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Taxation of Carried Interest

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Re: Taxation of Carried Interest

#151

Post by Retric »

beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

Corporate taxes include foreign companies which would otherwise extract money tax free from the US economy. Removing them is a terrible idea that increases the net US tax burden.

Further, the tax rate is less important than the fact capital can appreciate for 40 years without paying any taxes what so ever. Remember the robber barons accumulated vast wealth just fine in a time with extremely high personal income taxes. Those appreciated assets then pass on without ever being taxed at death.

Re: Taxation of Carried Interest

#152

Post by maxerickson »

imgabe wrote: post #148
beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

I'd rather go in the opposite direction. Tax all ordinary income as corporations get taxed. Corporation only pay taxes on their profits, not on the expenses necessary to keep them alive, so why not give the same deal for people? Yes, it would make people's taxes more complicated, but also much lower. Software like Mint and Personal Capital already make it easy to track expenses. Although they might not be accessible…

Progressive tax schemes more or less do this.

Deductions take them in the other direction, giving people with higher bracket income a larger benefit than people in lower tax brackets. Of course they are still paying more tax, but deducting $30,000 of mortgage interest from the 39.6% bracket is quite a bigger tax benefit than deducting $5,000 of mortgage interest from the 20% bracket.

Re: Taxation of Carried Interest

#153

Post by wycs »

etaty wrote: post #124

Capital gain tax or income gain tax are designed to make the wealthy wealthier. Don't tax "gain", tax the "wealth". This will make it harder and harder to hoard wealth as you gain wealth. Every other "tax" can then be removed. So with the "wealth" taxt, every year you sum all your possessions and you give X% (20%?) to the government. This look simple enough to me, did any country try that?

20% wealth tax per year? Think about what you are saying. The state would own everything after 20 years.

Re: Taxation of Carried Interest

#154

Post by phkahler »

zimablue wrote: post #147
beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

Abolishing corporation tax has always seemed to me like something that makes sense only in a quite naive view of the world. The idea is always just to tax methods of getting income out of a corporation instead, (income, dividends) but there's a problem with this idea. There are infinite ways to get your money out of a corporation. If you start off with: power is power all forms of power can be transferred into money…

Most importantly. If you only tax money coming out of the company to individuals, any savings within the company can be invested tax-free.

Re: Taxation of Carried Interest

#155

Post by phkahler »

tim333 wrote: post #146
lotsofpulp wrote: post #140

Earlier quoted context omitted.

Isn't that how income tax works too? Why should cap gains be different?

Say you buy a house for $1m. You then want to move to an identical house in another location and houses now cost $2m. By moving, on a basic capital gains tax calculation you have a profit of $500k and a tax bill of say $200k. But you don't have $200k and can't move. This not a good situation hence various fixes. That particular problem does not come up with income although there are other problems there. Tax is messy…

So provide an exemption for primary residences. There is a similar concern with stock sales causing tax payment, but in that case it's an incentive for longer term investment. You goose quote is really awesome.

On a related note, I think we need to stop providing incentives for housing prices to go up. Municipalities could put caps on the percentage of value they'll enforce a lean on. This would reduce housing costs to the benefit of people at the bottom.

Re: Taxation of Carried Interest

#156

Post by logicallee »

beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

>Tax capital gains as ordinary income. It's simple and fair.

It might seem like money is money: if you have $20,000 more than a year ago, due to making capital gains on something you've just sold, you're $20,000 richer (less taxes) than if you hadn't invested. If you make an extra $20,000 in income through a salary raise (you get a raise to $80,000 from $60,000) you are also $20,000 richer (less taxes) than if you hadn't worked for, argued for, and gotten the promotion or change of jobs. And if as a side gig you sell $20,000 of software as a service as a 1-person engineer with a web app, you're also $20,000 richer (less taxes) than if you hadn't been on that market and promoted it in the right way.

And yet these three are totally different sources of wealth in every respect, and taxing them equivalently would have a totally different effect on people's behavior, as well as produce wildly different amounts of tax revenue. They are also subject to different ideas of "fairness".

The main difference is risk structure.

There's a counterparty to most salary income which guarantees it in a way.

By contrast, capital investments can go up and down, so if you want people to make capital investments it makes sense to have a lower tax rate to incentivize it.

There's a risk when you make income, but it is basically limited to the chance that your employer will go bankrupt and not pay for one month of that income. (Or similar risks if you charge someone yourself.) These risks are absolutely minimal and a whole different kind than the idea that capital investment will not appreciate (or even go to 0!)

You can feel this difference yourself quite easily: if you had $1.25M in cash how much of it would you make as a capital investment, and into what kinds of investments (how risky) if capital gains were charged at 90%? (You could keep only 10% of the gains.) I think most people would make only exceedingly unrisky investments, basically keeping it as cash. Investment would be heavily disincentivized.

On the other hand would you stay at home or work for a $1.25M/year salary if it were taxed at 90%?

Most people would still work! And there are historical examples of this (where the marginal tax rate at the highest end was 90% or more.)

So saying capital gains = income is very dangerous from the point of view of incentivizing investment (fundamental to capitalism) and also ignores the risk structure.

The only time it seems similar is in a "bubble mentality". In other words, if you think that all capital investments always appreciate. For example if you thought this way: of course it's not risky; of course it will go up; of course I would put my $1.25M net worth into bitcoin, after it goes to $20M then even if I had to let go of 90% of my gains it still makes a lot more sense than keeping it as cash. The fact is it's no different than $18.75M of income from any other source.

I hope I don't have to tell you how irrational and bubble-like this thinking would be.

I believe that in sane capital markets, capital gains and earnings from other sources are entirely different kinds of things. Investment behavior responds extremely different to these things.

Re: Taxation of Carried Interest

#157

Post by Dwolb »

beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

Just a note with this post's structure:

I'm surprised in this day and age of dealing with complex global economic systems that we'd upvote any post that starts with an absolute view "The correct solution..."

Re: Taxation of Carried Interest

#158

Post by phkahler »

xapata wrote: post #118
valuearb wrote: post #71

Earlier quoted context omitted.

Problem is that capital gains aren’t all gains, they include inflation. I’m all for a transition to ordinary income if you index the basis of investments to the inflation rate.

Or we could simply allow shareholders to pressure companies into giving dividends, as was the original intent for the value of a share. The bizarre focus on capital gains at the expense of dividends was created by the tax code. Switching it back would eliminate the perverse incentive for corporations to merge and acquire for no other reason than to avoid disbursing capital as dividends.

A hundred times this. If your plan is make money by selling at a higher price, you're playing the greater-fool game. If you make your return via dividends, it is a direct reflection of the value of the company.

Re: Taxation of Carried Interest

#159

Post by lotsofpulp »

tim333 wrote: post #146
lotsofpulp wrote: post #140

Earlier quoted context omitted.

Isn't that how income tax works too? Why should cap gains be different?

Say you buy a house for $1m. You then want to move to an identical house in another location and houses now cost $2m. By moving, on a basic capital gains tax calculation you have a profit of $500k and a tax bill of say $200k. But you don't have $200k and can't move. This not a good situation hence various fixes. That particular problem does not come up with income although there are other problems there. Tax is messy…

How is the $500k profit calculated?

Re: Taxation of Carried Interest

#160

Post by dick_sucker2 »

Dwolb wrote: post #157
beat wrote: post #54

The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate. Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral…

Just a note with this post's structure: I'm surprised in this day and age of dealing with complex global economic systems that we'd upvote any post that starts with an absolute view "The correct solution..."

Maybe it is the correct solution?
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