US Tax law - Capital Gains

The capital gains tax rate in the US is currently 15% (20% in 2013) for long term assets which is defined as assets held more than 1 year. The top income tax rate is 35% (39.6% in 2013). This discrepancy in tax rates is designed to encourage investment, which it does.

However, by the law of unintended consequences CEOs, hedge fund managers, etc have arranged for most of their "pay" to be in the form of assets covered by the capital gains tax. Thus all a CEO "paid" a million dollars in company stock must merely hold the stock for 1 year for a net of $850,000, instead of the $650,000 they would wind up with if paid in cash. This has the unintended consequence of incentivizing CEOs and other top members of public corporations to devise policies which lead to short term gains in stock prices to maximize their income, even at the expense of the long term future of their companies since they only have to hold the stock a single year. To increase the incentives for corporate officials of public companies to invest in the long term future of their companies.

1. Increase the time require to hold long term assets to get the capital gains tax rate to 3 years from the current 1 year for assets up to $100,000

2. Increase the time required to hold long term assets to get the capital gains tax rate to 6 years from the current 1 year for assets between $100,000 and $1,000,000

3. Increase the time required to hold long term assets to get the capital gains tax rate to 10 years from the current 1 for assets greater than $1 million

4. Any senior corporate officer who decides to sell assets early and pay 35% must publicly disclose the fact in an SEC filing. After all if the senior corporate officials don't have faith in the long term stability of the company, the stockholders should be made aware of that fact. Of course, they could issue a press release explaining it if they like "I sold my stock early to buy my grandmother a really expensive 100th birthday present and was afraid she wouldn't live to be 110."

Another idea. Simply redefine the tax code to say any compensation for services will be taxed at the higher rate. That definition of compensation to include things such as reimbursed travel expenses, parties thrown by the company for an individual, company provided transportation (such as rental cars, airplanes and taxies), or personal secretary. Also included would be stocks (of any kind), company paid insurance, company paid medical benifits and any dividends those stocks paid out.

In Australia our top tax rates are 45% plus a couple of levies ending up at about 47.5% for incomes above $180,000. When you consider that those at that level have access to good accountants and various ways of structuring their affairs it's not too onerous. We also have a Goods and Services tax of 10% on most items (excluding unprepared food).
Our capital gains tax for capital held for more than a year entails simply adding half of the net capital gain to your overall income for that year, so low income earners pay less anyway. If the US has such low tax rates for the wealthy it's no wonder that they have a huge deficit, and were hard hit by the GFC.

A link to some data from 2009. Haven't looked at it much recently so sorry for the age of the data. I tend to ignore the write up and use the data which matches the IRS.

http://taxfoundation.org/article/summar ... a-0#table1

Not the upper brackets that are really the problem, IMO. Make $50,000 dollars/year adjusted gross income in 2010 pay somewhere around 5-6% or something less similarly obscene.

If we tripled the government's tax income from the the top 1 percent it still leaves us with a debt of over a trillion in 2009. Which doesn't address the problem that if you change the tax law to get more money from them fastest growing job category will be accountants and tax lawyers.

I did a bunch of number crunching back then using triple the income from the top ~10%(I think) and guess what, US still had a debt issue.

Nope I don't really have an answer. Other than the actual federal revenues seem to increase the longer the system stays unchanged. Yep spent just a few hours trying to understand it then. Nope I still don't.

Hope it helps,
T2M

PS. Now if you wanted a "Fair" system local cost of living should be a multiple of the amount you are allowed to deduct on your Federal Return. I mean is a $1,000 in NY equal to a $1,000 dollars in Rural Alabama. I just passed through both this summer it ain't. Much less NYC to western New York state(nope didn't go to NYC, shudder.)

No I don't really want to make the tax system fairer/more complicated. Problem is every time someone wants to simplify the tax code people say yep we need to get that loophole closed but not this one this that affects me.

thinkstoomuch is correct. The problem is so big that increasing taxes on the rich isn't going to produce enough money to close the budget hole. The only way to fix the problem is to fix the economy There are a lot of ways to do this. they aren't all mutually exclusive and we need to do multiple things simultaneously. No single fix is going to get us out of this mess.

However, one fix that needs to be made is to encourage more long term thinking among corporate mavens instead of get rich quick schemes. Entrepreneurs and family owned businesses already have the incentive to think long term. However among public companies, paying the leadership in stock they are only required to hold for a single year incentivizes short term gain over long term corporate growth.

Exactly. We've had a problem in recent years with CEOs closing down parts of companies that only pay off in the long term, so they can sell off assets and make a profit in that year ensuring their bonus is as big as possible. An example is banks closing small country branches and discouraging small depositors (like children). Thus the whole of life feed into the future prosperity is curtailed, but by the time this bites the CEO is long gone with his pot of gold.

biochem wrote:thinkstoomuch is correct. The problem is so big that increasing taxes on the rich isn't going to produce enough money to close the budget hole. The only way to fix the problem is to fix the economy There are a lot of ways to do this. they aren't all mutually exclusive and we need to do multiple things simultaneously. No single fix is going to get us out of this mess.

However, one fix that needs to be made is to encourage more long term thinking among corporate mavens instead of get rich quick schemes. Entrepreneurs and family owned businesses already have the incentive to think long term. However among public companies, paying the leadership in stock they are only required to hold for a single year incentivizes short term gain over long term corporate growth.

Hi guys

I am not a tax expert!!

?? Does anyone favor a "flat tax" ??

R

kbus888 wrote:Hi guys

I am not a tax expert!!

?? Does anyone favor a "flat tax" ??

R

A flat tax sounds simple, but there must be some disadvantages to it. not an economist, but there must be more besides the disadvantages it heaps on the poorest compared to the richest.

A flat tax sounds simple, but there must be some disadvantages to it. not an economist, but there must be more besides the disadvantages it heaps on the poorest compared to the richest.

Most serious flat tax proposals I have seen have a floor. The actual numbers vary but are usually something like $20,000 per person and a 20% tax rate above that.

- a couple earning $25,000 would pay nothing
- a couple earning $50,000 would pay tax on $10,000
- a couple earning $1 million would pay tax on $960,000

That sort of scheme would make it fair to the poor, especially when most proposals also include few or no exemptions. Right now the highest earners have all sorts of exemptions, loopholes etc buried in the 1000s of pages of current tax laws that they can use to pay much less than the nominal rate. And currently the really rich: the corporate CEOs, the hedge fund managers, the trust fund babies etc have the vast majority of their income as investment income which is only taxed at 14%.

The biggest disadvantage (and the reason why it will never be passed) is political. Politicians love money and power and control of the tax code gives them both. The rich donate LOTs of money to campaigns to ensure that their favorite loopholes remain. Plus playing with the tax code gives politicians a way to control people for good or ill and they love that power. If you favor green energy - put in a tax credit for it etc etc.

Hi biochem

Amen !!

R

biochem wrote:

A flat tax sounds simple, but there must be some disadvantages to it. not an economist, but there must be more besides the disadvantages it heaps on the poorest compared to the richest.

Most serious flat tax proposals I have seen have a floor. The actual numbers vary but are usually something like $20,000 per person and a 20% tax rate above that.

- a couple earning $25,000 would pay nothing
- a couple earning $50,000 would pay tax on $10,000
- a couple earning $1 million would pay tax on $960,000

That sort of scheme would make it fair to the poor, especially when most proposals also include few or no exemptions. Right now the highest earners have all sorts of exemptions, loopholes etc buried in the 1000s of pages of current tax laws that they can use to pay much less than the nominal rate. And currently the really rich: the corporate CEOs, the hedge fund managers, the trust fund babies etc have the vast majority of their income as investment income which is only taxed at 14%.

The biggest disadvantage (and the reason why it will never be passed) is political. Politicians love money and power and control of the tax code gives them both. The rich donate LOTs of money to campaigns to ensure that their favorite loopholes remain. Plus playing with the tax code gives politicians a way to control people for good or ill and they love that power. If you favor green energy - put in a tax credit for it etc etc.