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Comment by atlgator | Hacker News Reader

The wealthy are very supportive of higher tax on EARNED WAGES. Why? Because they don't make money through earned income. They make it through capital gains, which is taxed much less than wage tax. Wage tax increases at best affect the working rich like doctors, lawyers, Oracle employees making all cash, etc. Just look at the reactions to Biden's proposal to raise capital gains taxes to 40%+ above a certain threshold. The wealthy are up in arms, which is why it won't happen. Wage tax is a great system for the wealthy, because they look humanitarian in their support of higher taxes to fund welfare programs while not actually being affected by such increases. And the general public largely knows no different because they lack basic personal finance knowledge.

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I'm "young" and relatively unexposed to capital gains; I have some index funds, etc -- but I'm not "loaded".

Capital gains taxes are purely based on profit; you can carry over $3k in losses each year, and that's a "common" tactic, to sell losing positions at EoY to reap the $3k benefit (which can carry over if >$3k).

Why don't we tax capital gains higher, perhaps average it over 5-10 years even, and continue to allow carryover of losses, etc... ? Surely there's middle-ground here that [most] everyone could support....

The reason against raising capital gains taxes is because the basis is not adjusted for inflation.

"If you bought an asset for $10,000 in 2000, for example, the BLS says you spent $15,700 in today's mini-dollars; if you sell it for $15,000 in 2021 you've actually suffered a loss, but will owe capital gains tax nonetheless" https://philip.greenspun.com/blog/2021/04/29/economic-wisdom...

That's a pretty low yield. That same investment in an index fund over that period is probably worth ~$40k and that's assuming you have no dividends.

Kind of a weird example to pick. Also, even if your investment lost against inflation, you still made money. Stuff that $10k into a mattress and you'll have $10k after 20 years.

and that 10k will be worth less in 20 years. How many loaves of break could you buy 20 years ago? how much land? how much gas? You can buy less of it today with $10k than back then. You'll be able to buy less again in 20 years.

Yes. I understand inflation.

I'm pointing out that a $5k return is still income. Compare:

Scenario 1: person stuffs $10k in mattress for 20 years. They have $10k at the start, $10k at the end. $0 taxes.

Scenario 2: Person invests $10k, makes $5k when they sell after twenty years. $10k start, $15k end. Pays capital gains on $5k.

Scenario 3: Person stuffs $10k in mattress, makes $5k in wages on twentieth year. $10k start, $15k end. Pays taxes on $5k.

Scenario 2 and 3 are similar, right? Both lose to inflation. The capital gains, however, have a max of 20% taxes.

The thing to remember about tax-loss harvesting is that it delays taxes. It lowers the cost basis on the new assets, which are eventually sold.

I did a big TLH in March of last year when the market tanked. Now I have a bunch of assets that just entered capital gains again, but I still have to pay taxes on 75+% gains.

But if you're a high wage earner, those losses could have offset taxes at a 35% marginal rate, whereas you will pay a lower rate on long-term capital gains. It's not just delaying, it's lessening the marginal rate. As a young person fortunate enough to be highly paid, it seems like a total scam on poorer (non-wealthy) people.

You can potentially arbitrage the tax rates, but you can only apply $3k a year of carried losses against income. I don’t think it’s as big as tax avoidance panacea as you’re making it out to be. Not to mention losses must be applied first to gains of the same type. Akso This “loophole” is used widely among middle and mildly upper class, not just rich.

For the real wealthy they have other games they can play, such as charitable organizations or “pledged asset loans” which they take out take tax free, and when they transfer the assets and “reset” the cost basis — they can sell the stock at zero profit and pay back the loan.

Capital gains taxes are paid on NET profit (profit minus losses) for a given year. Yes, if you have a net loss you can carry that forward to future tax years but you also aren't paying any taxes on a net loss. Biden's plan to add another bracket to capital gains tax is the right approach to actually tax the wealthy.

>They make it through capital gains, which is taxed much less than wage tax.

Capital is taxed considerably more than you believe. If you own shares in a corporation, on every dollar of profit that corp pays 21% tax. The investor pays 23% on what's distributed. So on every dollar of profit, the government takes 39.2%

This is set to go to 28% and 40% respectively, for a combined tax rate of 56.8%.

Oh and I didn't mention state taxes. Tack another 8-10% on the corporate side and up to 13% on the income side. So if you had the misfortune of starting a successful business domiciled in California, on every dollar of profit:

Fed: 28 cents (corp tax) State: 8 cents (corp tax) Fed: 43 cents (Biden admin proposed top capital gains rate) CA: 13 cents (Top CA income rate) Shareholder: 8 cents

That's a 92% effective tax rate.

None of what you're saying exclusively affects capital gains earners. Higher corporate taxes also affect employee wages. The market does not accept a lower earnings per share report just because corporate taxes increased. Therefore, companies compensate by cutting costs, often by reducing raises, promotions, and/or benefits. Wage earners also pay state income taxes, which are often more than capital gains taxes.

The pre-distribution tax is absolutely unique to capital vs wage. Even at the top end of the wage side; 43+13.3 is a net rate of 56.3.

At lower income brackets you could throw in payroll taxes, but marginal rates go down considerably at payroll tax phase out levels.

My statement stands. There is a pernicious lie that the investor class pays low tax rates because their capital gains rate is a particular value. It’s just _one_ of the taxes paid on profits.

Your math is wrong. If the company makes $1 in profit, they will pay 36 cents for federal and state taxes. Then they will distribute the remaining 64 cents as a dividend, assuming they don't just hold it. Then you'd pay 27.52 cents more for federal and 8.32 cents in personal taxes.

So that's a 72% effective rate. Which the company has the option of getting to 0% by just spending on new equipment, or hiring more people, or anything else they can write off to reduce profits to 0.

Which is kind of the point. They want to force corporations to spend all their money so it gets redistributed. The owner of the company still gets "richer" because they own all that stuff that was purchased or the IP produced by the extra workers.

You are right. My math in the post-distribution was wrong.

But the implications are still valid. There is a considerable tax on investment income.

And yes, corporations have figured out ways around paying the tax, but not in an efficient or socially useful way. Corporations are forced to reinvest beyond their competency instead of just distributing returns and allowing investors to re-allocate capital.

> If you own shares in a corporation, on every dollar of profit that corp pays 21% tax.

No, it doesn’t, which is why many corporations with large profits still pay ~$0 corporate tax. On every $ of retained profits not negated by some special tax deduction, they pay 21% before considering special tax credits, sure. But the 21% is, as a result, an upper limit on the tax on retained profits, the lower limit is zero, and the biggest corporations tend to also have the most effective tax optimization (and also lobbying, so that the rules favor them from the outset) and so end up toward the lower limit.

> The investor pays 23% on what's distributed.

Nope, they pay the same rate as long term cap gains, 20% max (not flat, can also be as little as 0% depending on thr taxpayers income.)

> Fed: 28 cents (corp tax) State: 8 cents (corp tax) Fed: 43 cents (Biden admin proposed top capital gains rate) CA: 13 cents (Top CA income rate) Shareholder: 8 cents

Earlier, you correctly combined taxes where one applies only to the residual, despite the other misleading elements, but here tou seem to have forgotten how to do that and are, in addition to the mistakes made earlier, treating personal maximum tax rates applicable to distributions as applying not to the distributed amount but the amount before corporate taxes. This further overstates the total tax take.

You are missing the 3.8% net investment income tax on capital gains.

I acknowledge the math error in a sibling post.

This is a good point. Wealthy are just like the rest of us; they support giving other people a bath.

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