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Ordinary Income vs Capital Gains

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Re: Ordinary Income vs Capital Gains

#11

Post by _delirium »

yummyfajitas wrote: post #7
meric wrote: post #4

Earlier quoted context omitted.

>> they are taxed first at the corporate rate and then again when they are distributed as dividends. >> Really? Well that sucks. What logically should happen is if you receive dividends and the company already paid 30% tax on it, and your personal tax rate is 45%, you should pay only the extra 15% tax. (And it does happen over here in Australia). Otherwise what you get is that companies, in shareholder's interest, tr…

You'd ask, what is really the point of buying stock in a company that will never pay dividend in its lifetime? They can distribute profits via share buybacks. Instead of distributing 1% of the companies value as dividends, they can buy back 1% of shares. You then have the option of selling 1% of your shares back (equivalent to taking dividends) or keeping your shares (equivalent to reinvesting dividends). This only w…

That's in practice what happens, but it does make for a bit of strangeness from the perspective of fundamental valuations. At least in idealized theory, a stock is worth the time-discounted value of its future dividends plus any terminal liquidation payout (if the company eventually gets sold for cash). A share buyback increases the share of a company that a given stockholder owns, by getting rid of some of the other outstanding shares. That should make the share more valuable, because it's now entitled to a larger percentage of those future earnings... but raising the percentage of future earnings you're entitled to is only valuable if there are any! So either there have to eventually be some dividends or a cash sale, or else we have to abandon that view of valuation as having any tie to future earnings.

Re: Ordinary Income vs Capital Gains

#13

Post by yummyfajitas »

spenrose wrote: post #9

The thrust of this post is wrong; while I'm looking for a good breakdown of tax burden by quintile I'll just observe: "We live in NYC and according to our accountants, we pay a marginal fully loaded tax rate of 47.62%. That means we keep about half of the ordinary income the Gotham Gal and I generate." The second sentence glides over the key word in the first sentence, "marginal". AVC and GG pay much lower rates on t…

Yes, instead of paying taxes directly, the corporations owned by those 400 taxpayers paid taxes on profits (15-35%). Then their owners paid an additional 15-35% tax on those profits (averaging out to 17% for the top 400).

I agree - we should make it fairer. We should eliminate taxes on corporations and replace it with taxes on their owners. It's unfair that the owners of corporations are taxed at such high rates, but the taxes they pay are ignored by journalists and propagandists.

Re: Ordinary Income vs Capital Gains

#14

Post by roel_v »

spenrose wrote: post #9

The thrust of this post is wrong; while I'm looking for a good breakdown of tax burden by quintile I'll just observe: "We live in NYC and according to our accountants, we pay a marginal fully loaded tax rate of 47.62%. That means we keep about half of the ordinary income the Gotham Gal and I generate." The second sentence glides over the key word in the first sentence, "marginal". AVC and GG pay much lower rates on t…

I understood this sentence, and I think it's the most likely explanation, that the total tax pressure is 47.62%. That lower brackets are taxed lower doesn't matter. As one makes more, the total tax pressure will approach the tax rate of the highest bracket; in other words, if the lower brackets are a marginal amount of the total, the lower brackets don't matter very much are more.

I'm just waiting for someone to calculate his total gross income last year from that figure. Some journalist from the NYT living in the Netherlands did a long article on the Dutch tax system a while ago, expressing surprise at the total tax percentage he paid. He was quite surprised when I emailed him back with a calculation illustrating the errors in his article, and at the same time deriving his gross income (which was only just within the highest tax bracket, 52%, btw - so his complaint how he was 'paying more than half of his income in taxes! omg!' was totally wrong).

That said, I don't think this error was made in this article, and that the 47.62 is the net, effective tax burden.

Re: Ordinary Income vs Capital Gains

#15

Post by roel_v »

meric wrote: post #4
triviatise wrote: post #3

Earlier quoted context omitted.

not saying if this is right or wrong, but with dividends at least, they are taxed first at the corporate rate and then again when they are distributed as dividends. Increases in equity on average, but not in the short term, coincide with accumulation of shareholders equity via retained earnings.

>> they are taxed first at the corporate rate and then again when they are distributed as dividends. >> Really? Well that sucks. What logically should happen is if you receive dividends and the company already paid 30% tax on it, and your personal tax rate is 45%, you should pay only the extra 15% tax. (And it does happen over here in Australia). Otherwise what you get is that companies, in shareholder's interest, tr…

"What logically should happen is if you receive dividends and the company already paid 30% tax on it, and your personal tax rate is 45%, you should pay only the extra 15% tax. (And it does happen over here in Australia)."

I was skeptical of this claim but Wikipedia confirms - that's an interesting scheme. It basically eliminates taxation as a decision factor in incorporating a company or not. That's interesting, I never heard of such a construct before, although it's quite obvious.

In most of Western Europe, there are different rates for dividend and income tax. So if you own a company, the company first pays e.g. 20% 'profit tax' on it, and then you pay 25% on the dividends; in the end, roughly coming out to the same marginal highest tax bracket for the income tax.

Re: Ordinary Income vs Capital Gains

#16

Post by yummyfajitas »

_delirium wrote: post #11
yummyfajitas wrote: post #7

Earlier quoted context omitted.

You'd ask, what is really the point of buying stock in a company that will never pay dividend in its lifetime? They can distribute profits via share buybacks. Instead of distributing 1% of the companies value as dividends, they can buy back 1% of shares. You then have the option of selling 1% of your shares back (equivalent to taking dividends) or keeping your shares (equivalent to reinvesting dividends). This only w…

That's in practice what happens, but it does make for a bit of strangeness from the perspective of fundamental valuations. At least in idealized theory, a stock is worth the time-discounted value of its future dividends plus any terminal liquidation payout (if the company eventually gets sold for cash). A share buyback increases the share of a company that a given stockholder owns, by getting rid of some of the other…

Share buybacks and dividends are mathematically equivalent:

1% share buyback when you own 100 shares (price=$100) -> $100 cash in your hands + 99 shares valued at $100/share.

1% of corporate value distributed as dividends -> $100 cash in your hands + 100 sharesvalued at $99 (since 1% of corporate value was given away).

Re: Ordinary Income vs Capital Gains

#17

Post by yequalsx »

yummyfajitas wrote: post #13
spenrose wrote: post #9

The thrust of this post is wrong; while I'm looking for a good breakdown of tax burden by quintile I'll just observe: "We live in NYC and according to our accountants, we pay a marginal fully loaded tax rate of 47.62%. That means we keep about half of the ordinary income the Gotham Gal and I generate." The second sentence glides over the key word in the first sentence, "marginal". AVC and GG pay much lower rates on t…

Yes, instead of paying taxes directly, the corporations owned by those 400 taxpayers paid taxes on profits (15-35%). Then their owners paid an additional 15-35% tax on those profits (averaging out to 17% for the top 400). I agree - we should make it fairer. We should eliminate taxes on corporations and replace it with taxes on their owners. It's unfair that the owners of corporations are taxed at such high rates, but…

When dealing with corporate tax rates one should talk about effective tax rate. There are quite a few examples of corporations paying very little tax on their profits. Some even pay zero tax whilst making billions in profit.

I believe that the effective tax rate on U.S. corporations is roughly the industrialized nation average. Having no corporate tax would make the U.S. an outlier in terms of tax policy. This doesn't make it unsound but does make me hesitant to agree with you on this point. Are the tax policies of most nations unfair to corporations? I have a hard time believing this to be so.

Imagine a business with one owner. The owner employs 5 workers. Shouldn't the business pay tax on the profits? Suppose the business owner makes a profit of $100,000. Should this be tax free because he/she owns a business? If the business owner made $100,000 while working at 3M then the salary (profit) would be taxed.

I think the philosophy under girding the tax system is that, roughly speaking, any entity that gets money [edit] should pay tax on it. This seems fair to me.

There are notable exceptions of course. If I find $5 million dollars in gold while on a walk I pay tax on the whole amount. If I get the money because someone died I don't.

Re: Ordinary Income vs Capital Gains

#18

Post by gopi »

Most of the small business in US are pass thro entities so they pay ordinary income tax rates and also they reinvest the money back into business. They are inherently non-scalable business so the owners don't realize wealth by selling the business instead they get it thro the profits from operating the business... IMO, its not ethical that his tax rate is double than that of a tech entrepreneur or a wall street hedge fund guy.

My personal preference would be a lower overall rate (25%) with no deductions for both ordinary income and capital gain. For a brief time in US history (in the Reagan administration) this was the case and from what i read it never discouraged capital investment.

Re: Ordinary Income vs Capital Gains

#19

Post by yequalsx »

cynicalkane wrote: post #6
ulf wrote: post #2

The major problem with the much cheaper taxing of capital gains remains the growing inequality: Of every you dollar you earn through your own labor, you get less (until you pass the max threshold). And this while your capacity of personal labor is clearly somehow limited. On the other hand, people earning one million dollars from capital gains are taxed equally with people who earn one billion.

There are two counterpoints to this. The first is that capital gains taxes tend to be on investments made with income you've earned, so there's already been an income tax. The second is almost all of the uber-rich made their fortunes by growing a small company into a big one, so it's not as though they're already being taxed (through progressive corporate taxes). There are obvious flaws to this scheme, but it's prett…

I think the idea of double taxation is a bogus one. When I get money from an entity or process or by working there is no reason to consider whether or not the source of the money has paid some tax in some context. From the perspective of the person receiving the money the only thing that matters is that you got the money.

I pay income tax. With the money left over, after paying the tax, I buy things. I pay tax on the things I buy even though the money has been taxed, so to speak. Suppose I buy something from the place I work at. The money I'm spending to buy the object has been taxed multiple times and part of that money ends up back in my hands. You just can't realistically distinguish between the myriad ways that money has been previously taxed.

Re: Ordinary Income vs Capital Gains

#20

Post by yummyfajitas »

yequalsx wrote: post #17
yummyfajitas wrote: post #13

Earlier quoted context omitted.

Yes, instead of paying taxes directly, the corporations owned by those 400 taxpayers paid taxes on profits (15-35%). Then their owners paid an additional 15-35% tax on those profits (averaging out to 17% for the top 400). I agree - we should make it fairer. We should eliminate taxes on corporations and replace it with taxes on their owners. It's unfair that the owners of corporations are taxed at such high rates, but…

When dealing with corporate tax rates one should talk about effective tax rate. There are quite a few examples of corporations paying very little tax on their profits. Some even pay zero tax whilst making billions in profit. I believe that the effective tax rate on U.S. corporations is roughly the industrialized nation average. Having no corporate tax would make the U.S. an outlier in terms of tax policy. This doesn'…

Some even pay zero tax whilst making billions in profit.

Yes, typically because they lost billions in prior years. Sometimes also due to various tax subsidies (e.g., green energy tax credits in the case of GE).

Are the tax policies of most nations unfair to corporations?

I didn't say it was unfair to corporations. I don't believe that a claim like "unfair to corporations" even makes logical sense.

I said it was unfair to their owners. Consider your hypothetical business owner. Out of the $100k in profits, the business pays perhaps $20k. The business owner then pays another $15k. But then people trying to score political points complain that he is getting away with something, and paying only $15k on $80k (19%). I think that's unfair.

Under my proposal, the business pays $0k and the owner pays $35k. This way, he gets to take (moral/political) credit for the taxes he pays just like a salaried employee. (Similarly, I favor eliminating payroll taxes.)

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