Biden eyeing tax rate as high as 43.4% in next economic package

Personally, I'd prefer higher capital gains tax and lower corporate tax. I think it would be more transparent and easier to collect.

It's already been mentioned that some of the money has been taxed once already, when the corporation pays taxes on profits before they're paid out as dividends.

I imagine large investors will just break up their investments into so many shell companies/trusts that each entity will never carry more than 1M in investments. There's always a loophole.

you might want to think about what happens when companies run out of capital.

Does that mean if someone makes $1M of capital gains and has no other job, he'll get taxed at the high rate?

It's pretty simple in my mind: Retiring is hard enough, and at some point I won't be able to do any labor. Market investments are the current way that most people are able to retire, whether we like it or not.

Raising it for anything above 1M / year? No problem. They've got enough money to retire comfortably.

For everyone though? My god.

Granted probably much income that counts as 'capital gains' right now should be classified as regular income and taxed as such.

I also don't think it's about incentivizing investing relative to labor. The incentives are for investing relative to other things you could do with money, like spend it, save it, move it elsewhere, etc.

Note however that capital gains tend to be "bursty", so having $1M of capital gains in one year doesn't imply having $1M of income in a normal year. (To take a personal example: I had a very large amount of capital gains in 2020 because I sold my entire portfolio of ETFs and bought a house.)

The reason is caring about the seniors/elderly and a pro-home ownership policy.

As you age, your ability to earn a living from labor goes down, for a number of reasons (ageism, family obligations, less energy), but your costs go up (healthcare, family obligations).

Having investments and being able to sell off capital, taxed at a lower rate than income is an insurance policy against reduced earning potential in senior years.

Is that in and of itself enough to say the tax rate should be half? Maybe not. But the argument is solid. It just doesn't determine the exact percentages.

A laborer gets paid $1 for working hard.

An investor gets paid for $1 for doing something smarter.

Work smarter, not harder, as a civilization. Deliver the most value to the greatest number with the lowest labor input. That's how we get scale, grow an economy, and prosper.

This is on a graduated tax schedule, correct?

If so, then only the 1,000,001st dollar gets the higher tax (and every dollar thereafter).

Perhaps income should be income. It would definitely simplify the tax code. But money needs to circulate, that is how you have a booming economy. You asked how is a dollar earned from an investment with more than a dollar from labor. Well that dollar from labor might only exist because of the dollar from investment.

The rationale for this is that corporate profits are already taxed. The effective tax rate is about 25% for US corporations. For income from corporate profits to be taxed at the same rate as normal income, it should be taxed at a lesser rate once it's been distributed via dividends or buybacks (which is how the system is set up).

Changing the system would have several negative effects. It would encourage companies to take on leverage. Interest expenses are deductible for the purposes of corporate taxes. While interest earnings are and have always been taxed as ordinary income. So companies would likely shift their balance sheets to compensate. It would also make short term speculative trading more attractive for US citizens (and lord knows we have enough of that). And lead to greater foreign ownership of US equities, which is not necessarily desirable.

There are certainly fairly indefensible aspects of the US tax code. This just isn't one of them.

There's also an interesting argument that it's less distortionary to tax wage income than investment income. Because wages (and especially the variation thereof) are substantially driven by unearned human capital endowments.

That's exactly right, but you're only looking at it from the point of view of someone clicking "buy" on their phone. Instead, look at it through the eyes of someone who has twenty years of working the daily grind saved up and is thinking about building something new out of nothing. Maybe it's worth the risk of losing that savings. If you tax that even more, then the balance tips even more into riskier territory and makes it less likely that you take on that new business venture.

You're saying that the market corrects for that, and it does... by disincentiving the investment by making the potential payoff less.

in similarity, we are see that capital gains tax today still exist above historical past, the graph you link again cherry-pick. longer-term view is showing of a different picture: https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com...

under here we are see a recover to normal over time not the "cuts for rich" things you are saying.

https://checkyourfact.com/2019/01/09/fact-check-90-percent-t...

> The top 1 percent of income earners paid an average effective income tax rate of 16.9 percent in the 1950s, according to data compiled by the Tax Foundation from a 2017 paper by economics professors. That figure includes all federal, state and local income taxes.

> Congressional Research Service calculations of data from the Internal Revenue Service similarly found in a 2012 report that the very top income earners – the top 0.1 percent and 0.01 percent – also paid effective tax rates lower than the 91 percent top marginal tax rate in the 1950s. The average rate for the top 0.1 percent fell from the low 40 percent range to the high 30 percent range during the 1950s. For the top 0.01 percent, it fell from the 50 percent range to the mid-40 percent range.

https://www.investopedia.com/financial-edge/0110/10-things-t...

Raise taxes if you need money. I guess the government does?

But doing it to solve inequality and bring down equity valuations? That seems like irresponsible tinkering with the economic chemistry set, and not the right way to set govt policy.

Depends how the money is used. If we spend it on social programs, reducing taxes on lower-income earners, infrastructure, then it will.

But if it just gets spent on more weapons? I don't know that that does anyone any good.

Do you want actual, proper change that will benefit society? Ban interest and all the shenanigans that come out of it (shorting, puts and calls, etc.). I guarantee things will dramatically improve - it's been done before.

As a stockholder, I can always make my own dividend by selling shares; but I can't make my own stock buyback, because I only get a portion of the dividend.

Also, there’s nothing nefarious about buybacks. It’s just a more tax efficient way to return money to shareholders. There’s no boogie man there.

Is that a bad thing?

There seems to be some myth going around that high income folks can just pay a CPA to absolve themselves of tax obligations. That's really not how this works.

Think of this as a patch which fixes a bug that said financial professional would exploit.

What it does do is alter the effective tax rate, and even a partial effect is desirable.

Most of the things I'm aware of, and have been advised of, are things like QSBS (Qualified Small Business Stock) which I've been able to claim once. In that case it was a 5 figure gain. So the tax benefit was not particularly amazing. Yeah, others have been able to benefit much more from this. But it's a pretty narrow situation where you can.

I've recently early exercised some ISOs, so if this proposed tax change didn't pass, I'd have the long term cap gains rate.

I think there are some interesting things you can do with charitable trusts, but I think you're mostly deferring taxes, and I haven't had a situation where it made sense.

But all in all, in the years that I've paid, what I think, are a pretty competent set of financial professionals, I've yet to come across any magical way to avoid paying any taxes. I've actually paid a large amount of taxes and have to ensure my investments and finances are planned so I can pay the tax bill when it comes due.

I think most stories we hear about the wealthy not paying any taxes are either tax fraud, or substantial capital losses that offset all gains.

In the capital loss situation, that's probably a temporary thing for that person, otherwise they won't be wealthy for long.