General Discussion
Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsNo, the capital gains tax is not “taxing the same income twice"
Whenever the subject of increasing the capital gains tax from its current 15% rate comes up, you’ll invariably hear opponents breathlessly crying, “but that’s taxing the same income twice! Capital gains is double dipping!”
It’s a great line, and has proven powerful in debates. The only problem is, it’s 100% bullshit.
The capital gains tax is NOT a tax on income already taxed, it’s a tax on the ADDITIONAL income you earn by investing that income. For example:
■You earn $100,000. Yay!
■You are taxed 35% on it. Boo!
■You invest the remaining $65,000, you do well, and you double it! Yay!
■You now have $130,000 in the bank. You are taxed 15% for the capital gains, i.e., the $65,000 you made. You pay $9,750.
More...
http://hlinkoreport.com/2012/12/09/no-the-capital-gains-tax-is-not-taxing-the-same-income-twice/
= new reply since forum marked as read
Highlight:
NoneDon't highlight anything
5 newestHighlight 5 most recent replies
jody
(26,624 posts)I thought this was a good article from a blogger.
How would inflation contribute to the idea of double taxation?
ProfessorGAC
(65,159 posts)Inflation may impact the actual intrinsic value of the extra $65k, but it's still not double taxed.
That posters question doesn't make sense to me.
jody
(26,624 posts)amount.
How is the increase due to inflation? That would only be true if the doubling in value was over the exact right amount of time to match the rate of inflation. There is no such statement in the OP. Just that the $65k goes to $130k.
So, that's not inflation and you're making a giant leap in logic and not getting why that doesn't make sense to those of us who aren't making that leap. Really?
What if the OP had said that the $65k went to $130k in a year?
And, if you pay taxes on a paycheck, and then 10 years later make more money, should you pay the taxes only on the amount you made 10 years ago?
You're positing a non-sequitur. The two have nothing to do with one another.
jody
(26,624 posts)■You earn $100,000. Yay!
■You are taxed 35% on it. Boo!
■You invest the remaining $65,000, you do well, and you double it! Yay!
■You now have $130,000 in the bank. You are taxed 15% for the capital gains, i.e., the $65,000 you made. You pay $9,750.
I asked "1. Why did you ignore the effect of inflation?"
What part of that simple exchange don't you understand professor?
Orrex
(63,220 posts)1. Inflation isn't a tax, so inflation is irrelevant to the example at hand.
2. The capital gains aren't the result of inflation but of capital growth, so inflation is irrelevant to the example at hand.
3. Value lost due to inflation is comparatively minimal. Certainly inflation-related losses of (at most) a few percentage points wouldn't be a big deal compared to a gain of 100%.
4. Inflation would impact all income more or less equally. If one year's dollar is next year's 98 cents, then that's true whether you have $130,000 or $1.30.
Perhaps I'm missing something that's obvious to . Care to share with the rest of the class?
DireStrike
(6,452 posts)
Major Nikon
(36,827 posts)Even if they were, I'm not sure what difference that would make. Tax brackets are already periodically adjusted upwards due to the effects of inflation, and we don't give people tax deductions for savings accounts for the loss of purchasing power due to inflation.
jody
(26,624 posts)Major Nikon
(36,827 posts)jody
(26,624 posts)Major Nikon
(36,827 posts)However, you have yet to explain how such a discussion is relevant to double taxation.
So it seems as if there's at least one other option, no?
jody
(26,624 posts)Major Nikon
(36,827 posts)Just sayin'
DireStrike
(6,452 posts)
freshwest
(53,661 posts)jody
(26,624 posts)jody
(26,624 posts)
rucky
(35,211 posts)But 15% is an insult. I assume you're not defending that, but it's hard to tell from the tone of your response.
The base rate should be raised to regular income, and there should be an adjustment for inflation so long-term investors don't get hosed when they retire.
jody
(26,624 posts)
JHB
(37,161 posts)As for tone, both "why did you leave out the effects of inflation? Ignorance or deliberate omission?" and "I think you're leaving out the effects of inflation and how it erodes the value of the principle over time" convey facts, but they clearly have different tones.
jody
(26,624 posts)JHB
(37,161 posts)...that whether you know it or not, whether you intend it or not, your manner of posing your questions (I.e., your tone) is accusatory and belligerent, for no obvious reason.
Ikonoklast
(23,973 posts)You cover the Bingo card.
Not even vaguely a supporter of anything Democratic.
jody
(26,624 posts)Ikonoklast
(23,973 posts)who have infiltrated the party via Wall Street and the Banks.
Back to where it used to be.
The direction we are now moving, and it scares the authoritarians.
jody
(26,624 posts)then with what political group do you identify?
Ikonoklast
(23,973 posts)You figure it out.
jody
(26,624 posts)Communist Party of the United States of America
Freedom Socialist Party
National Socialist Movement
Party for Socialism and Liberation
Socialist Action
Socialist Alternative
Socialist Equality Party
Socialist Party USA
Socialist Workers Party
Ikonoklast
(23,973 posts)It is always good for a laugh.
Good thing you're not one of them.
The Democratic Party is going through a demographic change just as the rest of the country is, and the more conservative elements of the party will either die off or find themselves so marginalized as to be easily ignored.
Tick, tock.
jody
(26,624 posts)
Walk away
(9,494 posts)Why don't you give us a few real world examples. That might be helpful instead of just attacking a post.
geckosfeet
(9,644 posts)rucky
(35,211 posts)Your follow-up questions seem to dig for personal motivation: Ignorance, omission, agenda... are pretty loaded words. You don't think you have a tone?
jody
(26,624 posts)issue and reinterpret the OP example.
Fact is the OP gave a simple example, "You invest the remaining $65,000", with few qualifications one of which could have dealt with inflation.
I stand by my question re inflation to the OP's investment and nothing I said in another post in this thread is intended to apply to the excursions that others might try to make.
The Magistrate
(95,252 posts)jody
(26,624 posts)ProfessorGAC
(65,159 posts)Impossible. What you're posting isn't logical. You're comparing apples to coffee tables and want us to be logical?
jody
(26,624 posts)The Magistrate
(95,252 posts)Since both are affected by inflation in the tax they pay, and you desire allowance to be made for one without mention of the other.
jody
(26,624 posts)The Magistrate
(95,252 posts)I charge for abuse....
jody
(26,624 posts)
on point
(2,506 posts)In other works you pay on 'real' value of the gain, not the 'nominal' amount
( Translation = The real value, not the named value)
This can be calculated a number of ways but the basic idea is to use 'Net Present value' to calculate the real value, taking into consideration inflation
Short term capital gains does not have inflation adjustment because the inflation period is considered too small to count and also to provide an incentive for people to hold longer term
coalition_unwilling
(14,180 posts)much ignorance and innumeracy. The OP is trying to correct a common misconception that income from labor gets double taxed as gain from capital appreciation. It does not and the OP is to be lauded for attempting to correct the misconception.
True, inflation over a number of years may theoretically contribute to capital gains. But inflation right now runs less than 2% per year. So really, what possible effect could inflation have that is statistically significant to the discussion at hand? Unless we're talking an investment horizon of 10 years or greater, inlfation is statistically insignificant to this discussion and, thus, a classic red herring meant to further confuse and mystify.
Hoyt
(54,770 posts)and one pays the taxes with inflated dollars. The 15% capital gains tax is dang low anyway.
jeff47
(26,549 posts)Inflation acts to reduce the real income of the investment. It doesn't change the absolute dollars paid by the investment (unless you're talking about an investment with an explicit inflation adjustment, but those are rare.)
If your investment happened to go up due to inflation, then yay you made more money. But it doesn't have to - it's possible for inflation to hurt investments.
jody
(26,624 posts)latter, then inflation could affect it.
I asked in #1 why the author did not consider inflation. Nothing more.
Why do you think that was not a legitimate question?
jeff47
(26,549 posts)If I had an investment in the form of $100 stuffed in my mattress, that is affected by inflation. Negatively.
If I have an apartment building full of renters, my rental income is affected by inflation. If I sell that building, the price may or may not have benefited from inflation.
There's no reason to provide any tax benefit for inflation. Expected inflation should be part of the math you do before buying an investment. If your investment went up due to inflation, then congratulations, you made more money.
I am aware that long-term capital gains taxes currently consider inflation. My point is they never should have. And even though you can currently calculate the effect from inflation in your taxes, that effect has been very small since the first Reagan term so it's safe to ignore in this discussion. For example, population growth over the last 30 years has had a much, much, much, much, much, much, much, much, much, much, much larger effect on real estate prices than -1 to 2% inflation.
jody
(26,624 posts)consider inflation.
Many tax theorists suggest capital gains taxes ought to apply only to real gains; that is, those that are adjusted for inflation.
It is not clear how laws can be passed that achieve those goals.
Currently inflation is running around 2% year but was over 4% a few years ago.
Lasher
(27,633 posts)These are ways the wealthy elite 'earn' their dynasties without really working.
FarCenter
(19,429 posts)Capital gains should be discounted for inflation. If you bought an investment for $100,000, hold it for a decade and sell it for $150,000, part of the $50,000 capital gain is just dollar inflation. If inflation averaged 2.5% over the decade, the $150,000 is really worth only $117179.76. So the inflation adjusted capital gains that you should be taxed on is $17,180.
Obviously, the current scheme of taxing capital gains held longer than 6 months at a low rate doesn't do the math right.
Dividend are taxed twice -- once when the company earns the profit and again when the stockholder receives the dividend.
ProfessorGAC
(65,159 posts)Since that money is in fact double taxed, it has always been the talking point for keeping dividend rates low.
It's not a completely baseless argument either. I may not buy it totally because it's a little shallow, but it's not wrong either.
FarCenter
(19,429 posts)Along with the requirements that:
- all corporate earnings have to be returned to the stockholders as dividends each year (no retained earnings -- if companies want to use stockholders dividend money for investment, they have to sell shares to stockholders to get it) and
- dividends disbursed to other corporations are taxed at the highest individual income tax marginal rate (e.g. insurance companies cannot earn dividend income tax free.).
Diego_Native 2012
(65 posts)when wages are indexed to inflation. Why should 'gains' receive special treatment when actual wages don't?
dbackjon
(6,578 posts)Ashamed anyone here would fall for it.
Most everything is double/triple taxed, if you dig deep enough - YOu earn income, it is taxed. You spend that income at a store, it is taxed. Why a big fuss for investors?
That income is not double taxed on the same person.
Anyways, capital gain, dividend, everything should be taxed at the same rate.
still_one
(92,372 posts)
SunSeeker
(51,662 posts)The company and the stockholder are not one and the same. They are separate legal entities for purposes of taxes and liability. Otherwise, we'd be able to sue shareholders when the corporation they invested in polluted our town. They can't have it both ways, either they are separate entities for purposes of taxes AND liability, or they are one entity for purposes of both. As the OP says, the capital gains tax is NOT a tax on income already taxed, it’s a tax on the ADDITIONAL income you earn by investing that income. Shareholders are investors, they are not the corporation.
jeff47
(26,549 posts)Each time it's paid to someone, it is taxed. Why should dividends receive special treatment not provided to paychecks?
FarCenter
(19,429 posts)jeff47
(26,549 posts)C corp requires it's own return, the others don't.
But that has nothing to do with the number of times the money is taxed.
Ruby the Liberal
(26,219 posts)The concept refers to corps paying taxes on their net income and then shareholders paying taxes on the dividends they earn. Dividends are taxed at full earned income rates while anything held 1 year and 1 day+ qualifies for the capital gains tax rate.
SunSeeker
(51,662 posts)The Corporations and their shareholders are two separate taxable entities. The shareholders are investors in the corporation. They are not the corporation itself. And would never want to be, since then they would have the corporations liabilities--and liability avoidance is the main reason corporations as separate legal entities were invented.
As the OP correctly notes, the capital gains tax is NOT a tax on income already taxed, it’s a tax on the ADDITIONAL income you earn by investing that income.
I think it is proper that dividends are taxed at full earned income rates. I think that it is a gift to the wealthy that anything held 1 year and 1 day+ qualifies for the much lower capital gains tax rate. The capital gains tax rate should be the same, if not higher, than the earned income rate.
Ruby the Liberal
(26,219 posts)a new staircase, you are taxed on the income I pay you. The whole "corporations are people" thing is complete nonsense - I just laid out what the argument is, I am not arguing for it.
I want to see the elimination of a mountain of tax breaks for corporations. Tax break for operational costs for moving your Ohio business to the Phillipines? Gone. Oil and Gas subsidies to ExxonMobile & their friends who are in the most profitable industry in the world? Gone.
I don't get why we don't just go back to the Clinton era rates. That was the last time this country was running efficiently and at a budget surplus. Somehow, tie the deal to the name CLINTON ERA and tell the deficit hawks to STFU given that his rates made the surplus happen. Dump the MIC and their damn wars and bring that money home to do a little nation building right here.
Swede Atlanta
(3,596 posts)1. You invest $65,000 in a business
2. The business is able to quadruple that $65,000 into $260,000 of profit
3. The business pays 25% of that $260,000 in corporate tax ($65,000) because of tax deductions, et.
4. The business pays out the remaining $195,000 to you as the sole shareholder
5. You pay capital gains tax on the $195,000
The argument is the corporation has already paid a 25% tax on the earnings/profit. So when they distribute some or all of the profit to an investor and the investor pays capital gains this is a double tax on the same earnings.
That would hold water IF corporations actually paid taxes. We know that several of the most profitable American businesses don't pay nor will they ever pay any corporate taxes due to corporate welfare written into the tax code, generous tax deductions and the ability to shield income through shell corporations.
If it was true the company had paid tax on the initial $260K of profit or gain then this would be double taxation. I'm not, per se, opposed to double taxation when it recognizes that the corporation made profit they could invest in their business. They chose to distribute the profits out.
jmowreader
(50,562 posts)Starting with the fact that the IRS has special tax rules for illicit businesses. Got news for ya, sir; any business that can quadruple its initial investmant is either benefiting from first-mover advantage (the Blackberry company probably made 4x profits until everyone else figured out how to make those things) or they import drugs.
hfojvt
(37,573 posts)Thus all those profits would be paid on the individual 1040, using schedule C. There would be no 25% corporate tax on the profits.
Now if the owner did decide to incorporate. First, there would be fees associated with such a move, but there would also be some advantages to it as well, legal and financial. It would be too complicated to make a simple example out of, and also, I would admit, I have no clue how corporate taxes work. I have never filed them for myself, nor been trained or paid to file them for others.
jmowreader
(50,562 posts)...hope their audience doesn't know shit about corporate finance.
The "double taxation" schtick comes from dividends. A corporation pays them from after-tax money, then the recipient pays taxes on them. This is one of Michael Milken's junk bond sales pitches: because bond interest is paid from pre-tax money, a bond issuer can give better returns than a stock issuer.(Because buyers are more likely to churn than to hold today, all this is academic because a minority of stock players hold long enough to be paid dividends anyway.)
There are two issues here, and both are important.
Issue one: dividends are not capital gains. A Romney likes dividends because they help pad his income tax rate."See, I paid 35 percent on a million of my income!" Great, pal; how much did you pay on the $24 million in carried interest?
The other is investing isn't what the Masters of the Universe will have you believe. There's a scene in Wall Street where Hal Holbrook tells Charlie Sheen tbe deals Jackson-Steinem do create science and research jobs. Actually, the deals they do are a lot like the ones a Studebaker dealer does in 2012. You got a whole lot full of Studebakers you bought from rich guys and you hope to sell them to other rich guys, and Jackson-Steinem buys stock from rich guys to sell to rich guys. Neither Studebaker nor the companies on the stock certificates ever see the money.
Now check this out: let us say Skinner and I were to move to Pocatello, Idaho, and open a tractor dealership. We would make lots of money...and because we would sell new tractors, the proceeds would create jobs at Agco-Allis or John Deere. Our profits would be taxed at 35 percent. If we are trying to make jobs and growth with tax policy why aren't profits on tractors (which create jobs for machinists, truck drivers, service techs and machine operators) taxed at 15 and profits on used stock (which creates jobs for guys on the floor of the NYSE with numbers on their jacket sleeves) taxed as ordinary income?
coalition_unwilling
(14,180 posts)
customerserviceguy
(25,183 posts)If there's already been a corporate income tax applied at some place along the line, it is.
So what, double taxation happens all the time. I pay Federal and State income taxes on the money I never see that's decducted from my checks for Social Security and Medicare taxes. I never see the rich whine and moan about that.
hfojvt
(37,573 posts)First, I hate the phrase "capital gains tax".
There is no such thing.
There is an income tax. which includes tax on income made from capital gains.
To say "capital gains tax" makes it sound like there is another tax just on capital gains.
Which would be nice, but isn't reality.
Second, income of $100,000 is NOT taxed at 35%. Not even close. The 35% marginal rate does not even start until $357,700 (and that was in 2010), AND that rate only applies to the income over that amount. Taking $100,000 even for a single. childless person (the people who pay the highest tax rates on income) AND assuming no other deductions (I, myself put $6,000 in my IRA which I generally do every year and tax a deduction, and sometimes even a double deduction thanks to line 50 on the 1040) - a single person would pay $19,056 in taxes. A 19% rate, not a 35% rate. Even throwing FICA in there only gets it to 26.65%
Granted, it was just a made up example, but it is one that might make some people think - "35%??!!? taxes are way too high!"
Egalitarian Thug
(12,448 posts)
humbled_opinion
(4,423 posts)that people pay on gambling income 25 percent..... because it is roughly the same concept.
marybourg
(12,634 posts)
reACTIONary
(5,771 posts)...it encourages savings and investment. If you save your money and invest it in the economy, so the story goes, you are also helping everyone out and you deserve a reward (lower tax) for your discipline and willingness to forego immediate gratification (consumption).
This argument has some merit, both ethically and practically, but past a certain level of investment income it breaks down. There is just about nothing else to do with the income but to invest it, so it is no longer a virtue and it need not be encouraged.
The argument that some income taxes constitute double dipping is an argument for doing away with the corporate income tax entirely, and taxing the income only as dividends paid to investors.
SunSeeker
(51,662 posts)The corporation and the shareholder are separate entities. They are not the same "dip." If corporations are going to get away with the legal fiction that they are separate entities, whose liabilities do not extend to their investors, then the corporation needs to be taxed. They are benefiting from our society, they need to pay their share to maintain it.
And IMHO labor should be encouraged more than passive investing. Earned income should be taxed less than dividends.
reACTIONary
(5,771 posts)
former9thward
(32,068 posts)The shareholder is the owner so they can't be separate. Our laws shields the shareholder from liabilities but that is a different matter than taxation. If the corporation makes a profit that profit is taxed. From what is left over the corporation may choose to issue a dividend. That dividend is then taxed. So, yes, the same money is taxed twice. Once at 35% and the second time at 15%. You may not care about that but the facts remain that it is taxed twice.
SunSeeker
(51,662 posts)That shareholder holds an ownership share as an invester. The corporation owns the machines, means of production, etc. in the name of the corporation, not the shareholder. The corporation makes money by making widgets. The shareholder makes money picking stocks to invest in.
Our laws shield the shareholder because of the legal fiction that the corporation is this separate entity. It is not some "different matter." It is the whole basis why shareholders can't claim double taxation. If it's "all the same money" and the "shareholders are the corporation" then there is no liability shield, because the shareholder and the business entity are one and the same, like a sole proprietorship.
former9thward
(32,068 posts)The shareholder owns the machines,the factory, the land, everything. The money is exactly the same. Any accountant would tell you that.
SunSeeker
(51,662 posts)Seriously, people buy stock as an investment. They don't buy it to own the factory. Stockholders buy a right to a dividend and a right to later sell their shares, hopefully at a gain. They should be taxed on dividends and any capital gains from future sales of those shares like any other income. Sorry you don't feel the same way. Pretty sad to see this sentiment here on DU.
former9thward
(32,068 posts)You still own the company. A very small fractional share but it is ownership none the less.
COSCO has just issued a $7 a share special dividend to escape the higher dividend taxes next month. The CEO is picking up a nice $14 million from that dividend that he will not have to pay the higher rate on. That is real "sacrifice" isn't it? (The CEO of COSCO gave a speech at the DNC calling for 'sacrifice' by the rich).
SunSeeker
(51,662 posts)Tax policy is meant to encourage productive behaviors and discourage destructive ones. Which is why it is so ridiculous to give a lower tax rate on capital gains, coupled with lower taxes on the rich, since it encourages the rich to pull money out of their businesses rather than re-invest it back into their businesses. If taxes on dividends were the same as earned income, Costco would not be paying out all that money as dividends. Instead, it would be reinvesting it in the business. But with dividend rates likely going up in January, I'm guessing they felt they had to do that or face a potentail shareholder class action suit for not letting them get the money at the low rate when they could.
And having a miniscule fractional share of a company is simply not the same as owning a company. You have an investment. It is just a right to collect dividends and later sell the stock, hopefully for gain. You do not have all the rights nor responsibilities of ownership.
former9thward
(32,068 posts)There is absolutely no legal basis for it. The vast majority of companies are not issuing special dividends. They did it because they are greedy 1%ers who don't want to pay a nickel more in taxes than they have to. The CEO tries to cover his greedy hypocrisy by giving speeches calling for "sacrifice". Yeah, some sacrifice. Hope you do well with your "investment".
SunSeeker
(51,662 posts)Which is why my husband bought the stock. But, like the vast majority of Americans, 98% of my income is earned income, so I pay about 30% in income taxes regardless. I'd like to see the Buffet Rule instituted, at a minimum. As I've posted in the past, capital gains/dividends should be taxed at a higher rate than earned income. Do we at least agree on that?
brewens
(13,618 posts)not right, because that money's already been taxed. I could say that about every dollar I've ever earned. The only difference is that it's not a person from my family that paid taxes on it. Sorry junior. Your inheritance is income, just like my paycheck and you should be taxed on it!
By treat all income the same, I don't mean tax everyone at the same rate of course. Just that income, whether wages, investment or inheritance, is income.
brokechris
(192 posts)that wants to pass something like a family farm on to the next generation. Of course we can eliminate small businesses and small farms and just go with Walmart and factory farming.
SunSeeker
(51,662 posts)I would imagine most family farms are incorporated now anyway, but taxing capital gains is not keeping small farms or small businesses from being passed passed on to the next generation.
brokechris
(192 posts)was talking about taxing estates. Oh---and there are plenty of small farms where I live. I get around 90% of my food from them direct.
Ilsa
(61,697 posts)Certain personal corporations (say, a therapist running her own business) are taxed at that corporate level, then the earnings are taxed to the individual at the individual rate. It seems to me that the income should be able to pass-through to the individual and taxed only once for that kind of sole proprietorship.
Evasporque
(2,133 posts)from capital gains....
He SCREAMED at me that it was taxing it twice....he said you keep your money in the bank...does it get taxed....
I said no. I don't make any capitial gains income.
He screamed at me that he already paid taxes (on this millions of dollars he got from a golden parachute)
which he turned in additional millions....each year he makes income off his investments.
I just called him a cheap freeloading selfish bastard for making income off of a pot full of money and thinking you shouldn't have to pay ANY taxes. Haven't talked to him since.
liberal N proud
(60,340 posts)They have convinced the ignorant who never receive capital gains that it is.
quaker bill
(8,224 posts)Every time a reported dollar changes hands, it is taxed, unless you donate it to a tax exempt charity. I make and sell art jewelry at art festivals. Every single dollar I get for a piece was taxed before the customer came to me to spend it, it most likely was taxed before they earned it, and I pay taxes on it again when I receive it. There is some left over and if I spend it on anything other than supplies to make new work, I pay taxes on it again. The people I purchase from pay taxes on that dollar again, and the cycle continues until the dollar is literally gone.
It is really not different that if I were to buy and sell stock. I don't currently, I buy, work on, and then sell semi precious gems and precious metals. I work hard to assure that these investments gain value and that I sell them for more than I pay for them (thus comes profit).
At one point earlier in life, I inherited a bit of money and bought and sold stock. I did not use a hammer, files, saws and a torch, but I did use tools (the internet) to attempt to assure that what I sold was worth more than I paid for it (thus comes profit - but they call it capital gains). The money was taxed when I made a profit from these transactions.
Both should be taxed the same.
Thinkingabout
(30,058 posts)If the selling price is larger then you have Capital Gains. The tax is on the gain not the selling price. If you purchased a home for $200,000 in 2000 and sold the property in 2012 for $300,000 the Capital Gains would be $100,000 less any improvements you may be able to claim.
On stocks you purchased in 2000 @ $50.00 a share and you sold those shares in 2012 for $100.00 a share then the Capital Gains would be $50.00 per share you sold. On the money you made from income was taxed at the time you earned the money and is not taxed again as Capital Gains at the time of selling asset.
Odin2005
(53,521 posts)a low Capital Gains rate encourages pumping money into the Wall Street casino.
