Every. Single. Time.
The worse tax situation is always the person who makes 500k in a good year, or sells a house they held for 25 years which went up a bunch in value.
I suspect this is a significant factor in social mobility. Our tax system is punitive to people who try to leave the working class.
The solution is not to give up, the solution is to actually tax the rich more. Also, your examples are awful: paying taxes on the sale of your house is extremely rare, and the reason your hypothetical person who makes $500k in a good year pays such a high tax burden is because we tax income more heavily than capital gains, i.e. the exact opposite of a "tax targeting the ultra rich".
Raising the top rate on income when most of the ultra-rich's money comes from investment isn't making sense. There is also little interest in creating ultra-high tax brackets. I agree in principle with someone earning $5 million/year paying a higher percentage than someone earning $1 million/year. Many countries the top rate starts at $120,000ish in local currency.
Taxes on the sale of a primary home is not as rare as you think. It may be a twice in a lifetime event for many people but if it costs you a fortune each time people are discouraged from buying starter homes and then upgrading as their family grows. Make this too expensive and people even choose to have fewer children rather than get a bigger house. People may also choose to avoid the real estate market early to wait for a realistic home and risk getting priced out entirely. Admittedly, capital gains taxes are less punitive than land transfer taxes in this regard but it's still a factor. A capped to $500K of capital gains on a primary residence of tax avoidance is useful for middle and upper middle class Americans. It's not a measure designed predominantly for the rich unless your definition of rich is so broad that it includes any property owner. We've seen what happens when you create markets where people can't move and it looks a lot like San Francisco. That's not something I'd want policies to try and replicate.
Maybe a requirement to save money in advance based on market price, like payroll deductions? Then once you actually sell, you might even get a bit of a refund, encouraging turnover. But that would affect people with cash-flow problems the most.
And the biggest problem is that many people don’t want to sell and will resent any attempt to encourage it. Because encouraging turnover is equivalent to penalizing people who stay.
There is no “natural” way to do this, anything can be considered a market distortion depending on your point of view.
For large residential buildings in California, I’ve heard that apartment owners will essentially swap buildings for some kind of tax advantage. (I forgot what it was, though.)
The land tax advocates would say that people who own valuable real estate should sell, they are hoarding valuable property.
My scheme (which I’m not too serious about) would not force bankruptcy in the stock options scenario because you could give up some stock options to get your money back. Or possibly get a very low interest loan since it would be fully collateralized by the forced savings.
You might be thinking of the federal-level 1031 exchange [1]. California’s particularly distortive Prop. 13-based market has led to a separate Prop. 60 tax base exchange mechanism that might also fit what you saw [2].
[1] https://www.investopedia.com/financial-edge/0110/10-things-t...
[2] https://www.bosinvest.com/blog/tax-planning/dreaming-of-down...
In NYS, you would lose 2% for selling a home in transfer tax (of the value not the gain); and then if you are financing another home 1.25% of the mortgage value. So right there you've lit 3% of the two transactions on fire. That doesn't even count the non-government fees like commissions, attorneys (for you and the bank), title insurance, etc. that eat quickly eat up many thousands of dollars.
Zero support among whom, the wolves or the sheep? Taxing the rich more is generally popular[0] and this would accomplish that; it would seem like that's support.
> Taxes on the sale of a primary home is not as rare as you think.
I would need to see a source on this; I can't imagine a scenario in which any middle-class person pays any tax on their home at all, unless they live in an extreme-outlier of a neighborhood or find gold in their backyard.
0: https://money.com/wealth-tax-rich-tax-rates-2020-presidentia... for example
This is a circular argument. Taxing the rich is popular, but the argument is that it would hurt everyone else. Hurting everyone else is not popular.
Could you elaborate on why they wouldn't pay tax on their home?
> The act permanently exempted from taxation the capital gains on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles. This exemption applies to residences the taxpayer(s) lived in for at least two years over the last five. Taxpayers can only claim the exemption once every two years.
As I interpret the text, the middle-class homeowner will have to live in a home for two out of five years before they can claim an exemption. This matches the experience of my father, who sold his home after about four years and had to pay federal tax on the profit.
Is there something I'm missing or interpreting incorrectly?
You need to live there two years, not five[0].
> You showed that there are ways for middle-class homeowners to pay the tax...
I said... "on their home". If you move out of it and rent it out, it's not your home anymore, it's an investment property, which is taxed differently, as it should be. Regular people (not real estate investors or landlords, people who just own one home at a time) almost never pay taxes on a home purchase[1].
0: https://www.irs.gov/businesses/small-businesses-self-employe...
1: https://www.letmegooglethat.com/?q=do+i+need+to+pay+taxes+on...
Thank you. That wasn't clear to me. I interpreted it as you needed to have it for five years and live in it two out of those five. Makes me wonder why my father had to pay tax when he sold his house. But then this is just by memory, he doesn't have his 1040 anymore.
Wealth taxes are extremely well-supported, despite the media as an industry [and politicians] being owned by people strongly motivated to campaign against it all costs, e.g.:
https://www.reuters.com/article/us-usa-election-inequality-p...
Second, please re-read my comment above as to why you might have understood that.
There are two studies cited. One on the repeals is by "Institut de l'Entreprise" which seems to be a wealthy people's think tank [1] and the other is about why the wealth tax wasn't introduced in the UK [2]. I'm not convinced by the evidence here.
[1] https://fr.wikipedia.org/wiki/Institut_de_l%27Entreprise
[2] http://eprints.lse.ac.uk/42582/1/Why_was_a_wealth_tax_for_th...
In an ideal world, I would tax money only when it is static.
This is a clever way to reduce purchasing power without making it seem as bad, ie. nobody really considers the tax on a new car purchase until they're signing the final paperwork... or even on a new T-Shirt. Depending where yo live, this sales tax is non-trivial too, sometimes up to 10%+.
One of Amazon and other online only retailers’ biggest advantages until 2018 was that it did not have to charge sales tax to people in states without a physical Amazon presence. That meant you saved 7% or more buying from Amazon instead of locally. Basically everyone I know used to buy online to skirt sales tax.
https://en.wikipedia.org/wiki/South_Dakota_v._Wayfair,_Inc.
It was a very big deal and politicians had been complaining about waning sales tax revenues.
The only reason we are told to see the illiquid wealth of billionaires as a problem is the lie that Congress can spend that money better.
They cannot.
What's the problem here? Income tax rates are moderately progressive. They'll pay a higher marginal tax rate and a moderately higher total tax rate in this year. That seems fine to me.
> or sells a house they held for 25 years which went up a bunch in value
This is what I have a problem with. This house has already had plenty of favourable tax treatment, which could include:
- Tax-deductible mortgage interest
- Gains on that property deferred for up to 25 years. To give you a comparison, zero coupon bonds don't get this favourable tax treatment;
- Possibly capped or even frozen property tax increases;
- Long-term capital gains are generally significantly lower than income taxes
Just how much tax subsidies does real estate need?
> I suspect this is a significant factor in social mobility.
Let me give you an example where this is definitely true. In Australia, pretty much every state charges stamp duty on the sale when you purchase property. It's typically in the 2-5% range. There are various exemptions and allowances for first home owners and the like (this varies from state to state).
This was all meant to go away 25 years ago when the Federal government replaced a bunch of taxes with a consumption tax (ie the GST) but it didn't happen, largely because the states were addicted to the income, which became hugely significant as property prices skyrocketed in the early 2000s.
The median price of a house in Sydney is now over A$1m. How do we expect anyone to have any kind of mobility when simply moving may result in a $50-100k+ tax?
Now the US has some of this. For example, to buy my one bedroom apartment in NYC I had to pay a "mansion tax" (that's literally what it's called) but at least it was only 1%.
My point is it could be much, much worse.
Well yeah, before that point it hasn’t been sold, so paying taxes on unrealized gains on what the house “should” be worth is bullshit.
This is fucking spot on.
[1] https://www.forbes.com/sites/paulroderickgregory/2012/01/25/...)
Up to a certain level you are taxed on what you EARN. Income tax is relatively progressive.
Beyond a certain point you cease to be taxed on what you earn. Instead you are taxed on what you SPEND. By this I mean, you have unrealized or non-repatriated money and you only realize those gains and pay taxes on what you need to cover your expenditure.
So if you gain $100m in a year but only spend $10m then you're only taxed on $10m and the other $90m probably grows tax free until you really need it. This might mean then that you're effectively paying a 4% total tax rate (40% of 10% of your income).
But it gets worse. Because of zero interest rates, there's no point in paying tax on that 10% either. Instead you borrow $10m at 1.5% interest secured by your unrealized gains. If your unrealized gains grow at more than your interest rate you're coming out ahead. The worst case is you're deferring your taxes for years. The best case is you're effectively deferring them forever, or at least until interest rates increase to the point where realizing the gains is cheaper than borrowing.
It’s a huge tax advantage for homeowners. One could argue that it is in itself unfair as it advantages people who already have large assets over those who do not.
In a lot of markets this absolutely hits the "moderately wealthy trying to leave the working class". Bay Area houses that went for $1.2M in 2009 now go for about $3M, for a gain of $1.8M. That's well over the $500K exclusion, even including capital improvements.
Few folks will shed a tear for people who own a $3M house simply by virtue of living in a hot area, but that's exactly who the OP is talking about.
Just because middle class people benefit from the subsidy of low interest rates that create asset bubbles does not mean that the people who raised families in a neighbourhood or a city are somehow undeserving of the rewards on their equity.
The idea that money not taken in taxes is an "expenditure," or an advantage, and this idea of accounting for the hypothetical opportunity cost of not taking some peoples money as a tax privilege is bizzare.
Yikes. Do you really think places like SOMA, SLU, DTLA, etc. got better because rich people brought their 'culture' there? I'd recommend you visit said places and see for yourself, most of the 'culture' is in adjacent (usually historically minority) neighborhoods.
These are the people that brought their culture. Their housing is probably also well appreciated.
The idea of taxing this "profit" for the home owner would be insane. The investment and re-investment in real-estate drives a big majority of the economy.
I'm for modifying 1031 for investors who rent their properties. \
Investments of all kind receive generous tax breaks even when they're simple rent seeking.
So you get the triple whammy of unaffordable prices with unaffordable rents with downward pressure on wages - because the rent-seeking behaviour of share holders is privileged over the value of the work that underpins it.
It's not just a recipe for economic disaster for most of the population, it's also a recipe for political instability. In a democracy everyone should feel like the system is working in their interests.
When essentials become unaffordable and pricing becomes punitive and extortionate, people get angry and start to act in insane ways.
As far as I can tell, this comment is semantically identical to:
"Every time someone tries a new cancer therapy, it ends up not helping the worst cancers."
"The sting operation was a failure because it only caught low- and mid-level criminals."
"We shouldn't use automated tests because some bugs cannot be caught by it."
"Look, this bully is ten times stronger than my kid. He's gonna beat him up whether my kid wants him too or not. We should just accept that the kid is gonna get pummelled."
There are at least four flaws I can see:
1. The obvious "perfect is the enemy of the good" argument. Unless you have an alternative proposed tax that is flawless, then the comment does not get closer to a world where people pay a share of taxes commensurate with their point on the wealth continuum.
2. By framing it as "hurting" the moderately wealthy, it applies a narrative that taxes exist to punish, that the extremely wealthy deserve that morally, and that the moderately wealthy do not. Every piece of that narrative is wrong. Taxes exist to fund services, not enforce moral orders. It's not like we have a higher tax rate for convicted criminals. The moderately wealthy also have a capacity to afford taxes higher taxes without lowering their quality of life, so a tax law that hits them too has not "failed". Even if taxes were punishment, this comment presents no actual evidence that the moderately wealthy are morally purer than the ultra-wealthy.
3. Some fraction of today's moderately wealthy are tomorrow's obscenely wealthy, so applying some tax pressure on them today is a step towards preventing them from escaping that tax burden tomorrow.
4. Equating people who make 500k in a year with "the working class" is... I don't even know what to say about it.
5. Forcing the ultra-rich to do extra work to dodge this new law is a net good. Defeatism, which seems to be the counter-proposal here, makes it even easier for them to retain and acquire wealth. We should keep passing laws. Every time they find a loophole, close it. Vote out politicians that get bought. Make them keep jumping. Wear the fuckers out because eventually some will lose if you keep trying. If you let them win... well you let them win.
https://www.npr.org/sections/money/2019/02/26/698057356/if-a...
>In 1990, twelve countries in Europe had a wealth tax. Today, there are only three
>France's wealth tax contributed to the exodus of an estimated 42,000 millionaires between 2000 and 2012, among other problems. Only last year, French president Emmanuel Macron killed it.
The "Today,..." claim is is simply false (both when the article was written, and now).
Wikipedia lists examples including six countries in Europe. Belgium is listed, which created a wealth tax in 2018 - why is that missing from this article of 2019?
Tax regimes in Europe change frequently according to the political situation, so this presents little evidence as to whether any individual tax "worked" anyway. But, this claim is just badly researched (generously speaking).
> UC Berkeley economist Gabriel Zucman, whose research helped put wealth inequality back on the American policy agenda, played a part in designing Warren's wealth tax. He says it was designed explicitly with European failures in mind.
> He argues the Warren plan is "very different than any wealth tax that has existed anywhere in the world." Unlike in the European Union, it's impossible to freely move to another country or state to escape national taxes. Existing U.S. law also taxes citizens wherever they are, so even if they do sail to a tax haven in the Caribbean, they're still on the hook. On top of that, Warren's plan includes an "exit tax," which would confiscate 40 percent of all a person's wealth over $50 million if they renounce their citizenship.
> Warren's tax is also only limited to the super rich, whereas in Europe the threshold was low enough to also hit the sort-of rich. This higher threshold helps it avoid problems like someone having a family business that makes them look rich on paper but, in fact, they're short on the cash needed to pay the tax.
> Also important, Zucman argues, the higher threshold means only a small group will be affected. And smaller groups have a harder time fighting for exemptions, which hurt European efforts. Some countries, for example, exempted artwork and antiques on the grounds they were hard to value. It's true, but it creates a huge loophole: Buy lots of art! Economists hate incentives like these because they distort markets. Warren's proposal calls for no exemptions.
Then they also go on an all out propaganda offensive to act like it'll hit even more than that.
If we really claim to live in a progressive society, shouldn't renters be getting the subsidy? I mean, sure, a small percentage of the population does have public housing. But that hardly compares to the amount of people saving $10k per year on taxes with the mortgage interest deduction on ~$1M homes in HCOL areas, and then another 15-20% on $250k ($37.5k-$50k) when they sell it.
This is more than the average household makes per year after taxes...
The long-term average for appreciation on housing is 2.75%. In the last 20 years, it's been well above that. But even still, the average home-owner with a $1M house is saving $20k+ in taxes per year.
I mean - I get it. The average person buying a million dollar home these days probably has a marginal tax rate of >40%, and houses are wicked expensive. It's nice to save some taxes. But is this really the group that should be getting the savings? And isn't it possible all this is just manipulating the housing market further?
I'm not sure about everyone else, but I'd rather my home be a place where I live than a meme-stock I speculate on.
https://www.nytimes.com/interactive/2019/08/01/upshot/are-yo...
At a minimum, there is one simple reason for this - the amount of infrastructure investment over the years (power, sewer, roads, etc), of which there is basically none in central Kansas, but loads of in the bay area.
And the weather.
I think the infrastructure is pretty important. Disregarding it entirely seems a bit much. Even a bad neighborhood in Philly has more value per square foot than farmland in Kansas.
You're proving GP's point. People from the Bay Area go to a desolate desert in the dead of summer because of the social aspects of Burning Man - the land is worthless because its a desert, owned by the Federal government, and they only stay a week out of the year. They bring the infrastructure with them, from stadium audio equipment to porta-poties to wireless equipment.
Californians will never vote away prop 13 so property taxes will never go up, even in this imaginary increased tax burden scenario. With incomes taxed higher, prices would not come down at all.
No one would want to sell their houses, as they could never afford a new one after taxes. Prices would continue to be propped up by real estate investment wealth that is largely unaffected by this increased tax burden. No one could afford to buy a first home as their income is taxed to a degree that saving up for a 20% down payment would require being in the 1% of CA income or saving up frugally for >10 years.
Taking things requires force. Force only works against the powerless. That’s tautological.
And also tautologically, if you’re benefitting from the use of force, it’s because you are powerful, and you are exploiting the powerless. I don’t care how poor or oppressed you think you are.
As someone from a poor family, never received inheritance of any kind, and now (40 years old) makes +/- $1M per year, I climbed through every 'tax bracket'. The income tax system is absolutely designed to make it very hard to move through working class into middle class, and then from middle class to upper middle class.
Once you have escape velocity, you've got room to move with debt facilities and other options. Everyone wants to give you free, high quality banking services. It gets easier. But moving from, say $70K to $500K is very very hard specifically because of taxes.
For a very long time, the cumulative sum of taxes I'd paid were more than the money I actually had in my account, to invest and pay for things.
Ted Cruz was right, taxes should fit on a postcard for everyone.
And no, unrealized investments shouldn't be taxed and no one except do-nothing journalists are surprised to learn that they aren't - this ProPublica article is really the definition of fake news.
Actually let me just say what it is: propaganda leaked in order to build support for the president's tax increases, which are a very bad idea.
So 500K after tax - 90K private school for two kids - 50K mortgage payment - 30K - 10K - 10K - 20K = 290K in totally disposable post-tax income. Still not even remotely close to middle class.
Governments around the tax the middle class, because that's where the money is. Our current spending campaign will result in substantial tax increases for the middle class; the only real questions are when, and how much (less if it's sooner, more if it's later).
Except that its not. Did you actually read the article?
Get back to me when there is a good faith effort to raise the capital gains tax and/or institute a wealth tax instead of pretending that that "ultra rich" people derive their wealth from employment income.
But I'm starting to think they need their own PAC and they could afford that.
https://www.investopedia.com/ask/answers/06/capitalgainhomes...
Could you please share some of the situations you're thinking about here? I'm not familiar.
An example: in SF/LA (California), a decent civil litigator will cost about $400+/hr. And a lawsuit will run for 1-3 years. When you add all the legal costs up, it turns out that just to defend yourself, you’ll need to spend about $100-$200k. So, unless you have quite a bit of money, you’ll have to either default or settle in maybe not very favorable terms. Either way, you might end up bankrupt, in debt for a long time, or just with no savings at all.
The same thing plays out on the state level. Eastern Washington loves to complain about taxes, and I would love nothing more than to let it have its wish... As long as Western Washington can stop subsidizing it.
So frankly, I think it’s fair for some Midwest farmer with land left barely fertile due to mono cropping to pay the full shot of capital gains on his farm, after all, the farm would be worthless without federal price supports, irrigation, levee systems, and direct payments for the corn. Likewise, the Floridian using the homestead laws to launder money in property should be paying the full shot on the Miami condo.
When demographics starts shifting the congress in a few years, I’m sure similar scorched earth policy will happen, which sucks, becuase it will utterly destroy whatever rural economy exists in these states.
How?
The point of being able to deduct state and local taxes from federal ones is to devolve power to as local a level of government as possible. You've already paid the local authorities some taxes, so now you owe the federal government less.
SALT limits do the opposite of that.
And when a state like New York or California decides to raises income taxes, it should not be understood that they are strengthening their participation in any power devolution scheme. It could work that way, but it doesn't. The Feds do not generally delegate their services like that.
Not sure what that has to do with SALT deductions. My understanding is they were on top of the standard deduction, not as an additional line on itemized deductions.
I wasn’t exactly living in the gutter, but would say I was “rich”.
Give everyone one big tax day on a house. The family that bought a ranch style house years ago is allowed 1 huge tax holiday. That married $500k deduction is a joke, and needs to be increased.
So, the widow living in the ranch style house should be exempt from taxes, say up to 3M, if she decides to move. With that money, she could move anywhere, and not worry about property taxes too? I know you guys don't like prop 13. (Only about 4-5 counties in CA that will accept a recriprovial property tax transfer. Keep that in mind if older, and looking to move.)
Let's face it, most Americans will only see one big pay day over an asset, and it's usually the family home.
My point is only allow the tax holiday 1 time, and it would be for individuals whom make less than $500k/yr. Don't allow the tax dodge to go on forever, and abused by every ultra rich guy forever.
Let Elisabeth Warren right the bill, and I would bet the lucky middle class 1 home asset person would not be affected by a wealth tax? Warren is wealthy. She is not ultrarich. She knows the difference.
There’s already an exemption for capital gains tax on the sale of primary homes. $500,000 for married couples, and you can remove the cost basis and cost of improvements from the equation.
In other words, almost nobody is taxed on the sale of their primary home.
A household that makes $500k on a good year is actually in the 1% statistically. They have left the working class long ago. They could work for about 7-10 years in their career and retire with an above-median salary (withdrawing following the 4% rule) in perpetuity. That is by definition not the working class: that family barely has to work in order to secure a lifetime of comfortable living if they don’t inflate their lifestyle.
In my view, your comment acts as an implication of support for regressive tax policy that hurts the actual working class. No, moderately wealthy people do not need help. No, we are not temporarily embarrassed millionaires held back from generational wealthy only by government tax policy – that’s a farce sold to us by the very billionaires that want to avoid being taxed. They want us to think that taxes hurt us more than they hurt them, which is mathematically not true.
They want us to think that “if only our taxes were cut, we could go back to affording a middle class lifestyle.” It’s not true.
The "in a good year" qualifier in both your comment and the parent comment means that your conclusion that this person has left the "working class" is untrue. It's not uncommon to get a windfall (stock option vesting cliff, inheritance, capital gains, etc.) that boosts income in a single year to many multiples of one's typical income. Such an occurrence does not boost the recipient out of the working class. Managed carefully, it can change their life (buy a house, turbo-charge retirement savings, etc.) but no one's buying a private island with a single year of $500k income.
Or much of a savings account or 401k, for that matter.
The option to stop working for more than a few weeks or months takes you squarely out of the working class.
Basically, what I’m trying to say is that the parent comment to ours is attempting to advocate for taxing just the billionaires and not to tax the moderately wealthy so much. I think that’s a flawed argument, because the moderately wealthy don’t need help, and are perhaps even more wealthy than they realize.
robinhood.com would beg to differ. Anyone can invest in the stock market and get capital gains.
There's no magic threshhold of $500k.
In the US in 2021 (aka, right now) the magic threshold for capital gains is $445,850-$501,600 depending on filing status. So you're technically correct that $500k isn't a magic threshold, but it's certainly in the middle of it.
But more importantly, you're going down a technical rabbithole. The point of this comment chain is "what happens to people experiencing a one-time windfall capital gains of $500,000". The response was "what about RH investors". My point was they weren't making 500k, so it was irrelevant that they made income taxed as a capital gain. And I stand by that.
Sorry, but capital gains taxes start at $15,000.
Long-term capital gains less than $40,400 (or higher, depending on filing status) have a 0% rate.
No, its not.
The transition point between the top (20%) and middle (15%; the bottom is zero) marginal rate of long-term capital gains rates are either exactly the top or bottom of that range for 3 of 4 tax filing statuses (you left off married filing separately, which is much lower than even the low end), but that’s not a “magic threshold” by any reasonable definition.
Its a threshold, but not one below which capital gains stops mattering, which was the significance falsesly ascribed to the “magic number".
If you had cited the bottom of the 15% bracket instead of the top as the magic number below which cap gains don’t matter, well, “magic” would still be overdramatic but you would at leaast have something of a point. But that’s close to an order of magnitude lower.
It's helpful in this little side discussion because policies that might affect people with (as GP says) any ability to make six figures in a year are pretty different than those that affect people without. The "works for a living" distinction isn't super relevant.
This is a meaningless distinction because there was a time where mechanics and factory workers also made 6 figure salaries. The divide should always be between someone who makes most of their money from labor rather than capital. Actors and basketball players are not people that I think should necessarily be more impacted by a wealth tax.
I don't disagree that there are also huge differences between people making income from wages vs. capital, but that's beside the point.
Your comment about actors and basketball players confuses me a little. I think those are textbook high wage earners, not people who primarily live on capital (at least until they retire anyway). And presumably yeah, once you cross $100m (which I would guess not that many actors/athletes really do), it seems reasonable for a wealth tax to kick in. Isn't wealth wealth? Why should we make carve outs for specific professions?
Estate taxes don't kick in for estates worth less than $11.58 million and most states make immediate family exempt from all inheritance taxes.