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Why American Workers Pay Twice as Much in Taxes as Wealthy Investors (bloomberg.com)
254 points by champagnepapi 10 months ago | hide | past | web | favorite | 310 comments

> Americans in the top 1 percent, and especially the top 0.1 percent, have seen their wealth and income multiply in recent decades as the rest of the country’s share of the economic pie shrank. Since 2000, a recent study found, the top 1 percent have made those gains almost entirely on income from capital, especially corporate stock—not on labor income. One reason may be the financial options of the wealthy: Business owners can lower their tax bills by paying themselves in dividends rather than in salary, for example.

I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual.

I think I was 25 when I incorporated my first corporation, not because I was a startup founder, but to reduce my taxes. I'll bet if you look around at the most wealthy people you know, almost all will have their own corporation or two.

I mean, just the fact that people pay taxes and then expense out of after tax money and corporations pay expenses and then tax on whats left should be enough to illustrate how corporations keep the rich ahead of the salaried population.

It can get worse as corporations can change their tax year. This means if you are someone who gets a large bonus at the end of the calendar year you can shelter the tax on it for an entire year. So you can have someone who earns a $100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes into the corporation and has a full year until November 30th before the tax is due. If you invest the bonus and earn 20% by next November you have earned enough money back to cover the corporate taxes due vs the salaried employee who pays the full 40ish% tax rate on the $500,000 bonus. Now, you'll have to eventually pay dividends to take the money out of the company but I think I've shown enough to prove just how far ahead the person with the corporation comes out ahead of the average person.

Until the tax law changes, smart people have corporations, the 99% don't.

>I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual.

I don't think that's right. If you look at the dividends in isolation, it looks like a low tax rate. But if you ask "what's the tax rate on capital income?", then you have to adjust for the fact that, before the capital can pay out anything, the investment must pay taxes on profits (35%), taxes on dividends (15%), and taxes on undistributed gains when selling (capital gains, 15-35%).

So, trace out the taxes on a $100 investment that miraculously pays for itself and throws off $200 in profits on top and pays $50 as a dividend. I exit the position. How much was I taxed at?

$200 profits -> $70 in corporate income tax. (35%)

$50 dividend -> $7.5 dividend tax. (15%)

$115 capital gain (it retained $115 of the $200 profits, raising its market price by that much) -> $17.25 capital gains tax (15%)

Total investment (capital) income: $200.

Total capital income tax: $94.75 (17.25 + 7.5 + 70)

Total capital income tax rate: 47.3% (94.75/200).

(That understates it since you can't deduct inflation.)

And keep in mind, investment is believed to have positive externalities!

Wealthy investors do not pay anything close to 47.3% on their capital gains. Looking at the statutory rates is ridiculous.

It's not at all true that "before the capital can pay out anything, the investment must pay taxes on profits." Familiar examples are commodities, Bitcoin, REITs, Amazon in the 90s, carried interest. Hell, I have a friend who makes a living buying stuff at flea markets and reselling stuff on eBay - that's capital gains.

But below that there's a whole industry devoted to transforming ordinary income into capital gains, like the Ernst & Young Contingent Deferred Swap (which they landed in hot water for). This is the sort of malinvestment that differential taxation encourages.

Yes, but let's take the path of income, if you're an investor in a company. So company does work, makes gizmo, whatever, and gets out of this x, and makes costs of y. So the basis of the income of the investor is x-y, let's call that z.

Ok. Most, but not all, companies would pay VAT on z. 10% in the US, 20% in Europe. That reduces the income from z to, let's call it 85% z.

Then there's corporate tax. 35%. That makes it 55.25% z. The result of this is then used for dividends, which are then taxed at 15%. That makes it 46.9% z. So there's a tax rate for these investments of somewhere near 53% or so, and I bet it'll be more in practice.

Also, the odds of getting an IRS audit if you have a company go up 10-fold.

So the base taxes on corporate profits are higher than income taxes, no ? What am I doing wrong.

That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%.

Also you're dividing by 200 when you made 250.

My calculation with those two corrections give 27.6% which is lower 13%

20018.6% + 200(1-18.6%)15% + 5015%

37.2 + 24.42 + 7.5 = 69.12 / 250 = 27.6%

Marginal Tax rate for 38k-90k = 40.8%

                      90k-110k = 43.8%

                      110k - 190k - 28%

                      190k- 420k - 33%

>That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%.

That's with journalist accounting where they reject valid expenses to "prove" that the tax rate is lower.

>Also you're dividing by 200 when you made 250.

No -- the investment paid for itself (the 100) then earned 200 (the amount above what I invested), then paid 50 out of that as a dividend.

It looks strange because it doesn't make sense to tax for distributing the already-taxed profits, and yet people still think the 15% tax on the distributed part of the taxed profit is too low(!), specifically because they ignore the taxes it already had to pay -- that was the point.

Silasx do you think it would be better if they taxed capital gains as income and dropped the corporate tax rate?

Oh whoops I messed up with the 250. You're right it should have been 200.

The 18.6 number doesn't come from journalists though but from the CBO. And these numbers are in line with similar studies by other entities.

I'm sure you agree that its not just how much your taxed on profit, but also how much profit you had to record that matters.

> I'm sure you agree that its not just how much your taxed on profit, but also how much profit you had to record that matters.

If you're a retailer and you buy 1000 widgets at $9 and sell them at $10, then pay $350 in income tax, is your effective tax rate 35% or 3.5%? Can you see the problem if the government demanded 35% of total revenue instead of total profit?

What you're no doubt complaining about is the fact that many of the deductions can be gamed. But that doesn't mean you can discount the legitimate ones.

A more apt analogy is imagine you are selling 1000 widgets @ $10 that you bought for $9 in two different countries.

One country taxes you 20% but you can't mark down the depreciation of the building you're using so you're taxed $200 of your $1000.

The other country taxes you 30% but you get to mark down the $500 depreciation of the building you're using as an expense so instead you record $500 profit. Which means you're taxed $150.

You can see how even though the statutory tax rate is higher in the first country the effective tax rate is lower in the second.

Different tax jurisdictions have different allowable expenses and deductions, which mean your recorded profit can be different between them. The U.S. has an especially high statutory rate, but also allows for many more deductions and expenses than other countries. The effective tax is how you take into account these differences in deductions and expenses between countries, and the U.S. has one that is in the middle of the pack.

The problem with considering things that way is that then you can't compare countries unless they have identical economies.

Suppose two countries have exactly the same tax law. One of them is full of online retailers and the other is full of brick and mortar retailers. Maybe the second country has an oppressive package delivery monopoly. The brick and mortar retailers charge higher prices and have higher expenses (more employees, more real estate) and payroll and rent are deductible in both countries.

So the online retailers can make the same dollar amount of profit on lower revenue and expenses and as a result that country is considered to have a higher effective tax rate, even though their tax law is identical, because their economy is composed of a different type of companies.

And no two countries have the same economy, so you end up measuring something that can't usefully be compared with anything.

Effective tax rate as percentage of total income is a concept that originated in personal income tax, where it makes sense because the default is for expenses to not be deductible from personal income. But for business the default is the opposite. What expense is a business entity going to have that isn't a business expense? Which means that effective tax rate for a business is primarily a question of what percentage of revenue is profit.

Corporations don't care what the nominal tax rate is, they just care how big their tax bill will be if they incorporate in different jurisdictions. They care about the average and the effective. They care about the average for long term investments and the marginal-effective rate expansions of projects in countries they already operate in. And while the U.S. statutory rate is highest in the developed world by a good margin, the effective and average rates are close to top quartile.

Most small to medium corporations are organized as pass through entities so they don't have to pay the corporate tax rate.

Also parking profits in different companies doesn't affect the average or marginal effective tax rates because effective and average tax rates are only computed using the profit. And parking cash in offshore subsidiaries doesn't get recorded as profit for the U.S. corporation.

You've argued that effective/average rates depend on the type company. But the amount you pay in taxes depends on what type of company too. So this is a feature not a bug. For instance how many buildings do you own, how much debt you have, how much and what types of equipment do you own. All of these things affect how much you pay in taxes so of course they affect average and effect tax rates but not nominal rates.

My point is corporations care more about average and effective tax rates because they are more representative of what they will pay than nominal tax rates.

Here is the paper which lists the methodology the CBO used. https://www.cbo.gov/system/files/115th-congress-2017-2018/re...

> Most small to medium corporations are organized as pass through entities so they don't have to pay the corporate tax rate.

In which case they can't defer paying personal income tax to much the same effect.

> Also parking profits in different companies doesn't affect the average or marginal effective tax rates because effective and average tax rates are only computed using the profit.

They reduce their profits in the higher tax jurisdiction by paying more for products or services from a subsidiary in a lower tax jurisdiction, which lowers their effective tax rate because the cost paid to the foreign subsidiary is a deductible expense which reduces their tax burden.

> You've argued that effective/average rates depend on the type company. But the amount you pay in taxes depends on what type of company too. So this is a feature not a bug.

It is a bug if you are trying to compare effective tax rates between countries that have different types of companies, because you end up comparing company types instead of tax codes.

> My point is corporations care more about average and effective tax rates because they are more representative of what they will pay than nominal tax rates.

They obviously care about their own effective tax rate, but that may have little or nothing to do with what companies in other lines of business that represent the country's average are doing.

Moreover, they care about all the details of the tax code, and make decisions based on it. High property taxes cause companies to avoid/minimize owning real property, high income/profit taxes cause companies to avoid reporting profits in that country, high consumption taxes cause companies to conserve resources or acquire them offshore, etc.

Do you think their tax rate will be closer to the average tax rate or the statutory tax rate?

> Do you think their tax rate will be closer to the average tax rate or the statutory tax rate?

They are independent variables. The statutory tax rate could be 35% and the average 15% and the company could pay 34% or 3% depending on the nature of their business.

You're still ignoring the fact that the effective rate depends on the company type. The US is a great market for international companies because they can hire educated US workers to design their products and then manufacture elsewhere and sell those products to US consumers, in a way that most of the profits go to offshore subsidiaries. And so we have a lot of those companies here and it brings down the average.

But the US is quite horrible for small and medium sized companies who actually do pay the high nominal rates because they have no foreign subsidiaries to park profits in.

They're currently trying to close a couple of those loopholes here in Canada, and it's surprising how much traction the complaints against the reforms are getting. The opponents are claiming that the reforms are going to devastate family doctors and family farms. The complaints are mostly bogus, but people don't understand tax law so are vulnerable to an emotional plea.

That's eerily similar to what's happening in Australia - our opposition (which will probably become the Government in the next election because the current one is polling terribly) has announced some measures to close off some tax loopholes around family trusts and property speculation (negative gearing of residential property combined with the capital gains tax discount). The measures are well thought out and I believe have even been recommended by multiple independent reviews of our tax system.

But the current Government and part of the media are attacking it on emotional grounds, like talking about how removing tax dodges that mostly only benefit the highest income earners is an attack on something used by "nurses and teachers trying to get ahead"...

As someone who works at a startup and has interacted with many others, there is some merit to the claims. I agree that these loopholes should be closed and the tax system reformed, but I think we should be careful to do it in such a way that doesn't negatively affect e.g. companies like the one I work for, which went from three people to 70 and millions in revenue in just a few years.

Especially as Vancouver is trying to build its tech and entrepreneurial ecosystem, it's important to ensure that we aren't driving away or hindering small businesses to grow while also not letting huge corporations like TD, Telus, or Apple get the biggest benefits from the tax system the more money they have.

Since you pay taxes on profits and not revenue how would they impede growth? Money reinvested is tax free.

Money is reinvested tax free for a c corp. That is not always true.

Can you expand? Which particular change would affect your company? In no way should any of those changes affect a fast growing company. I doubt investors would be very happy if your founder was giving unearned dividends to family members. Your founder shouldn't be locking up capital in long term passive investments. Your founder probably isn't particularly worried about evading estate taxes.

The reforms are for business eligible for the small business deduction, sp isn't it mainly business at the doctor/farmer/incorporated contractor level?

I am confused. If you put your bonus into a corporation, you will have to pay tax twice, the corporate tax and your personal tax. And if your corporation is an LLC, it all flows through to your personal taxes anyway. So, I don't see how you shelter this just by putting into a corporation.

Salaries (and bonuses) are considered expenses for the company and will be tax deductible.

I believe the example was that you may as a contractor (with your own company) receive a bonus to your corporation and be able to offset taxes for another 11 months compared to having the bonus paid out personally.

Working as a contractor for your wholly-owned company would never pass muster with the IRS. You might be able to avoid audit for a little while, but when this catches up to you it will be a huge mess. They would recast the transactions (they can do this) and you'd end up owing a ton of tax and penalties.

Source: I'm a (former) tax lawyer.

So you're not allowed to be self-employed by a corporation that you own yourself in the US? I thought this was pretty normal practice for contractors, especially in IT.

I own my own company where I do contracting work for clients and the income goes to the company. I might have misunderstood or phrased myself badly above.

You’re allowed to be employed by the company you own as an employee, but not as a contractor. You’re a “contractor” from the perspective of your clients, but to your own company (if you made one), you’re an employee.

I think that he meant that you would be an employee of the corporation. The corporation would then be the contractor for someone else.

I'm still not convinced that this works, but that is how I read it.

That's why you pay yourself a small, but not alarmingly small, salary W2 and take the rest on your K1 or such.

The IRS routinely audits people for not paying themselves a market salary in order to shift income to another category. So in playing this game, you have to factor in the likelihood of audit, cost of defense, and cost of penalties and interest that could be assessed.

In the hypothetical scenario of the op, he has 100k as a salary. Which the IRS would not ever likely contest. Since it gets you close to paying out your full ss tax anyway. (since ss tax cuts out somewhere around 115k or so).

And it is also enough for almost any profession. Even CEOs of small companies earn in that range.

If there are job listings in your area for that salary it's market. I pay myself $80k. When I get audited it won't be for that.

no but instead of taking out the money to pay yourself, you just buy things as assets of the company therefore reducing tax exposure.. at least thats the way I have heard of.

You have to prove to the IRS that the asset is used 100% for work. If it's not 100%, you have to show documentation for arriving at that specific interpretation of a split. That's why buying a whole house to live in and writing it off won't work, but claiming 10% of the square footage of the house that's used for business (and business only) will.

Unless you feel very comfortable with IRS regulations and annual changes in them, you have to pay a business CPA to run the numbers, and in many cases the added complexity is just not worth it.

This is called "piercing the corporate veil" and will not only get you in trouble with the IRS but will also mean if you're ever sued you won't get any of the normal protections to your personal assets that you would expect from doing business as a corporation.

Protecting yourself in a single owner corporation or LLC would require extraordinary discipline and bookkeeping. The protections offered by an LLC or corporation to a single owner are generally overstated.

In other words, the corporate veil will be pierced either way.

It's not that bad. I keep a separate credit card, laptop, and office for company use.

assets are not expenses. (that's why it called assets)

some assets can be depreciated over years. some small assets (like printer, laptop) - can be written off in one year... but amount you would save on it is negligible.

Asset purchases are expense. It's a way to get cash out of a company to avoid paying taxes.

Money launderers will sell themselves electronics at a 5-10x markup on Amazon, for example, to get the cash out.

This is Cost of Goods Sold (this is an expense)

To get there you need to acquire Goods to Sell first.

Either way, it is not applicable to what parent was saying. What typically people mean in these situations is that "I can buy a car in the name of my corporation tax free, I can replace home AC unit in the name of corporation tax free" etc. And that is very wrong.

(I am here talking about accounting meaning of word "expense")

This is yet another barrier to entry for the working class. If the poor try to use tax loopholes they get nailed. The rich can afford tax lawyers to make sure they're doing it right.

For low to middle incomes there's rarely a case where itemizing beats standard deduction.

yes, but if you have your own corporation, unless it's an LLC, then you will have to pay corporate tax on that income in addition to personal income. And if it's an LLC, there is no difference.

^^^ this. In fact in the US the IRS will flag abnormally high salaries for small businesses (millions per individual) if no or very few dividends are paid out because income tax is less favorable to the government in the total amount the IRS receives when looking at multi million dollar salaries. Beyond the first $110kish FICA stops making a dent as social security caps out. I'm sure there are possible loopholes for very wealthy individuals but this article doesn't detail them and I'm not familiar with them either. This is the opposite of other places like Sweden where high income tax and low business taxes make dividends very favorable, and the tax authorities there will question paying dividends at too low of income levels.

People often forget about S-Corps. As the owner you W-2 yourself, then what is "left over" is a dividend. Since an S-Corp is a pass-through entity, you don't pay corporate taxes, and aren't getring the C-Corp double tax on your dividends.

On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.

IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants I've talked with define as within 30% of average wage for your "profession".

So the average programmer US wise makes something like 90k I believe (haven't checked in a few years).

You are saying if you ran a 1 man SAAS app and made 200k in a year, you would w2 yourself for 30k and take a 170k dividend?

I am not sure my accountant would like this plan. Taking say that 90k or 100k might be plausible, but 30% of the average wage?

(And at the 90k point.. FICA goes away past 110k anyway, so the savings is fairly minimal)

I think what he means is that your pay must be within 30% of the average wage. So you could likely pay yourself between 63k and 113k if the average wage was 90k.

Actually, the $30k COULD be reasonable if you are at that point only being a marketer.

If you go on indeed or glassdoor, search what ever your main task is, and screen grab that average salary. Keep searching until you find one that works best for you.

Change your salary with each task by being an hourly w2 employee with different charge codes based on the task. Just make sure you track what work you are doing.


I'd set up a solo-401k and take 20% of that ($40k) as a profit-sharing retirement plan between the "employer" and "employee". Add in a $18k elective contribution out of your W-2 wages as well. IIRC there's a maximum total contribution of $56k so this doesn't work particularly well past the $180k net profit point or so.

I'm seriously considering moonlighting as a freelancer just to get access to this kind of setup. Of course, my daytime employer not having a 401k makes a big difference - with the combination of the profit-sharing and employee elective contribution, the first $22.5k annually would go directly into a tax-deferred retirement account. Partner up with different people to run unrelated businesses, and you can set up a profit-sharing plan with each to get separate "20% up to $56k/yr" buckets.

Anyhow, I'm kind of rambling. My point is that when you wear both the "employer" and "employee" hat, there's some really good options that open up that most employers don't offer because it's a wealth-transfer from employer to employee.

More like $60k. But no, your accountant will not go for anything even remotely risky. Accountants are notoriously conservative. No accountant is going to stick their neck out for their average customer.

You have to pay the big bucks for the guys willing to push the envelope. And that's not be ause they are better, it's because they have to make more money to offset the risk to their career.

i went through calculating it. that works only for narrow range of revenue/profits per year. if you max out fica taxes, you are at loss, since s-corp still pays its half of employee taxes. on top of it whole uncertainty of "right" amount of salary and possible audits made me steer away from converting my llc into s-corp.

So while it might work for some - it is not a major "loophole" for top 0.1% (not even for top 1% i think)

It saves me accounting fees for the year ;). It comes out to just under $4k in savings for the year.

Not a major loophole, but its a nice little bonus.

> On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.

The dividend is taxed at 15% for incomes over $37,950.

That is for a Qualified Dividend. S-Corp Dividends are "ordinary", and are taxed as regular wages minus FICA/Self Employment Tax.

Don't you lose some of the benefits associated with filing as self-employed? E.g., health insurance premium deduction, ability to defer a larger portion of the income into SEP-IRA?

In an S-Corp as a "2% Owner," you are still granted the insurance deduction, but only if no one is qualified for a health plan through their employer.

"A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements."


Corporations have to pay quarterly estimated taxes.

So do most contractors.

So do most very wealthy people. Rule of thumb (possibly law?): if you will owe more than $1000 at tax time, you have to file quarterly.

Could you link to any "for dummies"-type resources that show how you can incorporate and use that corporation to reduce your taxes? Something that would hopefully be applicable to your typical middle-class homeowner in their 30s with young kids and a 9-5 making enough to get by but is looking for any edge they can find?

Edit: (in the US)

Tax shelters are not made for people like you.

The middle class is best served by collective bargaining to increase their wages and benefits, strong consumer protections, and access to affordable health care.

Up to about your first 5-10 million (depending on where you live) you need to play by the rules. After that, you can think about hiring a tax advisor to start scamming the system. But the downmarket financial advisors that serve people with a paltry million or two are mostly focused on selling high-commission financial products.

There are tax shelters and loopholes for upper middle class workers. The whole tIRA -> Roth IRA conversion is a trivial way to avoid the Roth IRA income contribution cap. The 401(k) system is itself a tax shelter, and is a larger portion of middle class earners' salary than it is for those with tens of millions. Need I mention HSAs which are like triply-tax protected?

Retirement savings is tax advantaged, however most people consider that a feature of the tax code, rather than a loophole. The traditional to Roth conversion will be of benefit only to those whose post-retirement income puts them in a higher tax bracket than they are currently in. Most middle-class wage earners would not be in that category unless they keep working well into retirement age.

Health Savings Accounts are highly dependent on the circumstances of the individual. Many people with employer-provided health care plans receive minimal benefit from an HSA.

That being sad, you've made you point, in that there are portions of the tax code with deductions accessible to the middle class, like home interest deductions and deductions for charitable giving.

But the, "I'm going to start 12 shell companies and park my money offshore" kind of tax dodges are not really feasible until after your first ten million.

The traditional to Roth conversion can help those who remain in the same bracket as well. This is because by spending Roth dollars one can avoid pushing one's taxable income into the next bracket. Technically, that's what you said, but this can be a significant issue even if one's expenses don't require that income, because of RMDs for tIRA but not Roth IRA. Likely to be an issue for those in the low-single millions of assets which is actually quite a few people who consistently save a large portion of income.

The OP mentioned starting their strategy when they were 25, implying they are/were a "normal" person, which is why I asked, since my vague understanding of the situation in the US matches what you describe, that you have to have gobs of money to begin with before you can really start gaming things.

It sounds like what they are doing may not be 100% audit proof. Do you want to play the shady taxes game and hope you don't get caught?

I will agree with brianwawok. Amount of BS I hear from friends "optimizing" their taxes is staggering. Be very careful about any advice you receive from such entrepreneur. Most of them either breaking laws, or breaking IRS rules, which, unless you got plenty of time and money to challenge in the court, is equivalent of laws for you (I guess until you get to these 10m+ where you can afford to fight IRS - I am not there yet, so can't comment)

No link, but the gist in the US is this:

1) Start Business

2) Get Real Clients to buy your stuff

3) Deduct Expenses

4) Pay 40%* of whatever is left over to the Government

* The 40% number can go up and down depending on your income amount [and local tax commitments].

That doesn't reduce your taxes, that just has you personally take on the accounting for an enterprise.

It would only work if you could relabel personal expenses as a business expense, which is what I think the parent was looking for (and which is a time-honored practice with its own dangers, of course, but is hard for the IRS to stamp out entirely -- you "lose" a "business" pen and keep using it for personal stuff; how does the IRS know?).

Use a company car, and company pay for gas. You can deduct that as expense.

Company phone. Company pays your data plan. Deduct.

You register your company at home, okay you can make an office, you can then deduct some expense as facility operational costs. (Of course there are a lot of regulations for this, and you have to document how big the office is, and it can't be bigger than X% of the house, otherwise it'd be income tax hiding - because it'd be the company paying your rent or just giving you money to heat your bedroom, which is not a business expense.)

Company sends you overseas on work? Business expense. But if you go there for 2 weeks and then post beach photos on Facebook for every day, you're in big trouble.

What is that responding to? I said it has its own dangers and the IRS stamps it out but there are some minor ways where it cant.

I wouldn't consider these minor.

As always talk to an accountant.

But, the 'deduct expenses' will help reduce taxes.

Start by getting paid on a 1099 instead of a w2

Which means immediately higher taxes because you get to pay the employer side of payroll taxes, plus no pretax benefits like health care and no vacation or other untaxed benefits.

You can elect to have your LLC taxed as an S-corp to avoid some of the self-employment tax [1].

1. https://www.thebalance.com/what-is-a-reasonable-salary-for-a...

this applies to the certain degree.. if you make less than FICA threshold - yes, you are right. If you make more from multiple contracts/jobs - it is more efficient to be paid as contractor (assuming that client will pay you your employee taxes share, which would otherwise be paid by employer in case of W-2 employment)

I wonder then why those Uber drivers so adamantly oppose a path to riches.

Because if you are a contractor then it's your responsibility to provide healthcare for yourself and think of the costs of that and factor that into your prices.

But if you don't set your prices, because you're a one-of-a-million driver, then you're shit out of luck.

This is very true. The hard part is we need corporations to create jobs, provide housing and finance company growth. You get what you reward and optimize for. The problem is that we aren't optimizing for the right things. I think we need to drop things such as "like kind exchange" and find new ways for people to use their retirement to start business but with tax forgiveness if it fails that could be used to refund retirement.

> we need corporations to create jobs

Not really. Sure, we need some form of association to hold property, and sometimes limited liability. Does it need to be the kind of corporations we have now, able to exercise all the rights of people but not taxed or held accountable like people? Nope. A deep reform in all of the laws defining what "corporation" means, and not just tax laws, is overdue.

> If you invest the bonus and earn 20% by next November

So simple!

And I imagine if there were a reliable way to earn 20% in a year even regular Joes would be taking advantage.

Ok, I'm not getting something here, how does incorporating a corporation at age 25 reduce your taxes if you're still a salaried worker in another company for example?

It doesn't. Incorporation only helps if you have a flexible work arrangement and can shift income from salary into consulting fees or other payments to your Corp.

> So you can have someone who earns a $100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes into the corporation and has a full year until November 30th before the tax is due.

How do you put "the bonus into the corporation"?

> You owe the IRS about $38,500 more, assuming each of us pays the maximum with no special deductions.

This also assumes the investor has no interest income, which would be unlikely. For a younger person with a big nest egg, this wouldn't be a huge chunk of their assets. But as you age you'd want to shift into less-risky assets, like interest-bearing ones.

Also, investors would probably be diversified into real estate (which generates rental income, which is taxed as ordinary income). There are tricks that can be played in real estate, of course, but there's also lots of ordinary income tax paid.

> I get to skip about $24,000 in payroll taxes that you and your employer must fork over each year.

"Payroll taxes" includes social security, which the worker will collect until he/she dies. It is also payable to the worker's spouse in certain circumstances. But you only get to collect social security to the extent you paid into the system. So if there's an economic downturn, the worker will have social security to fall back on in old age, where the investor will not.

The general point remains, but this is a highly stylized example designed to emphasize (hyperbolize) the author's point.

But you only get to collect social security to the extent you paid into the system

Medicare and social security payout more in benefits than you paid in: http://www.politifact.com/truth-o-meter/article/2013/feb/01/...

I was trying to avoid saying "you only get benefits if you paid in", which oversimplifies the situation. If someone paid in for decades, they'll get more SS than if they paid in for 2 years. Basically, I meant "to the extent" to mean that it scales with participation. Thanks for the link — interesting details.

*If you live long enough, which isn't looking to be the case for the bottom quartile, considering the retirement age will be raised to 67 before our cohort will start retiring.

> But you only get to collect social security to the extent you paid into the system.

To clarify: Social Security benefits are calculated based on the 35 highest-earning years you report to the IRS, up to a maximum cap. You will _not_ "run out" of benefits at any point, but if you report under 35 years of earned income to the IRS, those zeros will play into the overall calculation of your benefit rate.

> But as you age you'd want to shift into less-risky assets

Not if you are wealthy. If your money might not last you have to shift to conservative assets. But if you have 10x what you need for the rest of your life you can keep investing aggressively.

> "Payroll taxes" includes social security, which the worker will collect until he/she dies

The example is citing someone who's pulling in $300k from dividends and capital gains each year from investments.

If there's enough of a downturn which would long-term imperil someone pulling in $300k off dividends, it may be big enough to impact social security itself, no?

Well, no.

Big money from some investment now doesn't mean big money forever from that investment.

You can diversify and hedge, but then you're bound to get average market rate, that's basically the rate of Treasury bonds.

But if you get 300K from that per year, good for you.

Yes. I would assume the article's point IS to emphasize the author's point.

Sure! It'd be more credible if it acknowledged the unrealistic assumptions that it's making. Reminds me of the Engineering dept t-shirt I saw in college: "assuming a spherical cow..."

I mean, sure. But the point is to make the problem accessible to the reader, not to obscure it through the ton of variables present in real life.

Which actually goes back to the t-shirt example. If we had to consider a real cow every time, nobody would want to study engineering ¯\_(ツ)_/¯

Because politicians sell progressive income taxes as a way to screw the rich, when it actually just screws the upper middle class, since the actual rich don't have jobs to tax the income from.

It's not the progressive tax structure that's the problem, it's the fact that cap gains are taxed at a much lower rate than other forms of income.

We should tax consumption, not income.

Consumption tax is very regressive. We should tax wealth, not income. Eliminate income tax and extend property tax system to all assets, not just real estate.

Well now, that's an interesting idea! Is that your idea?

I guess it is. Haven't read Piketty, but from hearsay I thought he argues for wealth tax too.

Piketty's writing doesn't apply to the US. His work applies to Europe, where legacy far outweighs entrepreneurship.

And yet it's the US where wealth inequality is higher.

It's easy to fall for that liberal meme, but you (and they) are wrong. Pickety explains it in his book.

In Europe, most wealth is inherited, and power in concentrated in family dynasties.

I don't get your point and your focus on inherited wealth vs. entrepreneurial wealth. Even if most wealth in America is not inherited, a wealth tax wouldn't inhibit entrepreneurship.

If you have, say a $200K minimum threshold to start owing minimal annual tax, and a progressive scale after that, do you really think it would stop the next Bill Gates?

I encourage you to read Pickety's book. He argues that inherited wealth is bad because it rewards people for being born.

Why would anyone, including Pickety, want to prevent Bill Gates?

I feel like we're talking past each other at this point, so I'll drop off this conversation.

I don't agree with that at all. Consumption taxes can be quite regressive. I guess you picture the rich guy getting a huge tax bill when he buy's his yacht, but what if he just keeps saving, investing, and then, I don't know, buys a senator?

We should be trying to discourage the accumulation of power as well.

What's the average Senator cost? He'll have to pay taxes on it. /s

Take this example of poor people: A person earning 10k/year and a person earning 40k/year both need basically the same things: Water, shelter, food.

A person earning 40k per year isn't MUCH better off than the other. They are both broke, and only have money for the necessities. But if we only tax consumption. The person earning 10k will end up spending a larger percentage of their income in taxes than their counter part.

Now lets throw into the mix, me. I make a healthy 6 figure salary. Lets say I also only pay for what I use, and as a penny-pincher, I only get cheap housing, buy bread and cheese for my food, and tap water. I'm now paying the same taxes as the person earning an order of magnitude less than me.

Why would you choose a job that paid far in excess of your needs and lifestyle choices.

Do you know many people with high incomes but super frugal lifestyles? If so, are they a rare counterexample, and not the norm?

Most every person I knows spends in line with income.

For many reasons:

1. Rainy day fund, because you know one day the high pay may stop.

2. Retirement, because you know one day your ability to work may stop.

3. Estate planning, so that your family will be set up for a life that was better than the one you were given.

4. Investment capital, so you can turn your 100s of thousands into 10s of millions or more.

5. Startup capital for a future venture.

The difference between the middle class and the high-earners are that the high earners save their excess income.

Ok, sure, you save your excess income. Then, later, one of two events happen:

1. You spend the savings, and pay consumption tax

2. You die, and pay the estate tax.

The difference is that in an economic down turn, I am protected by my vast wealth, where a poor person has no savings because they spend every dollar they have on necessities.

A consumption tax is always regressive.

If you think about it, the poorest 10 percent of society consume 100% (or more) of their income, and would pay tax on all of it. The wealthiest 1 percent might only consume 20% of their income, and would therefore be taxed at a much lower rate vs. their income.

And? This is only "unfair" if you assume that people should be taxed as a percentage of their income, but by moving to consumption taxes we discard that assumption.

Also assumes that we would heavily tax the consumption of basic goods, like groceries.

More likely, we would heavily tax goods that poor people cannot afford. Things like dining out, travel, fashion, electronics, cars, and housing in excess of basic sq footage.

capital gains is the leftover of profit after tax. taxing capital gains is taxing profit twice.

in my opinion, for a clean treatment of value taxation, either corporate tax or capital gains tax must go.

No, I don't see it that way -- Taxing dividends is taxing profit twice, not capital gains. Capital gains is taxing asset appreciation.

No it's not, the corporation is taxed once, and the dividend recipient is taxed once. If a corporation is to have rights of personhood it needs to pay taxes as well. Also capital gains can come from many sources that aren't taxable.

That's to encourage money to be invested and also to compensate for the risks.

I've heard the former but I have never heard the latter unless it's been one of my friends in PE trying to justify it.

It's the investor's job to make sure their investments are producing an adequate risk-adjusted return, not the government's job to help you get there.

Taxes change the expected value of an investment. Thus, it changes the amount of risk v reward.

If I have you 51% odds on a coin flip, that's a good bet. But if you only get paid out 60% when you win, it's a bad bet.

Ok yes that's definitely a fair point. To be clear I like the idea of the tax code being simpler and rates lower since it unlocks more NPV positive projects by removing an important cost.

But I do think that's a different argument by a few degrees than the idea that capital gains taxes should be lower to somehow compensate investors for their risk.

If you made a thousand of those 51% bets, you could deduct the losses from the wins, and you'd be back to profitable.

What I gather from the 2000 dot-com bubble, the 2008 financial crisis and a slew of startups I've been seeing lately (cue, Juicero) is that _perhaps_ there should be a little more risk to investment. Idk, my own opinion here.

There was a ton of risk (they lost their pants) but they just didn't recognize it.

Yes and we've seen the outcome - top 1% benefits too much, and results in too much concentration of wealth (along with other structural issues).

And the problem with raising taxes on capital gains will be investors moving their holdings to other countries to reduce their taxes. So long as the taxes on capital gains are kept at a comparable rate across countries, this isn't a problem.

I don't think that's a given - there are plenty of countries with lower capital gain taxes, yet we don't see mass money moving to these countries.

Source: https://taxfoundation.org/capital-gains-rate-country-2011-oe...

If there is no difference between income and capital taxation people wont invest in companies.

And companies wont last with out access to capital trust me I have chaired share holder meetings caused by lack of capital

«If there is no difference between income and capital taxation people wont invest in companies.»

Nonsense. What alternatives do people have? Putting money in a lousy US savings account with a 1% annual interest rate? By comparison the US stock market's average annual return has been 7%. Hence even if income tax rate were the same as capital gains tax rate, the stock market would still give you returns 7× higher.

The problem (started by GP, tbf) is that "investing in companies" is not a binary choice. A given amount of capital is economically more productive in riskier bets in most real-world cases (i.e. bets on tech advances drive the economy forward but are risky). However, higher investment taxes tilts the investment decision towards less risky (and less productive) investments. Think of investing in 1997 Amazon vs 1997 Walgreens: the more your upside is taxed, the more attractive Walgreens is going to look (in 1997)

You lost me as soon as you said "trust me."

so how many share holder meetings have you chaired trying to save a company from going bust?

You've got a large number of logical fallacies in your comment.

Comparing your experience chairing shareholder meetings to tax policy is apples and oranges. Specifically, that because you've chaired a shareholder meeting, this somehow makes you an expert on the efficacy and outcome of changes to the tax code.

The theory of "investment fleeing" due to capital gain tax increases is, frankly, not proven by the data. We've had an increase in the capital gains taxes under Obama (2014) - yet investment continued across private equity, venture and general investment.

If I had the money, I'd renovate my roof, get a solar roof with battery backup, etc. It's an investment just as much as in any business; why am I discriminated against as an individual?

That's a tax-neutral investment. You would pay for the equipment with after-tax dollars, and your returns would be in lower utility bills, which you pay with after-tax dollars. So, your returns are effectively tax-free!

Maybe you can form a corporation and lease the roof area from your house, and deduct the investment?

I'm not really serious, but perhaps something along those lines is an option?

Are not homes exempt for CGT where you are?

Ostensibly, but really it's hard to look at it and not conclude that it's simply to ensure the rich don't have to pay taxes.

What do people imagine rich people would do with their money instead, if capital gains were taxed like income? Stuff it their madrasses, and be at the mercy of inflation? Probably not.

As the article points out we don't need to encourage money to be invested.

No, that's a post-facto justification trotted out whenever someone questions the capital gains rate.

Then add a progressive tax to investment income such as dividends, bond interest and proceeds.

I don't know why we have a flat tax on investment income but a progressive tax on labor. The easy, and fair fix, is to progressively tax investment income.

The biggest players in the bond market are either exempt (they're a pension fund, a 401(k), a foreign entity, a university endowment, a charitable organization, a church or other kind of non-profit) or pass-through (mutual fund, ETF).

I recommend Ken Fisher's "Debunkery" which covers a lot of economic what-ifs with hard data. Capital gains tax rates and treatment varied widely throughout the US history, yet collected revenues did not.

and it works because the politicians are pandering to the massive amount of people in the working class who are subject to income taxes exclusively, and don't understand the parallel tax systems

The Obama tax hikes were largely aimed at high capital incomes, though the accompanying high pay tax hikes was hardly "screwing the voters" either.

See http://money.cnn.com/2015/01/30/pf/taxes/obama-taxes-rich/in...

Pretty sure the proposed taxes in the article you linked to did not pass. The only major tax change Obama was able to get through was the Obamacare related 3.8% Net Investment Income Tax.

I stand corrected. Still, "politicians" tried to DTRT.

Amen, brother. This is why I saw Hilary and Obama as a false flag Democrats. Raise the marginal rates and screw the upper middle class (who basically carry this country) and let their billionaire friends keep their loopholes and lower rates on investment income.

Democratic or Republican, no difference at the highest levels. They will always support the people in power which are the 1%.

I've seen the song and dance for a while now and hoped Obama was different. Promise enough to get elected and hope they forget about the promises after.

Trump is literally doing to same thing. NAFTA and NATO are obsolete, oh wait now that I'm in office I didn't mean what I said. They're important.

There are many people making over $200,000/yr. With 20 years of investing $150,000 of that, it's incredibly easy to have over $6.5 million.

I don't see why it can't be a two-pronged approach with both higher income taxes and wealth taxes. It's what was done in the 1950's, and there was still plenty of wealth then.

Investing 100% of your post-tax income for 20 years is easy?

(Which would get you to three million by the way)

I'm saying there are plenty of people making $200k post-tax. Also, 7% annual returns combined with an additional $150k/yr would lead to having $6.5 million like I said.

To make $200K post-tax, you need to make at least $260K pre-tax. In the US, that puts you almost exactly at the boundary of the 1%.

I suppose this is a matter of your definition of "plenty of people".

There will be well over a million of the 1%ers by my reckoning (google says 122 million taxpayers), which is plenty by some reckoning..

1% of 300 million is still 3 million people. That's a lot of people making a lot of money.

Fewer than 5% of U.S. households [0] (or about 1.5% of working-age people [1]) bring in $200k per year. This is a big country, so I guess that's still "plenty of people," but it's not ordinary.

[0] https://statisticalatlas.com/United-States/Household-Income

[1] https://www.quora.com/How-many-people-earn-200-000+-per-year...

> It's what was done in the 1950's, and there was still plenty of wealth then.

That time period was one of great prosperity that won't be repeated. Market returns were higher; most of the low hanging fruit has been plucked, and you can expect ~5% in equities returns. Its going to take far more capital now to get the same returns your grandparents had, which is why you see capital chasing returns across the world.


"The leaders of Vanguard Group, overseers of some $4 trillion in client assets, have been advising investors to expect a typical 60 percent stocks/40 percent bonds portfolio to deliver two- to- three percentage points less in nominal annual returns than its long-term norm. (Since 1926, such an asset mix has returned better than 8.5 percent annualized.)"

"Other forecasts are even less generous. Research Affiliates, a quantitative and "smart beta" fund manager, projects that U.S. stocks might only offer one percent a year for the next decade, after inflation. This is based largely on the so-called Shiller P/E, a ratio of the S&P 500 index to its trailing ten-year average earnings, which is now above 29 and higher than any period aside from the run-up to the 1929 and 2000 market peaks."

"And with risk-free 10-year government debt yielding a skimpy 2.3 percent in the U.S. and far less elsewhere, all other financial assets have repriced for skimpier future returns as well."

Then why not try to structure our economy so that the lower and middle classes have more money to spend? It seems like that would be a pretty good way to get the economy moving more since giving poorer people money increases the velocity of money considerably[1].

[1] https://en.wikipedia.org/wiki/Velocity_of_money

That's definitely the case, but the goal of modern politics and the top 1% is to accrue wealth, not generate it. Giving the middle classes more money to spend is great for the economy but it only accomplishes their goals if all that money ends up in their portfolios or assets, which means that eventually it all has to trickle up to the top.

Because that concept only works in an idyllic small town dominated by sole proprietors.

The example they provide

> Farmer spends $50 on tractor repair from mechanic. Mechanic buys $40 of corn from farmer. Mechanic spends $10 on barn cats from farmer.

does not involve stuff made abroad, massive corporations with economies of scale eliminating the middleman, or foreign-owned entities.

Most of that velocity will end up in China invested into another skyscraper ghost town, a massive infrastructure project or a cryptocurrency mining farm.

Then what do you recommend should be done? Because it should be obvious to most that increasing inequality, record-breaking corporate profits combined with a decreasing quality of life for most Americans outside of large cities is leading to a destabilization of our political system.

I agree entirely.

You can't save $150k a year if you make $200k per year. Your taxes on that income will be over $50k alone. And, even if they are small, you will have some expenses for food, shelter, clothing and transportation - and in most places to hold down a 200k job, you're going to need to half-decent wardrobe.

Americans in the top 1 percent, and especially the top 0.1 percent, have seen their wealth and income multiply in recent decades as the rest of the country’s share of the economic pie shrank. Since 2000, a recent study found, the top 1 percent have made those gains almost entirely on income from capital, especially corporate stock—not on labor income. One reason may be the financial options of the wealthy: Business owners can lower their tax bills by paying themselves in dividends rather than in salary, for example.

Yeah...look at Bitcoin, Bay Area real estate, tech stocks (Google, Tesla, Amazon, Apple, Facebook, Sales Force, etc.)...it would seem like 'assets' are kicking the asses of wages. People are getting rich buy & holding assets and with speculation than 'building and making things' (except for Tesla). And the low long-term capital gains taxes to boot just makes it all the sweeter.

Now obviously,doctors, coders, and lawyers can do very well too. To get to the stage where you can live off assets, you need income.

Here is a question for any tax attorneys out there. Not sure how to find a clear answer to this question but these pages[1][2] seems to suggest that the capital gains tax rate is based on your "Taxable Income". This is shown further down the second page to be "really Regularly Taxed Income minus Adjustments, Deductions, and Exemptions". If your "Taxable Income" is less than 37,950 your long range capital gains tax is 0%.

This seems to me to mean that if you are say Larry Page or Sergey Page and set your salary to $1 (like the do), your main motivation for the low salary might not be to signal that, as a large shareholder, you are aligning your interest with shareholders and thus won't take a salary (this is what I thought the $1 salaries in the Valley were all about, but it always seemed a little silly to me). Maybe your main motivation is that you make all of your income in capital gains and if you have less than $37,950 in "Taxable Income", you pay %0 in capital gains. $1 in "Taxable income" with $1 billion in capital gains and pay $0 in tax. You could make a bit more with a salary of $37,949, but that is nothing compared to your capital gains, and then people would be pointed to exactly what was happening.

This would be a much bigger loophole than covered interest being taxed at the long term capital gains rate. Although, now that I think about it, the two loopholes would work together. Own a hedge fund, take $1 in salary, make $1 billion in carried interest, pay $0 in taxes.

I sure don't want to believe this is the way it works. Links to an IRS.gov web page example that shows otherwise would be greatly appreciated.



The base tax bracket rates you're looking at are based on AGI (adjusted gross income); investment income is _included_ in AGI, so if you have a million dollars in investment income and one dollar in earned income, your gross income is $1,000,001; your tax rates for both investment income and earned income will be set appropriately.

IANATA, but if you look at the qualified dividends and capital gains tax worksheet [0] on personal income tax form 1040 (that’s the main tax form for individuals), you’ll find that your capital gains tax rate is dependent on your income including capital gains.

For the purposes of your example, Larry and Sergei would pay no tax on the first 37,949 of capital gain income (thanks to the $1 salary), but regular capital gain rates on the next ~billion.

[0]: https://apps.irs.gov/app/vita/content/globalmedia/capital_ga...

Thanks. That makes sense. Didn't think a loophole that big would not be talked about more. On the other hand, it is interesting to know that you can have a capital gains income of ~75k as a married couple and pay no taxes, if you have no other income. Not a bad income for early retirement.

Here's an even more ambitious use of loopholes: "How to pay ZERO taxes in retirement with 6-figure expenses"

The poster "livesoft" is one of the consistently insightful and funny posters I know.


So does that mean that the effective tax-rate on 100k in (only) capital gains is roughly 63% of the nominal capital gains rate? And how would that typically compare to taøotal taxes on, say, 50k income tax and 50k (taxed) capital gains?

> The most famous economic boom in U.S. history, right after World War II, occurred when the top rates on dividends were between 70 and 90 percent.

This seems very much like presenting correlation without any semblance of causation. Specifically, "right after World War II" is a pretty significant variable to ignore. The financial impact of the war being over (and massive amounts of resources being re-allocated) may well have been large enough to counteract any other variables.

But it's a really popular meme so who cares? It's not like Bloomberg is supposed to understand economics or something

One thing a middle class friend of mine does is the following:

1. Buy house

2. Rent out rooms

3. Deduct all expenses that you'd have to pay anyway, utilities, internet, etc. as "business expenses".

4. Depreciate house

5. Renovate the house and depreciate the new fixtures/additions/etc.

6. Reappraise the house after a certain time and refinance.

7. Take money out after refinancing and buy more property.

Go back to (1).

It's pretty much foolproof. The tough part is being an owner-occupied landlord for a bit to get to the point where (6) is worth while. You also have to be in a hot market.

when you sell those properties, you still have to pay all the taxes. Depreciating doesn't save you from having to pay tax, it just defers the tax liability to the future.

You have to pay depreciation recapture tax whether or not you actually depreciate your house[1]. Not depreciating a rental property is just stupid.

[0] https://www.thebalance.com/depreciation-recapture-3192979 [1] Internal Revenue Code section 1250(b)(3)

I agree, I am just saying, depreciation is not a free pass, since when you sell, you have to pay the tax.

True, but you'd have to pay tax either way (e.g. don't have a rental and pay capital gains, though this is minimized if you're a first time homeowner), is what I'm saying. Though, the cool thing is that if your house is a rental (as opposed to residential) you can actually offset depreciation recapture by passive loss throughout the time the property was a rental. Often this completely negates the tax.

Man... too many benefits are given to those who own property.

doesn't passive loss lower your tax basis? so, no, I don't think it negates the tax.

You're right, however in the original scenario proposed you'd sell your property and buy another one, enacting like kind exchange. So then you don't have to pay any taxes.

Not if you do a 1031 exchange. In that case, you never pay taxes on the depreciation.

It just basically becomes a snowball, you keep on upgrading properties.

The biggest lie is this nonsense about "double taxation," ie taxing money that's already been taxed is somehow unfair. So stupid.

Capital gains tax shouldn't exist. It should all be one income tax. You can carve out discounts or exemptions for things like sale of PPOR, sale of family business up to a certain point, if you want.

Why should we want to tax income? If you tax something, you inherently affect the supply of it. I.e. taxing labor (income tax) will make people want to work less.


We need to implement a land-value tax, if simply because taxing land does nothing to change the supply of land. Unless America decides to invade Mexico anytime soon, the value of land will not change.

I responded to another post in this thread with a link on Georgism as well (https://en.wikipedia.org/wiki/Land_value_tax).

I see Georgism occasionally advocated for on Hacker News but I really wish I would see more discussion on it. IMHO, it is the only sensible tax and the most fair tax that economists have thought up.

It looks excellent at first blush, but calculating the value of land seems distinctly non-trivial even for honest assessors. For less than perfect people, this highly charged calculation could become a huge political football.

You would have to start adjusting for inflation. If I bought an asset in 1980 and it just tracked inflation, you'd show a nominal 200% profit. But really, it's worth the same as before.

yes, but that's not really an issue. If it's not a real gain (inflation adjusted), then it's not income, and doesn't need to be taxed.

If you want to distinguish between the creation of wealth vs. the appropriation of wealth it makes sense to distinguish between earned and unearned income.

Completely agree if you nuke the corporate / business tax as well.

I don't see it that way. When you invest you risk the capital. You might get a return, you might not and therefore the taxation rules should reflect that. The situation as a worker is different. The only risk you take is that you might select a bad company.

"The only risk you take is that you might select a bad company." - that's the same risk an investor takes no? Except the investor can diversify across many companies, while the employee can rely on only one. Yours seems like an argument for investors to pay a higher rate than an employee, because they can diversify their risk.

Personally, I don't think taxes should be based on risk assessment.

If there was no capital gains tax it would almost certainly reduce investment in risky industries. For example, high tech.

The risks should be reflected in the possible return from the investment (pre-tax), and it is. This is most obvious with fixed-income investments (bonds) where the rate is directly derived from the perceived risks.

The justification also breaks down when you recognise that capital gains taxes are the same for investments in any sector: If it's supposed to reward risk-taking, why tax investments in retail or insurance stocks the same as early-stage venture capital?

It is recognized to some extent. Thats why interest has a different taxation rate than capital gains on stock investments.

> You might get a return, you might not and therefore the taxation rules should reflect that.

So... you take a loss on your taxes, probably spreading it out in some way so you don't pay taxes for a few years, if it's a serious enough loss. Right? Why does the rate need to be different?

Probably spreading it out in some way? You must also have a have a future gain to offset that loss. The rate difference is to compensate for the risk that you are taking by investing the money. Again, as a worker you have essentially no risk of capital (only of effort).

Furthermore, I think you are misunderstanding the double taxation argument. The double taxation arises because the company has already payed tax on their profits.

Selecting a bad company is a pretty big risk. It may do a lot of damage to your career from which you potentially never can come back. The opportunity cost is pretty high.

I don't believe capitalists take more risk or should get preferential tax treatment.

it's not just capitalists who get a lower tax on investment income - it's everyone.

It's a little skewed towards wealthier people, don't you think?

Think of it this way. If taxes on investment income are raised, those who aren't wealthy will have an even harder time catching up to those who are

I don't think that's accurate. As of now the wealthy are pulling away quickly. This will continue if the majority of of workers' income (salary) is taxed higher than the income of investors.

yes, but those workers will at some point retire and live off their investment income, no?

And they would have had much more money to invest if their income tax had been lower.

You don't seem to want to understand my point: Low taxes for investment benefits wealthy people disproportionately. Yes, lower income also get some benefit but the vast majority goes to the wealthy. Same for all the Republic "tax reform" proposals: A little tax cut for small incomes, large tax cut for high incomes.

it's a zero sum view of the world that is not correct. You could be lower income when you are 30 and wealthy when you are 65. So it's a lot of the same people that benefit. But more importantly, you are not considering the benefit of higher investment that the wealthy make because their investment taxes are lower. Higher investment leads to more economic activity and more jobs. In fact, the whole world has moved over time for this reason to taxing consumption more than investment.

Yes, I understand Saez disagrees. But he is hardly the final word on this. Hardly.

> Higher investment leads to more economic activity and more jobs

In some cases. Investing in the stock market doesn't. It's just a somewhat randomized wealth redistribution system. If I invest $1M in IBM, IBM doesn't see any of that money. Nor do the investors in IBM. It might move the price of a fraction of a penny, but the money just goes to whatever person sold their stock.

So, some investment (private companies, municipal bonds, etc) leads to more economic activity, but not all investment. I'd be interested to see the breakdown.

Most people aren't wealthy at 65. Some do, but that's an exception. You seem to live in a different world than I do.

Average net worth of a 65 year old is over half a million in the US.

most 65 year olds who are wealthy at 65, weren't at 30. Just pointing out that if you support a policy because you don't think it will affect you, it very well might later on. But that's an aside point, not the main point.

Very few people actually do that. Majority rely on government checks when retired as they can't save / invest a sizable capital during their life working normal job to really be able to live on dividends from that.

I grew up pretty poor and a lot of people I know are still working. My step mom is 80 and still has to work. A lot of poor people never retire.

Also, we have ways to encourage and provide benefits for people who are lucky enough to save for retirement. 401Ks, IRAs, etc... You don't need a lower capital gains tax, instead, provide more benefits for investments specifically set aside for retirement if you think not enough is being done.

poor people already pay very little to none income tax. lower capital gains tax is supposed to stimulate overall investment, which leads to more jobs, including for poor people. That's the idea behind it.

Well, what else are you going to do with that capital? Stuff it in a mattress? The Government really doesn't need to encourage people with money to use it to make more money, that happens naturally.

You might argue that they'll just "waste" it on goods and services, but that's what keeps the economy moving so it's not really a waste.

This similar to the logic that used to fuel Adobe's anti-piracy numbers. They claim they lose (number_of_pirated_copies X retail_cost) to piracy, making the huge assumption that everyone who pirated would have bought a copy, and needs photoshop so badly that they will sell a kidney to get it if you could stop piracy. You can't selectively change variables and assume the others stay the same.

Your life would be negatively impacted if everyone paying capital gains decided it was advantageous to avoid paying them, so you can't talk about adjusting that tax structure as if all of the same money would stay on the table. If it were less enticing to invest it, fewer would, and that changes the environment in complex ways. It's a big assumption that if you raise taxes, everything else remains pinned down and we can analyze that variable in isolation.

I think I am on the side of Warren Buffet and agree that investment tax rates does not much effect how eager people are to invest. I mean, what else are the rich going to do with their money? If they think, "These tax rates on investments are too high. I'm not going to invest. I'm just going to spend it on yachts, hookers, blow, and black-jack.", then soon they will run out of money and have to start earning it again. Most investors like making successful investments and growing their wealth. What the capital gains tax rate is is not going to change that. Maybe they would not switch investments as much. That might be a good thing.

Maybe a better argument would be that successful investors use of money is better for everyone in society in the long run and that having lower taxes on earned income would just let more money be spent on "useless" things: longer vacations or fancy lattes.

"Taxing investors less is really not what the U.S. needs now,” Saez said. “Instead, we should focus on trying to rebuild middle-class wealth” by encouraging families to save for retirement and pay down mortgages."

How do you encourage families to save for retirement? isn't a lower tax rate on investment income a way to do that?

But how do you save for retirement when most of your income goes to expenses? It's not the tax rate on investment that keeps the middle class from investing - it's a lack of funds.

that's a different issue. To the extent that they have funds and do investing, their ability to save for retirement will be hurt by raising taxes on investment income.

Retirement accounts (401k, IRA, 403b, etc) are unaffected by taxes on investment income (capital gains, dividend payouts, etc.) Maxing out those retirement accounts (~$23.5k per person) is far more than most people save each year. So I don't think raising taxes on investment income would impact retirement much at all.

retirement accounts are exhibit A in why it's good to tax investment income at a lower rate. they are basically investment income taxed at zero.

It's hard to invest if you don't have any money, and as the article points out, investment income below $38,000 is already untaxed. Mortgage rates are a tricky lever to manipulate. Wealth redistribution (in the form of taxing capital gains / investment income more and taxing wages less, particularly middle and upper-middle class wages) is probably the only realistic way to accomplish this.

FTA “There is little empirical evidence showing that taxing investors less stimulates savings and growth,” said Emmanuel Saez, an economist at the University of California at Berkeley.

Yes. But that's because there is so little data and so many confounding variables There is little empirical evidence for everything in macroeconomics, including for Saez's claims.

Wait, did you really just say, “I acknowledge there is no evidence” immediately followed by “there is no evidence for the absence of evidence”?

If I’m not missing something you though was implicit somehow, that is some pretty remarkable logic.

There is evidence, but it's relatively weak from statistical significance point of view. This is also true of Saez's claims, such as if only we get rid of lower taxation on capital, things will improve for the 99%. I am not aware of any evidence that would support this prediction.

I don't need evidence to know that increasing return on investment stimulates investment. Some things are self-evident. I am giving the professor a D-.

If your only income is qualified dividends you can make about $90,000/year and pay zero taxes.

If you're making $90k a year in qualified dividends, you're almost guaranteed to be pulling a good chunk of change in other forms of income as well.

My parents saved their whole lives and now make about $100,000 / year in qualified dividends - They pay about 6K in federal taxes with all that income.

My dad bought pcg_pe for $12 / share when they went into bankruptcy protection bc Enron/etc. When they came out of bankruptcy they had to back pay him all the missed dividends and now continue to pay $1.75/share/year. For his cost basis, its 15% return yearly. Not too shabby.

America has among the highest capital gains tax rate in the world, and if you live in California (which treats gains as regular income) the combination of ACA/NIIT, state, and long term capital gains I believe is the highest in the world.

The intention behind this tax regime was that long-term investing has positive external effects on the overall economy so should can be incentivized (which like all other social incentives in the US is done via tax incentives). In 2017 with a global glut of capital desperately looking for any kind of return, it's not clear if this incentive is necessary anymore.

I would love a simple tax system but no politician in Washington wants, especially those on the left side of the aisle. the tax system is the largest source of political power that exists in the United States and likely everywhere in the world.

Politicians refuse to let you disarm them. Worse they are adept at convincing you they need more taxing power by playing you off each other, by preying on your jealously or creating it.

What is ignored about investment income taxing is that original income used to create the investment was taxed. Hence we are taxing it more than once and doing so forever. the alternative is they pull their investments/risks and put them into vehicles like bonds that government officials really want them in. don't think these articles come out of thin air, they are politically motivated to get you angry so you willingly give more power to the political class; they are the true one percent

There's a startup idea in this. Help people convert to corp-to-corp with their employer. Get them set up with health insurance and the normal bennies. Take advantage of the preferable tax position.

Any person or group that manages to avoid paying taxes should be celebrated. The solution to this "problem" should not be that the wealthy pay more taxes, but that nobody should have to pay taxes since it is blatant theft that funds incompetent and evil people. Nothing that the government does is good. All money that goes to the government is either wasted or spent in ways that make society objectively worse. All functions of government can be replaced and improved by a free market system.

Is this satire?

Whether or not this specific example is, I know people who legitimately believe this.

I found this example interesting as a Canadian, as currently there's a big tax battle over people incorporating to avoid high marginal tax rates and take advantage of relatively low small business tax rates, plus income splitting (which normal employees don't have in Canada). In Canada the emergency room physician would be incorporated.

Personally I think a lot of the issue is coming from lowering small business tax rates while cranking marginal tax rates federally and provincially.

Where this article "phailed" persuasion-wise was in its archtypes -- the hard-working, high-pressure ER surgeon v. trust-fund slacker baby. Really?

How about changing the dramatis personae a little -- say, make the wage-earner a VP of product development at a soon-to-be-purchased startup (straddling both wage-earning and investing, maybe) v. Warren Buffett?

Legislators, the best investment money can buy.

It's amazing to witness the compound effects of interest^H^H^H^H^H^H^H^H long term changes in tax policy, particularly when the advantage becomes the new normal and is then the basis for further changes. How many people look at tax legislation based on how much better it is than 50 years ago?

If capital gains taxes are raised, then someone who invests outside of a 401k or IRA gets double screwed.

Where does the double come from? Each dollar only gets taxed once... only the profit gets taxed when investing, not the principal, right?

Taxed when you get your income (income taxes) and then taxed again when you withdraw (capital gains). Traditional 401k and Traditional/Roth IRA allow you to only be taxed once. (Defer income taxes until you withdraw or you take the income tax hit upfront but are not taxed on withdraw)

The problem is inflation. Taxes aren't calculated on constant dollars, and it's really not reasonable to tax inflationary gains.

If you make capital gains tax the same as income tax, then you're making the situation worse for people who invest their actual income over trust fund babies, not better.

It places another barrier on hard working people trying to move from middle to upper-middle or upper class status.

That doesn't explain how this person would have the same income taxed twice. Taxes are paid on gains, not the return of principal. Income would be taxed, and then the returns from the invested income would be taxed at a later date.

How would you get double screwed? You would only pay income taxes on the gains.

the corporation also pays taxes on the income before distributing it to you.

Thats because US corporate tax rates are ridiculous and so big corp plays games. Small corp of course are the real victims because they can't afford the army of lawyers and accountants to manage all the complex tax avoidance schemes so they get stuck with some of the highest corporate tax rates in the world.

I agree. That is part of the problem. But, I'd argue that even if US Corp rates were much lower (say 15%), Tim Cook, ever the optimizer, would still pursue the 1% rate they currently achieve.

I think rates should be lowered and and tax avoiders/dodgers should not be allowed to bid on govt contracts.

If Apple pays a dividend, it has to pay taxes on it first. You are confusing that with their overall tax rate. It's low because they have a pile of cash that they aren't paying out

It's in good part because of that cash pile (now above $250B) that Apple stock price is so high. And this post is about capital gains being taxed lower than income.

Time Cook pays himself in options, which influenced by untaxed cash hoard.



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