[barmar]

ArtK78, on 2015-January-26, 13:02, said:

Actually, no. At least, not entirely.

One of the public policy reasons for taxing capital gains at a lower rate than other income is that capital gains represent many years worth of gain on the value of capital, thus bunching the income in one year - the year of sale. To compensate for the bunching of the income, it is taxed at a lower rate.

How is that "compensation"? First you let it grow tax-free for many years, then when it's sold you tax it at a lower rate. It seems to me that the lower rate compounds the benefit, rather than offsetting it.

I guess you're saying that after many years of growth the gain is likely to be huge, so you'd be hit with a huge tax bill if it were taxed at the normal rate, and we don't want to make selling too painful (an efficient market requires willing sellers as well as buyers). But paying taxes on gains isn't really that painful, since it comes out of the proceeds from the sale (unless you needed most of the proceeds for something else).

[kenberg]

Bunching:

If the problem is that it moves the person into a higher tax bracket for one year, that could be solve. He sells a stock that he has held for twenty years. You let him spread the profit over the twenty years of taxable income. Thus, if he sells for a profit of $400,000 you see what the marginal tax would be on $20,000 for each of the previous twenty years and he pays that tax.

But is bunching really the driving force behind deciding how to tax capital gains? I doubt it. We need revenue, which suggests taxing it, and we need people to invest money, and that suggests not taxing it too highly. And dominating it all is the politician's need to please the lobbyists. Maybe bunchiing gets mentioned, but mostly in terms of "How do we pitch this" , I would think.

[mike777]

Yes, and if we use a total global wealth tax we don't even need a sale or a gain and we can tax it at a lower rate say 2-10% every year, year after year, If they gift it we can tax it at 70- or 80% if they spend it there are all sorts of taxes that come into play. It may not increase revenue but it should reduce inequality if that is the goal.

OTOH if the priority is redistribution then that is another topic.

[Mbodell]

kenberg, on 2015-January-27, 08:53, said:

I can see I have to give the colleg plan more thought. I am not prepared to say yet where I come down on that.

Well the white house backed off the 529 plan. Mostly FUD about it IMO, but it wasn't a huge revenue saver and none of it had much of a chance to pass congress.

[Zelandakh]

Ken, courses giving certficates are not (primarily) about being better prepared; they are about being able to convince an employer you are worth hiring. The same can be said of university degrees in many cases too. When times are hard you sometimes need to separate yourself from the crowd. Taking the time to show your willingness and ability to learn is therefore very often time well spent, even if the specific skills you acquire are not directly used.

[helene_t]

barmar, on 2015-January-27, 10:37, said:

First you let it grow tax-free for many years, then when it's sold you tax it at a lower rate. It seems to me that the lower rate compounds the benefit, rather than offsetting it.

Yes.

Suppose the interest rate is 20% p.a. and the tax rate is 50%.

If they tax it every year, you keep 10% interest which acculmulates to 21% over two years.

If they tax it after two years, you accumulate 44% and get to keep 22%.

So long-term gains ought to be taxed at a higher rate to compensate for this.

[kenberg]

Zelandakh, on 2015-January-28, 03:41, said:

Ken, courses giving certficates are not (primarily) about being better prepared; they are about being able to convince an employer you are worth hiring. The same can be said of university degrees in many cases too. When times are hard you sometimes need to separate yourself from the crowd. Taking the time to show your willingness and ability to learn is therefore very often time well spent, even if the specific skills you acquire are not directly used.

I agree that the demonstration of "ability to complete something" is often the way employers regard a degree. This ability is important but I would like to see there be more ways of demonstrating it.

I hold to this belief even when it counts. I have two daughters, The oldest has a Pd.D., the youngest did not go to college. They both had my support in the choices that they made. They are both self-supporting with satisfying lives. People can be smart, hard working and capable without being academic.

I realize that the world has changed. My father finished eighth grade and went to work. That was 1913, a full century ago.More preparation is needed now. I get that part. But I want some thought to go into this preparation, particularly by the kids themselves. I know of some fairly severe "failure to launch" cases. The most severe cases are with young men rather than young women. Nothing is evere simple, one line explanations have to be faulty, but I suspect that at least some of htis is that no one ever said something on th e order of "Son, when you grow up you must be self-supporting, what are your thoughts on how you will do this?" And then listened to those thoughts. I was a math prof before retiring and I saw more than a few young people who, if you asked them why they were there, would mumble something that would demonstrate that they had not given the matter two minutes of thought. They were told they must go to high school, and when they finished high school their parents picked out a college for them and in some cases picked out a major for them.

Anyway, I think that when a kid turns 16 he is more than old enough to have serious thoughts about how he wants his life to go, and I would like to see society support his/her hopes across a wide range. Saying "Kid, go to community college for two years and get a degree in something, who cares what" doesn't cut it for me.

[kenberg]

Mbodell, on 2015-January-27, 21:26, said:

Well the white house backed off the 529 plan. Mostly FUD about it IMO, but it wasn't a huge revenue saver and none of it had much of a chance to pass congress.

The Washington Post came late today but yes, so I see. My Representative got his name in the paper:

Quote

Another lawmaker who raised objections to Obama’s proposal was Rep. Chris Van Hollen (D-Md.), ranking Democrat on the House Budget Committee. “This particular proposal undercut the message that they were focused on helping the middle class,” Van Hollen said in an interview.

Procrastination (mine) once again pays off. I was going to see if I could understand this well enough to have an opinion. Now I see I needn't bother.

[mycroft]

helene_t, on 2015-January-28, 05:13, said:

Yes.

Suppose the interest rate is 20% p.a. and the tax rate is 50%.

If they tax it every year, you keep 10% interest which acculmulates to 21% over two years.

If they tax it after two years, you accumulate 44% and get to keep 22%.

So long-term gains ought to be taxed at a higher rate to compensate for this.

I believe the reasoning is:

With a progressive taxation scheme, if I take out $X000 every year, I get taxed at rate Y%.
However, if I let it compound for a while, and take out $X0 000 (+, or maybe even not +) after 10 years, I get taxed on at least some of that money at rate Z > Y%. That's not really fair, so we'll tax everything that's designed to work this way at Q < Y% partly to alleviate some of that unfairness, and partly to encourage investment in the kinds of things that produce capital gains.

I don't say I agree with it. I certainly don't say that the legal games that allow raiding profits (to give one example from "recent" history), which are both short-term and actively destructive of capital investment, to be taxed at the same lower rate are fair.

But to really make money, you need money. To really make laws, you need money. To really take advantage of the way the laws are written, you need money. To believe that given that, that the law would not bend toward what we see now in general (with shocks pulling in the other direction when things blow up) seems naive. To determine what we need to do to resolve it seems nontrivial.

[Phil]

About 20 years ago I worked for a large estate. The deceased had a net worth of about $200 MM but had very little of a estate plan. He owed about $75MM in inheritance taxes.

Some observations.

His wife preceded his death by two years. Since all of their assets were held as community property he received a step-up in cost basis. A lot of these assets had been held for years (think industrial real estate) so this step-up virtually eliminated all cap gains.

His estate was valuated as of his date of death. For inheritance taxes there is a $4 MM exclusion (per couple) on value and taxes are assessed over and above the exclusion. In addition, estate taxes are unique in that it does not matter what state you live in. I believe the state and Feds keep 50% however some states have a higher rate and this reduces the amount the IRS receives.

After the inheritance is paid the heirs receive a new cost basis based on the value of the asset that gets assessed. But remember there is already a tax hit on inheritance. So this plea that rich heirs should be paying capital gains doesn't make sense to me because there's been a taxing event.

[blackshoe]

mike777, on 2015-January-25, 17:22, said:

I am going to assume you don't mind forcing the rich to pay taxes…

Why would you assume that?

[barmar]

blackshoe, on 2015-January-28, 14:59, said:

Why would you assume that?

If you agree that taxation in general is OK, there doesn't seem to be a reason to exempt the rich.

But if you believe we shouldn't force anyone to pay taxes, OK. Then it just becomes a matter of wondering how you expect the government to pay for all the services it provides.

[blackshoe]

I believe that taxation is what we have. I believe that if you're going to ask the government to do certain things, those things have to be funded somehow. Doesn't mean that I believe we should be asking the government to do all the things it currently does, or that taxation is the best way to fund those things.

[kenberg]

Thanks for the example Phil. My first thought goes like this:[I have to learn to type faster. Your reply was just above this as I started.]

We tax capital gains. We tax an estate at death. These are two separate events. We tax capital gains as soon as the investment is cashed in, whether or not the guy dies. We tax an estate at death, whether or not there are any capital gains. Two events, two tax situations, two payments.When I file my taxes, I do not get to say "I already had my tax event for this year". Maybe I could try that, but I am not optimistic. If my previous tax event lowered my profit, then this would lower my income tax. But that's a different issue and I would expect that the same holds in this case. If the estagte of 200 million has a tax obligation of 30 million from capitol gains, or anything, then of course the estate tax should consider the estate as 170 million. But I fail to see why anyone should be exempt from paying any capitol gains tax because he is paying an estate tax, or vice versa.

One can argue for or against a tax on capitol gains and for or against a tax on an estate as it is passed on to the heirs, but they seem to me to be entirely different things.

[blackshoe]

the tax code is too damn complicated.

[kenberg]

blackshoe, on 2015-January-28, 15:14, said:

the tax code is too damn complicated.

On this we agree. And my life, financial and otherwise, is really pretty straightforward. I have always prized simplicity and as I have aged that has become even more so.

[Phil]

Hi Ken. While death and a sale are two separate events consider this.

Mr X buys a property in 1980 for $100K. He dies in 2015 and it's worth $1.1 MM. Most of this increase is due to background inflation. Whatever.

Capital gains is taxed at 15%. So his tax bill is $150K.
Estate tax is 40%. His tax bill is $440K. Total is $590K

Whether or not you think this is a lot depends on your perspective. But also remember this property was also probably paid for with after-tax dollars.

*Note: some quick reading I did says that many laws that applied in 92 have changed. I won't go into detail.

[hrothgar]

Phil, on 2015-January-28, 16:46, said:

Hi Ken. While death and a sale are two separate events consider this.

Mr X buys a property in 1980 for $100K. He dies in 2015 and it's worth $1.1 MM. Most of this increase is due to background inflation. Whatever.

Capital gains is taxed at 15%. So his tax bill is $150K.
Estate tax is 40%. His tax bill is $440K. Total is $590K

Whether or not you think this is a lot depends on your perspective. But also remember this property was also probably paid for with after-tax dollars.

*Note: some quick reading I did says that many laws that applied in 92 have changed. I won't go into detail.

Of course, there is a five million dollar exclusion if this money is being left to a spouse...

In practice less that 1% of estates play any kind of federal estate tax.

[kenberg]

Phil, on 2015-January-28, 16:46, said:

Hi Ken. While death and a sale are two separate events consider this.

Mr X buys a property in 1980 for $100K. He dies in 2015 and it's worth $1.1 MM. Most of this increase is due to background inflation. Whatever.

Capital gains is taxed at 15%. So his tax bill is $150K.
Estate tax is 40%. His tax bill is $440K. Total is $590K

Whether or not you think this is a lot depends on your perspective. But also remember this property was also probably paid for with after-tax dollars.

*Note: some quick reading I did says that many laws that applied in 92 have changed. I won't go into detail.

Well, it's a lot, no doubt about that.I want to reserve the right to change my mind here, but try this:

If the capitol gains tax takes too large a chunk, argue for lowering it for everyone.
If the estate tax is too high, argue for lowering for everyone.


The part that I don't like is the idea that if the investments are to be cashed in then the amount of tax owed depends greatly on whether the invetments were cashed in and then he died or he died and then the investments were cashed in. Whatever the total tax bill should be on dying and cashing in, having it depend on the order in which these two things are done strikes me as wrong.

I am not trying to put tax lawyers out of business, There will always be a need for proper estate planning, but it bugs me that I have to correctly plan the sequence of dying and selling. Die first, sell later, ok got it. Yuk.


I realize that this is a gut reaction issue with me. It has little to do with economic theory. I would like to sell and die or die and sell, without it making much difference which order I do it in.


All theory anyway of course, I know nothing of such riches. We did get professional help for proper preparation of a trust. Not really all that complicated, we didn't need to go up to Philadelphia for legal advice, but of course we needed someone who understood this stuff.

[mike777]

Yes this is a big issue when it comes to taxes.

Keep in mind the big goal ( for those with money) here is try and pass on the money to someone or something else. Thus gift taxes and their loopholes in a broad sense of the word come into play.

OTOH the heirs are not starving as previous posters point out so where should the money go and how much to taxes or redistribution or to reduce wealth inequality? I mean however people rephrase it comes back to this question.