Ordinary Income vs Capital Gains • Hacker News Board

Re: Ordinary Income vs Capital Gains

#31

Post by _delirium » Mon, May 02, 2011, 5:14 PM UTC

cynicalkane wrote: post #10

_delirium wrote: post #8

Earlier quoted context omitted.

> 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. I don't really get this counterpoint; isn't everything in the economy a flow of money that has been taxed at a previous point in the flow? If I have $100,000 that I've already paid taxes on, I could invest it in external assets and hope to make capital gains on them; or I could plow…

I am not a tax lawyer, but my understanding is that capital gains only count as such if you've held the asset for at least a few years. By the way, in the first case, your outlays are tax-deductible. (edit: I'm not an expert, so downvoters, please explain your disagreement.)

The outlays being tax-deductible is the same in both cases: you only pay tax on the gains between what you put in and got out, not on the total revenue. If you spend $100k on art supplies and sell $110k in paintings, you pay taxes on the $10k net profit. Same as if you bought a bond for $100k and sold it for $110k; you only pay taxes on the $10k net gain.

But in the second case, you're taxed at a lower rate, so the tax code appears to want to discourage you from investing your capital in your own work. If you ever find yourself in a situation where you could make a 10% return on capital by putting that capital to work yourself, or could make the same 10% by putting that capital into a passive investment, the tax code promotes the 2nd option.

Re: Ordinary Income vs Capital Gains

#32

Post by maigret » Mon, May 02, 2011, 5:14 PM UTC

dpatru wrote: post #24

kleiba wrote: post #21

> And when you go to the pay window [...], you will be sharing a lot less with the government and keeping a lot more. Ever used a road? Or went to a public school? Do you have a local library? Your tax money doesn't go to the government, it goes to the state. And yes, the state has an expensive administration, but by and large the state is all of us.

Roads are paid for with gas taxes, something that is hard to avoid if you drive. Public schools and libraries are supported by property taxes, again, something all residents pay. Income taxes primarily go to the federal government to pay for military bases abroad, wars, and a lot of other functions that either aren't needed or could be better done by non-government entities.

Interesting. In Germany, the law states that taxes can't be bound to a certain goal. Taxes all go to a big budget basket, which is then allocated by the year budget. It means that the oil tax can finance school, military, or anything.

Re: Ordinary Income vs Capital Gains

#33

Post by truthtechnician » Mon, May 02, 2011, 5:16 PM UTC

Taxing income higher than capital gains encourages investment over consumption.

Re: Ordinary Income vs Capital Gains

#34

Post by orijing » Mon, May 02, 2011, 5:57 PM UTC

kleiba wrote: post #21

> And when you go to the pay window [...], you will be sharing a lot less with the government and keeping a lot more. Ever used a road? Or went to a public school? Do you have a local library? Your tax money doesn't go to the government, it goes to the state. And yes, the state has an expensive administration, but by and large the state is all of us.

Most of your taxes to the federal government actually get spent for Medicare, Medicaid, Social Security, Defense and Interest expense.

Unfortunately, just Medicare, Social Security and interest expense cost over 2.4 trillion dollars. And yes, that's more than the 2 trillion that the government makes... And we haven't even paid for the actual services and defense!

[1] http://www.nytimes.com/packages/html/newsgraphics/2011/0119-...

Re: Ordinary Income vs Capital Gains

#35

Post by URSpider94 » Mon, May 02, 2011, 6:33 PM UTC

yequalsx wrote: post #29

URSpider94 wrote: post #26

Earlier quoted context omitted.

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. You are missing the exact point. If this business were owned as a sole proprietorship, then the owner…

Suppose the owner pays herself $100,000 in salary and the business has, after this expense and all other expenses, $20,000 in the bank. The business then pays tax on this $20,000. Any entity that makes a profit pays tax on it (roughly speaking). This is consistent and fair. If the business (as an entity separate from the owner) decides to pay a dividend then whoever gets the dividend pays a tax on the money. Suppose…

Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business.

Your statement is not logical. A business can't just "decide" to pay a dividend to random individuals. A dividend, by definition, is a distribution of profits paid to the stockholders (owners) of the corporation. So, anyone who gets a dividend is, by definition, an owner of the business!

Re: Ordinary Income vs Capital Gains

#36

Post by yequalsx » Mon, May 02, 2011, 7:18 PM UTC

URSpider94 wrote: post #35

yequalsx wrote: post #29

Earlier quoted context omitted.

Suppose the owner pays herself $100,000 in salary and the business has, after this expense and all other expenses, $20,000 in the bank. The business then pays tax on this $20,000. Any entity that makes a profit pays tax on it (roughly speaking). This is consistent and fair. If the business (as an entity separate from the owner) decides to pay a dividend then whoever gets the dividend pays a tax on the money. Suppose…

Suppose the business decides to give me a dividend of $20,000 and I have nothing to do with the business. Your statement is not logical. A business can't just "decide" to pay a dividend to random individuals. A dividend, by definition, is a distribution of profits paid to the stockholders (owners) of the corporation. So, anyone who gets a dividend is, by definition, an owner of the business!

OK, I should have used a different word than dividend. I should have used "disbursement of funds from the profits made". The point still stands as do the other points I made.

Re: Ordinary Income vs Capital Gains

#37

Post by spenrose » Tue, May 03, 2011, 1:59 AM UTC

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…

One thing the richest people are VERY good at is paying themselves. If double taxation of capital were a problem, they could solve it by paying themselves salaries instead. They don't. I'm speaking of the executives here, of course. A bunch of those 400 richest got where they were by having 23 chromosomes donated by a CEO. The record of personal achievement by heirs is decidedly mixed.

Re: Ordinary Income vs Capital Gains

#38

Post by tzs » Tue, May 03, 2011, 7:31 AM UTC

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 one person receives income and pays tax on it, and then spends that income, so that it becomes income for someone else, it is not double taxation that the second person pays tax.

Corporations are legally distinct persons, separate from their owners, so the situation is essentially the same.

If the owners wish to avoid this, they can structure their business so that it is not a C corporation. Of course, then they give up many of the advantages of having the corporation be a separate person legally.