Master of Ossus rants about American IncomeTax

[Terralthra]

If high capital gains tax rates represent a disincentive to sell off stock (reinvesting in something else) frequently, wouldn't that mean cause an overall increase in volatility, as every move is a gigantic swing up or down, instead of greater volatility, but over a smaller range over time as investors trade in and out of stocks more regularly (as with a lower capital gains tax rate)?

[Broomstick]

Poor people live on less than what you do all the time. Success is not guaranteed to anyone, you can work your ass off and still be poor. This is just another way of saying the poor are poor because they deserve it. Blame the victim.

Let's be honest with ourselves, Broomstick:

How many destitute doctors are there in this country? Engineers? Scientists? Mathematicians? Operations Researchers? Lawyers? Success may not be GUARANTEED to such people, but you're lying to yourself if you think that there is no correlation.

As it happens, my Other Half is a destitute engineer - where he once designed entire assemblylines for Ford Motor Company he is now unemployed and unemployable due to disability. In other words, he worked his ass off for a couple decades and now he's poor because his body is fucked up - through no fault of his own.

Plenty of poor scientists - Einstein was shit poor for most of his life, as just one example. A lot of scientists live poor for decades getting their education, then remain poor because their area doesn't attract a lot of sexy funding.

My sister in Buffalo is an MD, but she's nearly bankrupt as well. My former college roommate is an MD, but the first 7 years she worked as one she drove a 14 year old car, shopped at Goodwill, and ate a lot of rice and beans (I'm happy to say she's doing better now). A lot of doctors in the US have gotten out of doctoring because it's getting more and more difficult to make ends meet as a general practitioner (as opposed to a highly paid specialist).

Ditto for those others named. Unemployment, disability, and bad luck can come to anyone. Does education make this less likely? Yes... but it's nowhere near the shield against misfortune you think it is. Lots of PhD's driving taxis could tell you that.

A few posts ago you said less than 40% - which is it? Your numbers are all hell and gone in this thread, which is unlike you, MoO. Your thrashing around because nothing supports your position.

It's between 39 and 40 percent, as I've shown. Now will you address the fact that this is a very large fraction of the populace?

If you will stop backtracking on the fact that a substantial number of that 40% are actually minors who aren't expected to work because, you know, child labor is illegal in this country.

On the other hand, letting people starve because there is no work is not a solution, either. The proposal isn't to simply throw money at people - it's to give people employment in exchange for money, with the results of that employment being tangible assets that will benefit the country for a long time to come.

Like what? Better power lines in CA? We don't need those--the system easily managed a 1/100 year event in 2006. In fact, I don't even think the state needed to trigger its emergency response mechanism during that heat storm.

Hey, I didn't say anything about California or powerlines. I'm very non-specific on this. We should take a look at what's needed, then use the idled labor as a means of obtaining it. Frankly, I think we need to work on bridges more than powerlines, but whatever. The point is, I prefer the government to hand out money in exchange for labor rather than just hand out money to people sitting at home. I don't understand why you have a problem with that.

Speaking as someone caught in this mess, I would have much preferred to work at a government job building roads or insulating schools or doing some other infrastructure project than simply sitting at home receiving a temporary unemployment benefit and feeling useless. By the way, did I mention that I pay Federal income tax on my unemployment benefits? If I had a government infrastructure job I'd be paying taxes on that, too. And the nation would be getting some benefit from not only my tax money but my labor as well. Why is this a problem for you? Alternatively, if I have no job at all there is no tax money from me at all.

Because, as we have shown, many of these people wouldn't actually be paying taxes--fully 39% of tax returns filed have zero liability.

And MANY of "those people" WILL pay taxes. I'll probably have to pay taxes even though my income this year will maybe touch $20,000. You're having a fit over a minority who take legal deductions and wind up owing nothing on one particular tax and still have to pay the rest of them.

You know what? I'm tired of arguing in circles. We're just going round and round on this. I've got better things to do than repeat myself to a selfish asshole who just doesn't get it. Not too mention so emotionally overwrought over the notion he might have to chip in a bit more the general good he's completely lost all grip on basic mathematics (because, you know, 40% does not equal one half). I'm done. Fuck you and go to hell.

[Master of Ossus]

If you will stop backtracking on the fact that a substantial number of that 40% are actually minors who aren't expected to work because, you know, child labor is illegal in this country.

No, that number comes from the number of tax returns filed in comparison with the total labor force. Some of those people are minors, but they're also being counted in the labor force for purposes of that calculation.

Hey, I didn't say anything about California or powerlines. I'm very non-specific on this. We should take a look at what's needed, then use the idled labor as a means of obtaining it. Frankly, I think we need to work on bridges more than powerlines, but whatever. The point is, I prefer the government to hand out money in exchange for labor rather than just hand out money to people sitting at home. I don't understand why you have a problem with that.

I agree that, given that we're handing out money, it's better to get people to work for it. But I'm unclear on why hand-outs are desirable in the first place, particularly given that only a fraction of the populace will pay for them and given that the budget is inadequate to maintain even current levels of spending.

You know what? I'm tired of arguing in circles. We're just going round and round on this. I've got better things to do than repeat myself to a selfish asshole who just doesn't get it. Not too mention so emotionally overwrought over the notion he might have to chip in a bit more the general good he's completely lost all grip on basic mathematics (because, you know, 40% does not equal one half). I'm done. Fuck you and go to hell.

Always a pleasure.

Now will you acknowledge that 40% is a significant fraction of people, which is the whole god-damned point?

[Executor32]

I'd just like to contribute my own tax return figures, but I'll do mine from the past 3 years instead of just last year:

Code: Select all

2005:     Total Wages:    $12,260
          Taxable Income: $4,060
          Tax:            $408
          Payments:       $1,102
          Refund:         $694

2006:     Total Wages:    $15,560
          Taxable Income: $7,110
          Tax:            $713
          Payments:       $1,621
          Refund:         $908

2007:     Total Wages:    $18,881
          Taxable Income: $10,131
          Tax:            $1,128
          Total Credits:  $99  (Retirement fund credit for having a 401(k))
          Total Tax:      $1,029
          Payments:       $2,070
          Refund:         $1,041

What should be obvious, if it hasn't even been pointed out already, is that people who get a tax refund aren't getting all of what they paid into taxes back, they're just getting back what they paid over the amount of tax they owed. This tends to happen at the lower income levels.

[Beowulf]

I'd just like to contribute my own tax return figures, but I'll do mine from the past 3 years instead of just last year:

Code: Select all

2005:     Total Wages:    $12,260
          Taxable Income: $4,060
          Tax:            $408
          Payments:       $1,102
          Refund:         $694

2006:     Total Wages:    $15,560
          Taxable Income: $7,110
          Tax:            $713
          Payments:       $1,621
          Refund:         $908

2007:     Total Wages:    $18,881
          Taxable Income: $10,131
          Tax:            $1,128
          Total Credits:  $99  (Retirement fund credit for having a 401(k))
          Total Tax:      $1,029
          Payments:       $2,070
          Refund:         $1,041

What should be obvious, if it hasn't even been pointed out already, is that people who get a tax refund aren't getting all of what they paid into taxes back, they're just getting back what they paid over the amount of tax they owed. This tends to happen at the lower income levels.

You're also not a 27 year old with a kid eligible for EIC. The past 3 years of tax returns have seen it fluctuate up and down, from about a thousand 3 years ago, to nothing last year. It'll probably be a non-zero this tax year.

My wife worked as a tax preparer this past tax season. It wasn't uncommon for someone to come in and get several thousand dollars over the amount they paid in the refund (due to the magic of refundable tax credits). If the retirement savings credit was refundable, by income tax liability would have been negative last year.

[erik_t]

Can we quit all posting our tax information from the last year? One or two or ten returns are not exactly statistically significant.

[The Duchess of Zeon]

It usually violates income nondisclosure agreements, also, and is thus grounds for termination from your employment.

[Master of Cards]

MoO I'm a 17 year old who didn't have a job for the past tax seasons, but I still filed income tax returns from bank accounts I had. So minors /can/ be in that 40% you harp on.

[K. A. Pital]

Capital gains taxes make it costly to move resources from low-performing sectors into higher performing ones.

Perhaps a little rigidity and cautionusness is what "investors" need then. Since they all rushed into the "higher performing" financial derivatives sector and it turned out to be a glorified pyramid scam of the highest order - I mean - 71 billion to 1,7 billion for Lehman, was it? Right? GDP of Kazakhstan to basically the value of a Coke plant? And that's "the higher performing sector" of economy? But of course, let's make it easier to move capital from A to B. That sure won't lead to unwarranted disproportions and gross fuck ups like it did this time, right? It will work?

[Darth Wong]

Why?

Capital gains taxes make it costly to move resources from low-performing sectors into higher performing ones. Suppose for example that some prescient investor knows that Stock A will return 10% each year over the next 5 years while Stock B will return 15%. Clearly Stock B would be the better investment a priori.

But if the investor has already invested in Stock A, and he must pay capital gains for selling it, it's not necessarily true that Stock B will provide him with a higher return. If the capital gains rate is high then the investor would have to evaluate whether selling the stock, paying the tax, and then re-investing in B would be better than just keeping his money in A and accepting the reduced returns.

It's interesting that you say it's "ideal", I ask why, and you respond with an argument that is entirely based on the self-interest of investors, with no regard for the impact on society.

[aerius]

Capital gains taxes make it costly to move resources from low-performing sectors into higher performing ones. Suppose for example that some prescient investor knows that Stock A will return 10% each year over the next 5 years while Stock B will return 15%. Clearly Stock B would be the better investment a priori.

But if the investor has already invested in Stock A, and he must pay capital gains for selling it, it's not necessarily true that Stock B will provide him with a higher return. If the capital gains rate is high then the investor would have to evaluate whether selling the stock, paying the tax, and then re-investing in B would be better than just keeping his money in A and accepting the reduced returns.

Let's put some numbers to that and see if it holds up. Let's say the cap gains tax is 10%, and you have an initial investment of $100k in Stock A. So after a year you have a profit of $10k, resulting in a $1000 tax. You can then dump it into Stock B and still come out well ahead, you break even and get ahead after a year in Stock B.

Ok, so what if the rate gets upped to 50%? Well, that's a $5k tax hit after a year, but if you cash out and buy into Stock B you're still well ahead after 5 years. Hell, you're ahead after 2 years in Stock B even after the 50% tax hit compared to sitting in Stock A, and that's with an absolutely insane 50% rate.

I'll put it this way, my wife & I are probably our online broker's best friends. Our capital gains rate is a third higher than that of the US, yet capital gains taxes is the furthest thing from my mind when we're trading since it simply doesn't fucking matter. You could double my cap gains tax and it still wouldn't affect our trading, the rate would have to go up to something absurd before we're forced to buy & hold instead of daytrading.

MoO's argument holds only if the profit margin between one stock & another is small, like say, something returning 10% vs. another returning 10.5%. Then the cap gains tax will whack you, but at that point you're seeing marginal gains anyway unless you're a hedge fund or other intitutional investor in which case you're loading up on margin & leveraging the trade, turning that 0.5% differential into a 5% or 10% spread. And then you're back to the above, where cap gains doesn't really matter.

[Starglider]

It's interesting that you say it's "ideal", I ask why, and you respond with an argument that is entirely based on the self-interest of investors, with no regard for the impact on society.

I don't read it that way. MoO is taking it on faith that the ideal is instant realignment of capital according to market whims and investor moods, and explaning how capital gains tax makes capital movement harder. Of course he would say that having capital in the right place provides the highest economic growth, ignoring the (recently) radical misalignment between investor's gain expectations and actual economic reality. But anyway, while I'm sure he is all for self-interested investing, that isn't the focus of the post.

[Graeme Dice]

The tax rate has risen and fallen over time, but people with high incomes currently pay a greater percentage of income taxes than they have at any time in history, in spite of the tax "cuts" that reduced the highest marginal rates to a level above what they were in the late 1980's.

This is only true because those people control a larger portion of the wealth than they ever have at any point in history since income taxes were introduced. Really, is your argument that people who make more than $5 million would really suffer if their top marginal tax rate were 90%?

Moreover, I think you can see the flaws in Obama's tax plan: despite the increase in taxes on the wealthy, overall revenues will remain far below what they would have to be in order to pay for the current budget, let alone increases in tax spending.

The current economic state of the U.S. provides a rather decent reason to borrow money to prevent further economic problems.

[Beowulf]

MoO I'm a 17 year old who didn't have a job for the past tax seasons, but I still filed income tax returns from bank accounts I had. So minors /can/ be in that 40% you harp on.

Then either your family is insanely rich, such that you actually get meaningful income from interest, or you're an idiot. You need to earn at least $850 in unearned income for a tax return to be necessary.

Anyway, he's not disputing that minors can be in that bracket, but rather that if they are, then they are in the labor pool.

[Rogue 9]

Can we quit all posting our tax information from the last year? One or two or ten returns are not exactly statistically significant.

Given that the federal tax code is known to be uniform, it isn't a matter of statistics; if something about federal taxes is true for one person of a given income or circumstances, it will be true for all people of that same approximate income and circumstances.

It usually violates income nondisclosure agreements, also, and is thus grounds for termination from your employment.

I've never even seen such an agreement, much less signed one. At any rate, I might care if I had the same employer now as I did last year.

[erik_t]

Yes, but there are many many circumstances to take into consideration. That's why your 1040 isn't three lines long.

[Broomstick]

It usually violates income nondisclosure agreements, also, and is thus grounds for termination from your employment.

Never worked at a job were there was one, myself. My old employer would have fired me for disclosing someone else's financial information but couldn't do jack if I freely advertised my own.

[Rogue 9]

My current employer tells us not to tell each other what we're being paid, but 1.) I'm fairly certain the state labor code says he can't actually enforce that, and 2.) we all do anyway, and he's not going to fire us because then he'd be SOL.

[Master of Ossus]

MoO I'm a 17 year old who didn't have a job for the past tax seasons, but I still filed income tax returns from bank accounts I had. So minors /can/ be in that 40% you harp on.

How much money do you have invested? IIRC, it takes close to $1000 of unearned income before you have to file a separate return on that basis, and I can't imagine why your parents wouldn't just include your income in their return below that point. Even if you're getting 5% on your bank accounts, you're still claiming to have upwards of $15 or $20k in them, which seems hard for someone who hasn't worked for years and is only 17 (it's also bad for college planning purposes for people your age to have any significant financial assets since they count against any potential financial aid awards given by most colleges--you may want to try and get those out of your name if you actually do have such funds).

[Master of Ossus]

Perhaps a little rigidity and cautionusness is what "investors" need then. Since they all rushed into the "higher performing" financial derivatives sector and it turned out to be a glorified pyramid scam of the highest order - I mean - 71 billion to 1,7 billion for Lehman, was it? Right? GDP of Kazakhstan to basically the value of a Coke plant? And that's "the higher performing sector" of economy? But of course, let's make it easier to move capital from A to B. That sure won't lead to unwarranted disproportions and gross fuck ups like it did this time, right? It will work?

Or, perhaps, it's an example of how capital markets are screwed up by high capital gains rates.

The market isn't perfect all the time, but it's very, very close to consensus of knowledgeable people's expectations of the future.

[Master of Ossus]

It's interesting that you say it's "ideal", I ask why, and you respond with an argument that is entirely based on the self-interest of investors, with no regard for the impact on society.

It's based on the idea that capital mobility is superior to capital immobility. I have no idea why this is objectionable.

[Master of Ossus]

this is only true because those people control a larger portion of the wealth than they ever have at any point in history since income taxes were introduced. Really, is your argument that people who make more than $5 million would really suffer if their top marginal tax rate were 90%?

I'm concerned that they would stop working nearly as hard and as much as they do, and that that will harm the economy at such levels. Moreover, it's not true that the wealthy today control a greater proportion of wealth than they did in WWI, when income taxes as we know them today were introduced. The 1920's showed far greater income and wealth disparities than exist today.

The current economic state of the U.S. provides a rather decent reason to borrow money to prevent further economic problems.

But even in a persistent state, Obama's tax plan falls far short of the revenues required to maintain the US government at it's current levels of spending, much less the additional spending that he's proposed.

[Master of Ossus]

[snip]MoO's argument holds only if the profit margin between one stock & another is small, like say, something returning 10% vs. another returning 10.5%. Then the cap gains tax will whack you, but at that point you're seeing marginal gains anyway unless you're a hedge fund or other intitutional investor in which case you're loading up on margin & leveraging the trade, turning that 0.5% differential into a 5% or 10% spread. And then you're back to the above, where cap gains doesn't really matter.

In your example, the capital gains tax was largely irrelevant because your basis was so high in comparison with the revenues you earned from selling the stock. A day trader probably isn't too concerned about the capital gains rate because they don't usually hold assets long enough for them to appreciate substantially (and, moreover, because their losses are deductible against their gains), but someone who's held capital assets for any length of time (like, say, someone with a house or a retirement account or a long-term bond or capital equipment or a farm or any number of other assets that are frequently held for years and subject to the capital gains tax) will have a much harder time ignoring the tax.

Moreover, even if the risk-adjusted spread is relatively small between assets, the capital gains rate would lead to a rigidity to capital which can only harm efficiency.

[aerius]

Perhaps a little rigidity and cautionusness is what "investors" need then. Since they all rushed into the "higher performing" financial derivatives sector and it turned out to be a glorified pyramid scam of the highest order - I mean - 71 billion to 1,7 billion for Lehman, was it? Right? GDP of Kazakhstan to basically the value of a Coke plant? And that's "the higher performing sector" of economy? But of course, let's make it easier to move capital from A to B. That sure won't lead to unwarranted disproportions and gross fuck ups like it did this time, right? It will work?

Or, perhaps, it's an example of how capital markets are screwed up by high capital gains rates.

So by that logic the US should have a better functioning capital market than Canada. Oh, wait, which country's system is crashing & burning again? Our capital gains tax is higher, and yet our markets are more stable and less screwed up.

[Broomstick]

Marina - change "minor children" to "legal dependent", as caring for an elderly parent or disabled adult relative is something we should encourage, and can be just as costly and demanding as caring for a child.

A very fair correction, and thank you for noting it. Editing period's already gone, but consider it amended. Also, I take it you generally approve of this line of modification to the American scheme of government?

Not entirely, and I'd like to think it over a bit. This might be worthy of a thread of it's own as a discussion of the merits and drawbacks of such a scheme. However, might be best to wait until everyone's finals are over.