American Tax Refugees, taxes part two

[liberty]

That's kind of the point, oldr: the tax game is rigged in favor of people who already have enough wealth that they can generate their income through capital gains. Why is their income treated more favorably than those of us who work for a wage or a salary? Why should that be "just the way it is"? As Scooter points out, there may be certain kinds of investments we'd want to offer favorable treatment in order to advance specific policy goals, but giving an across-the-board break to the weathiest "investors" just because they make their money trading stocks and bonds is hardly rational.

The problem is that they make their money from investment in places like China; they can easily take their investment out of the country. As taxes go up, the more that will do it. So there is a limit to how much they can be taxed . We might be able to tax them at fifty or sixty percent and make up the difference by taxing Oprah Winfrey and Koby Bryant at ninety percent. What could they do about it? Even if they went out of business it would be no big loss, especially the NBA

[Big RR]

Well lib, the only way they could avoid taxes on the ex-US income is by leaving the country and renouncing their citizenship. At that point they lose any protection the US law provides, and are gambling their new country of residence will protect them similarly. Some of the countries mentioned here will (at least for the time being), but I wouldn't gamble that the PRC will protect them to any degree. You pay your money and take your chances.

[oldr_n_wsr]

the tax game is rigged in favor of people who already have enough wealth that they can generate their income through capital gains.

And that game has been rigged for a pretty long time. I have money in the market earning capital gains and have money in muni bonds on which I pay zero taxes (depending on which municipality/state did the issuing).

As I said before, if it's unfair (according to whom? as I kinda like being able to make some money at a lesser tax rate), then it needs to be changed. But I don't see either Dems, Repubs, Libs nor Cons trying to change it. Those in the position to do so are all pretty much rich.

[Econoline]

There is nothing sacrosanct about the current extremely favorable treatment of capital gains. It has gone down and up over the years--in fact, in 1986, during the Reagan administration, favorable tax treatment of capital gains was eliminated completely and capital gains were taxed at the same rates as ordinary income for several years. If the Republicans are serious about reducing the deficit and the national debt (and not just hypocritically using that rhetoric as an excuse to reduce or eliminate programs they don't like for political reasons) it's about time for them to do what their hero, Saint Ronnie, did and bring the tax on capital gains back into line with the taxes that most ordinary Americans pay.

[Sue U]

the tax game is rigged in favor of people who already have enough wealth that they can generate their income through capital gains.

And that game has been rigged for a pretty long time. I have money in the market earning capital gains and have money in muni bonds on which I pay zero taxes (depending on which municipality/state did the issuing).

As I said before, if it's unfair (according to whom? as I kinda like being able to make some money at a lesser tax rate), then it needs to be changed. But I don't see either Dems, Repubs, Libs nor Cons trying to change it. Those in the position to do so are all pretty much rich.

"Those in the position to do so" will not change the system until the people who control their employment (i.e., you and all other voters) tell them that this is a priority. Tell them that you believe it is unfair that people who make their money by working for a wage or salary are taxed at a higher rate than people who make their money buying and selling "capital assets." Tell them that you want deficits addressed at least in part by taxing capital gains income the same as everyone else's income. Tell them that you want tax subsidies to the oil industry eliminated. Tell them that you want the loopholes closed that allowed GE and other corporations to pay no taxes. Tell them that you think that those who reap the most economic benefit from the structure of our society should pay the most to maintain that society.

oldr, the fact that you might make "some" money taxed at a lower rate is the bait that keeps you in the game -- that keeps the middle class from otherwise investing in pitchforks, torches, rope and guillotines; you're getting some crumbs while the one percenters get the meal and lick their plates.

[oldr_n_wsr]

How about they find some spot in the middle. I remember when I took hits on the kids accounts that I had set up for thier college duringthe Reagan years I think. We had no 529K (?) back then. I had good money socked away for them hoping to get some good dividends and roll those over. But the gov came and took a good chunk (30% IIRC).

Us, who are able to invest, need some kind of insentive to "lend" our money to corporations, small businesses and such. But if the returns are lowered to some arbitrary point, then we pull our money away from those "investments".

I am leaning toward a flat tax type of system, but as always, the devil is in the details. Sure I like the mortgage interest deduction, but being in my last 2-3 years of my mortgage, it's not that big a deal "for me". But it is (or would be) a big deal for my children if/when they decide to buy a house. I don't have all the answers (hell, I probably don't have any of the answers) but that is why I look to people (elected leaders) who might have some more experience than I do to fix the problems with this country.

Gob posted somewhere on this board about the taxes in Aussie (I think it was Aussie) and it seemed it was on average a 30% flat tax rate. But IIRC there were "loopholes" (aka deductions) that one could claim. So once again, it's the details that always seem to make or break a way of financing the gov. and I appologise if I have stated the tax structure in Aussie, or the UK incorrectly

[Big RR]

Sue--before we toss out the capital gains break, let's see what the general benefits are. Remember, this is only for long term gains, i.e. where the capital asset (generally stock) is held for a year or more; short term capital gains are taxed as ordinary income. Is there a benefit in encouraging people to hold these assets for a year or longer? Many economists would argue yes, by reduucing volatility in the market (the same might be true for other caital assets, like real estate). I tend to lean toward this as well, but in any event, I do think thhe debate should include this.

Want to eliminate a tax break that greatly favors the rich? Let's tak aboout eliminating the stepped up basis on the capital assets of a decedent. To illustrate the gross unfairness of this--let's look at someone who holds $100,000 in stocks (person A) vs someone who holds $100,000 in CDs (person B), both with a basis (purchase price, initial investment) of $30,000. After the death of A, his heirs will inherit the $100,000 of stocks and the basis will be stepped up to $100,000, neither the heirs nor his estate will owe income tax on the $70,000 incoome (whether ordinary income or a long term capital gain), while on the death of B his heirs or estate will owe income tax on the $70,000 gain. Fair? You tell me.

[Sue U]

As for long-term vs. short-term capital gains, I don't believe market volatility is significant issue. If the investor's portfolio is large enough, it's not terribly difficult to fnd year-old-plus securities to trade rather than the ones bought last month. And it's the large-portfolio trades that move the market. Nobody cares if grandma -- or even ten thousand grandmas -- dumps 100 shares of AT&T.

As for your example of estate tax on stocks v. CDs, it reminds me of a game we used to play in tax class: what's the difference between rents, royalties, license fees, interest, and (ordinary) income?

[Big RR]

Sue--I agree re single investors dumping a few shares, but the tax break applies to all investors, small and large. Even ginat individual and institutional investors might be prompted to hold shares for over a year if they stand to gain 15% in tax breaks; this especially benefits IPOs where the shares will be held, hopefully, for a long enough time to let the company get some financial stability. Is it worth it? It depends who you ask, but there are hundreds of articles on it.

As for the stepped up basis break, it appplies to income taxes, not estate taxes, but I think you know this. The incomes you cite are not really different, but each type has its cherleaders as to why it should be taxed at a lower rate than the others.