businessweek reader but this boils it down pretty well:

Since 1950 capital gains have generally been taxed at a lower rate than income, to spur investment...The rate under President George W. Bush went from 20 percent to 15—the lowest ever—and was billed as a way to stimulate the economy...Neither candidate, though, contests the Bush administration’s basic logic: that a lower capital gains rate encourages investment, which creates jobs and helps the economy grow.That doesn’t mean they’re right.Leonard Burman, who teaches economics at Syracuse University’s Maxwell School, presented a graph at the joint hearing that plotted capital gains tax rates against economic growth from 1950 to 2011. He found no statistically significant correlation between the two. This was true even if Burman built in lag times of five years.

Low Capital Gains Taxes May Not Help the Economy - Businessweek

interestingly

It hasn’t always been a foregone political conclusion that the capital gains rate should be lower than that for income. The 1986 tax reform ushered in by President Ronald Reagan pegged capital gains at the same rate as the highest personal income bracket, which was reduced from 50 to 28 percent.

[jizay]

there is no school of macroeconomics and certainly no universally accepted opinion about how the economy works...and generally accepted ideas are failing across the world. in fact, it is only with questioning accepted wisdom will we move forward. I'm not a businessweek reader but this boils it down pretty well:

Low Capital Gains Taxes May Not Help the Economy - Businessweek

Burman's analysis was very crude. Capital gains are a small part of GDP, so it's not surprising that with a crude analysis you don't see much of a correlation. But in fact, capital gains rates are related to venture capital investments, and the argument in the quote was just that; lower rates "spur investment." Here is an excellent rebuttal:

Super-Economy: Are Capital Gains Taxes Irrelevant?

[eldondre]

Burman's analysis was very crude. Capital gains are a small part of GDP, so it's not surprising that with a crude analysis you don't see much of a correlation. But in fact, capital gains rates are related to venture capital investments, and the argument in the quote was just that; lower rates "spur investment." Here is an excellent rebuttal:

Super-Economy: Are Capital Gains Taxes Irrelevant?

not exactly. the idea that capital gains lower relative to the marginal tax rate creates more jobs is still highly suspect. the rationale is that it creates more investment than otherwise which leades to more jobs, a dubious contention at best (unless you throw in creating jobs in other countries). the reality is, investment in labor saving technology is supposed to be in response to market driven rises in labor costs. in America we have tax policy encouraging capital investment and other policies raising the cost of employment artificially which, taken together, perverts the economy where it is too expensive to hire people who though people are willing and able to work. now for the article which is easily discredited given the chart mirrors growth in VC for reasons completely unrelated to the tax diferential between income and capital gains.
Venture capital - Wikipedia, the free encyclopedia

I'd also point out his method is also crude, looking at one small picture of the economy doesn't show that it's an overall benefit to the economy. looking at the chart it could also correlate with money supply growth. does the differential drive more investment into capital gains eligibile investment? if so, does that benefit the economy? I'm not claiming that lowering one tax relative to another doesn't encourage more of it (not taxing homes but taxing everything else, ceterus paribus, leads to overinvestment in housing) but that it's actually beneficial to the economy and produces the jobs we need.

[Politburo]

I'd also point out his method is also crude, looking at one small picture of the economy doesn't show that it's an overall benefit to the economy.

To the blogger's credit, they acknowledge it is a crude method.

[eldondre]

To the blogger's credit, they acknowledge it is a crude method.

in the end economics is still more philosophy than science. in the realm of politics there's plenty of stats to prove the point you're tyring to make. for me, I'm harping on the differential between tax rates which favors investment over production for no good reason. for democrats they want to show they can raise taxes without consequence and for Republicans that they can lower taxes for the rich and help the economy.

[jizay]

not exactly. the idea that capital gains lower relative to the marginal tax rate creates more jobs is still highly suspect. the rationale is that it creates more investment than otherwise which leades to more jobs, a dubious contention at best (unless you throw in creating jobs in other countries). the reality is, investment in labor saving technology is supposed to be in response to market driven rises in labor costs. in America we have tax policy encouraging capital investment and other policies raising the cost of employment artificially which, taken together, perverts the economy where it is too expensive to hire people who though people are willing and able to work. now for the article which is easily discredited given the chart mirrors growth in VC for reasons completely unrelated to the tax diferential between income and capital gains.
Venture capital - Wikipedia, the free encyclopedia

I'd also point out his method is also crude, looking at one small picture of the economy doesn't show that it's an overall benefit to the economy. looking at the chart it could also correlate with money supply growth. does the differential drive more investment into capital gains eligibile investment? if so, does that benefit the economy? I'm not claiming that lowering one tax relative to another doesn't encourage more of it (not taxing homes but taxing everything else, ceterus paribus, leads to overinvestment in housing) but that it's actually beneficial to the economy and produces the jobs we need.

Right. Made no claim to anything other than that lower capital gains tax encourages investment. I think that's a good thing in and of itself, but that's an opinion. It isn't the job of a venture capitalist to "create jobs" but simply to allocate capital where it is most needed. I think we agree that taxing an activity, all other things equal, reduces that activity. That's not a macroeconomic issue but a microeconomic one, and despite failures of economists to predict the economy, the conclusion about taxes is pretty safe.

[eldondre]

Right. Made no claim to anything other than that lower capital gains tax encourages investment. I think that's a good thing in and of itself, but that's an opinion. It isn't the job of a venture capitalist to "create jobs" but simply to allocate capital where it is most needed. I think we agree that taxing an activity, all other things equal, reduces that activity. That's not a macroeconomic issue but a microeconomic one, and despite failures of economists to predict the economy, the conclusion about taxes is pretty safe.

I'm not criticizing venture capitalists for responding to the environment which the government creates (assuming, of course, that cap gains tax is the actual explanation, which is debatable)but the point of the providing favored tax status should have a return for the american people and that return is most certainly needed in the form of jobs since many people lack them. there's nothing inherently good about encouraging investment over production.
we do both agree that taxing something, particularly relative to something else, creates less of it, which is why it makes little sense to have lower taxes on investment than production. you want the tax to be the same and if you aren't getting enough production, then lower the tax (or streamline regulation or whatever). provided production is profitable people will invest in it.