Income, Tax Rate, and Investments

Started by Zeitgeist, January 24, 2012, 09:06:17 PM

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Zeitgeist

So, correct me if I'm wrong. Seriously, please do.

If someone (Warren Buffet) chooses to draw their income from his investments rather than a salaried income, the rate of taxes is lower.

This is why his secretary pays more, because her income is based on a salary.

Presuming the above is true...

Does it not make at least some sense that if someone chooses to take the implied risk of living off the return on their investments, that they be 'rewarded' by a lower tax rate? And doesn't that lower tax rate (ideally) promote more investment?

So my point would be that salaried people are not being 'penalized' as much as people who choose the path of higher risk are rewarded. But this of course is based off my premise, presuming it is true.

Run8

I suppose, the need to focus never arose...so, something like a Swiss Army Knife, that's my life. J.B.

Pumpkin Seeds

Salaried people are not being penalized for working at a salary job and income.  The problem is that the investors are not putting forward their share in terms of taxes.  A reward for an investment is the money returned to the investor for their hard work, diligence and strategy in playing with the market.  Their reward should not be a break by the very government that defends, enforces and codifies their ability to trade in such a way.  The government already invests heavily in providing and protecting these avenues of trade.  Case in point, the infamous Bailout.  Billions of dollars given to shore up bad investments by these same people that reap huge rewards and pay less in taxes.  There is humor that the government dropped those billions to defend those banks and firms, but constantly wages battle over extending unemployment benefits.  So percentage wise the government collects the least, but spends the most defending these people and their investments. 

The penalty comes that there is discussion over increasing the tax rate on middle class income and salaried workers.  While there was a reaction to increasing the tax rate on the vast majority of Americans, there was an even larger outcry for raising the taxes on investments.  This is despite the fact that the net gain on raising the taxes slightly on investments would far surpass raising the taxes on salaried incomes.  Few salary positions can even hope to match investments.  So salary people are being put up to have their taxes raised, benefits lowered to make up for a deficit increased by a need to bailout the investors. 

Also, an argument can be made that less taxes on investments means more investments but that is also only true on the surface.  The flip side, for one, is that raising the taxes on investments would allow less taxation on the salaried worker.  Salaried workers make up a much larger portion of the spending power in this country and so their increased money would equate to more spending and saving.  Banks do most of the investing and trading, so more saving is more money for them to invest.  Companies are invested in and so more spending by the populace means more profits, more profits means a greater return to investors. 

Zeitgeist

Okay. So I'm not misinformed insofar as the mechanics behind the different tax rates. Salaried income gets a higher rate than income derived from investment.

The rub seems to be that that reward of a lower rate is uncalled for in the case of investors because they already are afforded protection of their investments by the government.

I do think its rather simplistic, the narrative bandied about, that Buffet's secretary shouldn't pay a higher tax rate than her boss. I mean, it's thrown out there quite often without the understanding behind it, the purpose of which is to illicit outrage and not so much to inform.

I do think its a fair argument to make that investors need not be given the safety net and lower tax rate based on the presumption of risk and reward.

I wonder too though if raising that rate is the way out of our economic demise we see ourselves in. I'm pretty certain it is more involved and complicated. I couldn't begin to speak as though I would have all or even some of the right answers. I does seem as though the improvement (vastly) of the job market is the key. The more people who are working and earning a paycheck the more people who are paying into the system (taxes).

Vekseid

Quote from: Zeitgeist on January 24, 2012, 09:06:17 PM
So, correct me if I'm wrong. Seriously, please do.

If someone (Warren Buffet) chooses to draw their income from his investments rather than a salaried income, the rate of taxes is lower.

This is why his secretary pays more, because her income is based on a salary.

Presuming the above is true...

Does it not make at least some sense that if someone chooses to take the implied risk of living off the return on their investments, that they be 'rewarded' by a lower tax rate? And doesn't that lower tax rate (ideally) promote more investment?

So my point would be that salaried people are not being 'penalized' as much as people who choose the path of higher risk are rewarded. But this of course is based off my premise, presuming it is true.

1) If you have a multi-million dollar nest egg somewhere (or in Berkshire Hathaway's case, $30 billion), can it really be called risk?
2) This is particularly egregious in Mitt Romney's case, where he doesn't even manage his own investments. That's the definition of corporate leech, right there. Buffet and Gates will personally get involved in where their investments are going, and have made some of these adventures the focus of some of their talks.
3) You are taxed on earnings after investment costs, in most situations. This is one of the prime reasons why the 94% top tax bracket era was the greatest period of economic expansion in world history - in order to not pay ridiculous amounts in taxes, you had to invest.

The economy's overall strength is given by how fast dollars move, and there is a threshold at which 'wealth redistribution' will in fact move it faster than individual action. What constitutes 'fair' here may be disputed, but if you want the strongest economy possible, you structure the tax rate so that money is moving fastest:
1) No sales taxes, except possibly on high-end luxury goods
2) Income taxes at zero through all nondiscretionary spending, and a little ways into discretionary. It would then scale to ensure that money either spent or taxed.

Some issues with the above:
1) The problem of course is that #2 makes the individual situation too vulnerable. We need to allow for some savings. However, no one deserves to live off of the rest of humanity for all eternity. There is a middle ground that we can find.
2) It might be possible to bring Romney and many investors like him in on fraud charges. Taking money for driving companies into bankruptcy ought to seem, at the very least, suspicious.

In any case, imagine you're making $200 million a year.

Under the current system, you get taxed around %15, and thus, pocket the $170 million. You stash it in a bank, offshore accounts, etc.

Normally, this would be okay-ish. Said banks would invest your funds for you, and give you a reduced return on the interest.

However, when the economy falls into a liquidity trap, like we are in now, that stops - banks no longer provide loans as frequently (i.e. invest), and they basically throw their money at the only institution they trust to provide a return - the Government. This is why interest rates are so low. However, we also have a political apparatus that has made the idea that borrowing a good chunk of this money is a toxic proposal for the Government, so we can't go that route. So, in summary
1) People aren't spending, so
2) Investors aren't investing, so
3) Banks aren't investing, and
4) The Government isn't allowed to borrow, so
5) The economy suffers.

Contrast this with what happens when you have a 94%-or-so bracket.

You make $200 million. Your effective tax rate is 90%. You have two options
1) Let the government take $180 million
2) Invest enough, this year, that the government will take a much fairer share.

Boom. Liquidity trap no longer possible. The housing bubble breaks a lot of banks, but far fewer homes, because investors have to keep moving their money, meaning
1) More people are employed
2) People are spending more
3) Meaning those investments are more likely to be profitable.
4) Meaning investors have more money next year to invest with.
5) Meaning they'll need to hire more people next year, unless they want it all to go to the government...


Petronius

Quote2) This is particularly egregious in Mitt Romney's case, where he doesn't even manage his own investments. That's the definition of corporate leech, right there. Buffet and Gates will personally get involved in where their investments are going, and have made some of these adventures the focus of some of their talks.

One minor point - isn't that creating jobs for the people who do manage them? So some of Romney's money is going to a poor underprivileged investment banker, whereas Gates and Buffet keep that commission to themselves.

Callie Del Noire

FYI. Waren Buffet said it wasn't fair that he paid less proportionally than his secretary in taxes.

And I agrees with the president, corporate tax rates need to come down and we need to reward companies for making stuff here rather than outsourcing. You want to outsource? Go right ahead, but it's STUPID to reward then. In 2010, GE made MILLIONS in tax credits for moving cash and jobs OUT of the country. 10,000 jobs and the didn't pay a cent due to tax incentives that made in profitable to move their money off shore.

Reward reinvestment and building US infrastructure not out sourcing.

Vekseid

Quote from: Petronius on January 25, 2012, 01:28:29 AM
One minor point - isn't that creating jobs for the people who do manage them? So some of Romney's money is going to a poor underprivileged investment banker, whereas Gates and Buffet keep that commission to themselves.

Ignoring that they do in fact have teams that assist them in managing their obscene wealth anyway, Gates and Buffet still make active contributory value to society, above and beyond just giving money to charities, they try to direct the world to be a better place and take an active role in managing things to their end.

It still remains that Romney is a leech on the economy. He drains resources (food, fuel, uses land) and provides nothing whatsoever in return.

You might claim that some people earn that. However
1) No one deserves to live off the dole of society for eternity.
2) What has Romney personally built? Even Warren Buffet's story is rife with things he personally created using his own blood, sweat, and tears, starting with his newspaper delivery. Romney's story is one after another of: Buy out a chunk of a company, charge it huge fees for management, drive it into debt, shuffle off his share before it collapses. If it manages to survive the resulting bankruptcy, well, good for them!

When I read how Romney made much of his money, I have to wonder how it was legal in the first place. When many of the companies you buy go bankrupt, the people who made those original loans ought to have reason to suspect fraud.

Zeitgeist

Quote from: Callie Del Noire on January 25, 2012, 02:37:26 AM
FYI. Waren Buffet said it wasn't fair that he paid less proportionally than his secretary in taxes.

And couldn't he easily direct his financial manager to change his earnings structure so that he drew a salary, and paid the same rate as his secretary? He obviously knows why it is he pays a lower rate, and rather than act like he's powerless to change that, he could put his money where his mouth is.


Thing is Buffet is an extreme example, on the far end of the spectrum.

What about those people further down the investment ladder, ones who may be taking a more real risk?

Vekseid

Most people taking real risk are actually fairly well supported by the IRS's current tax code. Almost every tax that is a problem for a self-employed startup is regressive in nature - sales tax (having to charge sales taxes on services in MN was the ultimate in bullshit), Social Security/Medica(re/id), and even the latter has been mostly resolved if you're just eeking by. Health insurance is where self employment really rakes you over the coals.

I mean - let's say that you take your savings of $200k or whatever, risk it all at an investment prospect - your own business, most likely. You take a $100k loss your first year, you can still deduct parts of those losses (depreciation, etc) the next few years.

You don't pay any federal taxes in this scenario. The Federal Government pats you on the back and says 'better luck next year, keep at it!'

Now, if you don't start earning a profit in a few years, the IRS will start getting suspicious. This isn't a tax haven - it's basically a period in which you are given some rope to start your business without worrying about a giant bureaucracy breathing down your neck.

However, when it comes to getting benefits, etc. you are not given this slack. Everything you earn is counted against you - your expenses don't matter. So if you have a health problem, and you had revenue of $30k that year you lost $100k, you are SOL as far as benefits are concerned.

MasterMischief

Quote from: Zeitgeist on January 25, 2012, 07:03:24 AM
And couldn't he easily direct his financial manager to change his earnings structure so that he drew a salary, and paid the same rate as his secretary? He obviously knows why it is he pays a lower rate, and rather than act like he's powerless to change that, he could put his money where his mouth is.

Why the attack on Mr. Buffet?  How is he acting 'powerless' to change things?  It seems to me he is trying to point it out exactly so that it will be changed.  If he did what you suggest, what stops anyone else from not doing it?  It is the system that needs to be changed and he is trying to point that out.

To me, he is pointing out that no one is going to 'do the right thing', as evidence, he is showing he is not.  It is the republicans  that seem to be saying everyone else will 'do the right thing' if we just leave them alone...yet everyone else is doing exactly the same thing Mr. Buffet is.  Who is the bigger hypocrite?

itsbeenfun2000

I don't think people were upset about others being taxed so low during the good times. After all they had benefits that were not taxed as well. What I think people are upset about is the double standard. The middle classes "entitlements" have been taken away or are paying more for them. The cooporations and investors "entitlements" are called tax breaks and those of course can not be taken away that would be raising taxes. It doesn't  matter that the middle class when asked to pay more for their "entitlements" see an decrease in their pay by 5%. After all it isn't a tax increase.

This because investors and corporations create jobs. Jobs are not created by investors and cooporations, jobs are created by demand of supplies and services. If you have no money to spend you can't buy the services.

vtboy

My chief problems with according preferential tax treatment to capital gains income (or, as proposed by Newt Gingrich, not taxing capital gains at all) are these:

1) Who says investors need more reward?

The rationale for taxing long-term capital gains at rates lower than those applicable to ordinary income is that, by so rewarding investors, the practice induces capital investments which would otherwise not be made, with salutary benefits for all. In efficiently functioning markets, however, there is already a direct correlation between perceived risk and promised reward, and investments are presumed to be priced commensurately on their merits. Thus, A rated bonds have higher yields than AA bonds, and AA bonds higher yields than AAA bonds. Similarly, stocks with highly variable earnings history or no history of earnings are generally cheaper than stocks with stable earnings history, resulting in higher yields on the former if and when they pay off, whether in dividends or in capital appreciation.

Under a neutral tax policy, there are no favored investment returns, with the result that investment decisions are made strictly on their merits (i.e., risk-reward calculus). When government tilts the playing field by offering greater rewards for certain types of expenditures than for others, the "wisdom" of politicians is substituted for that of the market. The question then becomes, is it wise to offer inducements for investors to take on or favor risks not justified by their inherent or natural rewards? While I am not willing to answer this with an unqualified "no", I find it very difficult to see any net benefit that has been or is likely to be derived from encouraging investments that otherwise would not be made.     

Parenthetically, I am often astonished that the most ardent opponents of government intrusion in markets through regulation are frequently the loudest champions of government tinkering with markets in the guise of reduced taxation of capital gains. I suppose my mind is just too small not to be troubled by this hobgoblin of inconsistency.

2) Long-term capital gains treatment may actually be counterproductive.

The practice of taxing long-term capital gains at favored rates produces all sorts of distortion in economic decision making. To name but a few, it encourages: (i) appreciated investments to be held for more than a year, when other factors might counsel earlier sale; (ii) reinvestment of corporate profits over the payment of dividends, even when reinvestment opportunities may not be particularly attractive; and (iii) financial risk-taking over many forms of entrepreneurial risk-taking which may prove far more beneficial for the economy.

With respect to the last of these, consider the disparate tax consequences for two investors, one of whom ("Investor 1") purchases $1,000,000.00 of the stock of Amalgamated Bullshit, while the other ("Investor 2") spends $1,000,000.00 to open a gas station/convenience store.

If, after a year, Investor 1 sells the Amalgamated Bullshit stock for $1,200,000.00, he or she will be taxed on the $200,000.00 gain at only 15%. It is unlikely, however, that the investment, except perhaps in the most remote of causal chains, led to any increase in the company's purchases of bullshit shoveling machines or its hiring of bullshit shoveling workers.

Investor 2, on the other hand, has likely spent a good deal of his or her $1,000,000.00 in stimulative purchases of gas pumps, signage, counters, refrigerators, cash registers, inventory, etc. Investor 2 has also probably created half or dozen or so jobs for people who might otherwise be unemployed. Yet, despite these contributions to the nation's economic health, and despite the risk of loss of the entire investment (perhaps more if Investor 2 has personally guaranteed the gas station's lease and other long-term contracts), if at the end of a year Investor 2 is fortunate enough to have earned the same $200,000.00 as Investor 1, he or she will pay 35% of it in taxes. (Yes, I realize I am ignoring the tax benefits of depreciation charges on the gas pumps, etc. If you are troubled by this, assume a $1,000,000.00 investment in a business that requires la small er expenditure on hard assets).

Where is the sense in this?

3) Social stability is at risk.

Finally, given the widespread perception of unjustified rewards going to the financial elite at a time when economic opportunity seems to be dwindling for the middle class and for those even farther down the economic ladder, one might also question the wisdom of tax policies which further attenuate the connections between financial reward and both risk and economic contribution. How much more stretching can our social fabric really take? OWS protesters have not shown up with pitchforks. Yet.

Callie Del Noire

Quote from: MasterMischief on January 25, 2012, 09:31:41 AM
Why the attack on Mr. Buffet?  How is he acting 'powerless' to change things?  It seems to me he is trying to point it out exactly so that it will be changed.  If he did what you suggest, what stops anyone else from not doing it?  It is the system that needs to be changed and he is trying to point that out.

To me, he is pointing out that no one is going to 'do the right thing', as evidence, he is showing he is not.  It is the republicans  that seem to be saying everyone else will 'do the right thing' if we just leave them alone...yet everyone else is doing exactly the same thing Mr. Buffet is.  Who is the bigger hypocrite?

Yeah, Warren Buffet (along with a few others like the Gates) are trying to reform the tax code. I'm betting the reason the President used his own quote was they have similar outlooks.

I think that right now our tax structure is hideously damaged. We need to reform corporate taxes a LOT. When we had a healthy corporate tax code, a LONG time ago, we were growing and innovative. Now, outlook has changed from 'This will be paid off in 10 years' to 'This will give ME a payout in 3 quarters who cares what it will be like in 10 years'.

Corporate America has gotten greedy, lazy and amazingly self centered.

RubySlippers

Everyone that is elected to the Congress is a millionaire if not when they get in within a term or two. Good luck reforming the system lets see how that goes.

Seriously the elected people set the rules here we don't have a say unless your willing to vote out incumbants and do so with enough clear mandate to the ones that get elected to behave and voters in this country rarely do that. At least in a way that matters. Say if they made so much money tell us how and where, if we don't approve your OUT level of voter commitment.

Callie Del Noire

Quote from: RubySlippers on January 30, 2012, 10:39:58 AM
Everyone that is elected to the Congress is a millionaire if not when they get in within a term or two. Good luck reforming the system lets see how that goes.

Seriously the elected people set the rules here we don't have a say unless your willing to vote out incumbants and do so with enough clear mandate to the ones that get elected to behave and voters in this country rarely do that. At least in a way that matters. Say if they made so much money tell us how and where, if we don't approve your OUT level of voter commitment.

So by reforming corporate tax codes to encourage R&D, domestic investment, cutting out the export of money outside the US (which benefits other countries and not us), and generally repairing the high end of the corporate tax brackets is bad how? We would still offer breaks and incentives but grow jobs here and not there.

Caela

Quote from: Callie Del Noire on January 30, 2012, 04:51:12 PM
So by reforming corporate tax codes to encourage R&D, domestic investment, cutting out the export of money outside the US (which benefits other countries and not us), and generally repairing the high end of the corporate tax brackets is bad how? We would still offer breaks and incentives but grow jobs here and not there.

It's not bad. It's just not going to happen unless you can make it entirely worthwhile to corporations bottom lines, or make politicians scared enough about keeping their jobs to actually force them to DO their jobs. One of my favorite lines from a movie (can't remember which one right now, am rather sleepy lol) is that "Buying your local Senator is one of the best investments any company can make". The reasoning behind the comment is basically that We the People, are sheep. We elect someone and then keep electing them unless they do something so totally egregious that they can't remain in office. It doesn't matter if they aren't serving our interests while in office. Most people will vote for the name they recognize because they are too foolish to bother finding out what the politician has actually been up to.

So unless you make such things good fro business, the corporate handlers won't let the politicians vote for it, and unless we actually start voting these bozo's out of office on a regular basis they won't be scared enough of the voters to buck their corporate handlers.

Oniya

#17
Quote from: Caela on January 31, 2012, 08:46:29 PM
It's not bad. It's just not going to happen unless you can make it entirely worthwhile to corporations bottom lines, or make politicians scared enough about keeping their jobs to actually force them to DO their jobs. One of my favorite lines from a movie (can't remember which one right now, am rather sleepy lol) is that "Buying your local Senator is one of the best investments any company can make". The reasoning behind the comment is basically that We the People, are sheep. We elect someone and then keep electing them unless they do something so totally egregious that they can't remain in office. It doesn't matter if they aren't serving our interests while in office. Most people will vote for the name they recognize because they are too foolish to bother finding out what the politician has actually been up to.

So unless you make such things good fro business, the corporate handlers won't let the politicians vote for it, and unless we actually start voting these bozo's out of office on a regular basis they won't be scared enough of the voters to buck their corporate handlers.

I'm rather fond of this rather apropos movie quote:

"And whatever your particular problem is, I promise you, Bob Rumson is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it and telling you who's to blame for it. That, ladies and gentlemen, is how you win elections. You gather a group of middle-aged, middle-class, middle-income voters who remember with longing an easier time, and you talk to them about family and American values and character. And wave an old photo of the President's girlfriend and you scream about patriotism and you tell them, she's to blame for their lot in life, and you go on television and you call her a whore. Sydney Ellen Wade has done nothing to you, Bob. She has done nothing but put herself through school, represent the interests of public school teachers, and lobby for the safety of our natural resources. You want a character debate, Bob? You better stick with me, 'cause Sydney Ellen Wade is way out of your league." 

(The whole [noembed]final speech[/noembed] makes me go wibbly, actually.  Wish we had some politicians with that level of ballsiness.)
"Language was invented for one reason, boys - to woo women.~*~*~Don't think it's all been done before
And in that endeavor, laziness will not do." ~*~*~*~*~*~*~*~*~*~*~Don't think we're never gonna win this war
Robin Williams-Dead Poets Society ~*~*~*~*~*~*~*~*~*~*~*~*~*~Don't think your world's gonna fall apart
I do have a cause, though.  It's obscenity.  I'm for it.  - Tom Lehrer~*~All you need is your beautiful heart
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Callie Del Noire

Quote from: Caela on January 31, 2012, 08:46:29 PM
It's not bad. It's just not going to happen unless you can make it entirely worthwhile to corporations bottom lines, or make politicians scared enough about keeping their jobs to actually force them to DO their jobs. One of my favorite lines from a movie (can't remember which one right now, am rather sleepy lol) is that "Buying your local Senator is one of the best investments any company can make". The reasoning behind the comment is basically that We the People, are sheep. We elect someone and then keep electing them unless they do something so totally egregious that they can't remain in office. It doesn't matter if they aren't serving our interests while in office. Most people will vote for the name they recognize because they are too foolish to bother finding out what the politician has actually been up to.

So unless you make such things good fro business, the corporate handlers won't let the politicians vote for it, and unless we actually start voting these bozo's out of office on a regular basis they won't be scared enough of the voters to buck their corporate handlers.

Thing is.. corporate tax reform is in their best interest. You need to devlop infrastructure, engage in R&D and other actions. Why not structure it so you get paid for your investments (earlier)? Most of the things that developed the computer, internet and almost every other modern conveience came out of R&D tax breaks before they went away in the 70s.

Caela

Quote from: Oniya on January 31, 2012, 09:03:56 PM
I'm rather fond of this rather apropos movie quote:

"And whatever your particular problem is, I promise you, Bob Rumson is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it and telling you who's to blame for it. That, ladies and gentlemen, is how you win elections. You gather a group of middle-aged, middle-class, middle-income voters who remember with longing an easier time, and you talk to them about family and American values and character. And wave an old photo of the President's girlfriend and you scream about patriotism and you tell them, she's to blame for their lot in life, and you go on television and you call her a whore. Sydney Ellen Wade has done nothing to you, Bob. She has done nothing but put herself through school, represent the interests of public school teachers, and lobby for the safety of our natural resources. You want a character debate, Bob? You better stick with me, 'cause Sydney Ellen Wade is way out of your league." 

(The whole [noembed]final speech[/noembed] makes me go wibbly, actually.  Wish we had some politicians with that level of ballsiness.)

+1

LOVE that movie! Micheal Douglas and Annette Benning are great together!!!

And I agree, I wish we had politicians with that level of ballsiness and integrity...oh and that they could get enough money to actually GET elected.

MasterMischief

Quote from: Oniya on January 31, 2012, 09:03:56 PM
making you afraid of it and telling you who's to blame for it

That should be Fox News' tagline.