Jump to content

ST capital gains tax likely to increase if Clinton is elected


Guest Schwab711
 Share

Recommended Posts

It seems likely that either Bernie Sanders or Hillary Clinton will be elected at the moment (I'd be interested to hear if anyone has any other contenders - it's way too early to worry about the exact individual). Clinton has just announced that she plans to further increase the capital gains tax to ~28% ST and up to 20% LT.

 

http://finance.yahoo.com/news/clinton-propose-increasing-capital-gains-161911270.html

 

Given how low the capital gains tax is relative to the historical average, I expect  this to give a slight boost to the relative returns of quality/compounding stocks. I had another post where I mention the high corporate tax rate. I think it is also likely we will see that drop to ~20%-25% (with the latter more probable), which will provide an increase in earnings by ~11%-15% for companies that have a high tax rate (mostly small domestic companies or profitable OTC). It would also make deferred tax assets more valuable if there was any possibility that they wouldn't be fully recognized before. Just some things to consider when strategizing allocation.

Link to comment
Share on other sites

Munger has been calling for drastic ST CG increase to dent the prevalent casino mindset. Power of incentives.

 

Link to comment
Share on other sites

Munger has been calling for drastic ST CG increase to dent the prevalent casino mindset. Power of incentives.

 

 

This is true that the casino mindset would be dampened. It's also true that in this case Munger and Buffett wouldn't be as successful. One man's gamble is another man's investment.

Link to comment
Share on other sites

I think this is so path-dependent that the best and least error-prone way to forecast this is to think about it as you would forecast the price of oil - by using the current price/rate (of course the other way is to do as you have done and looking at historical averages).

 

I can see where you are coming from, but I think it's pretty safe to plan for the tax rate to change (anything you buy now will probably be sold by the time this change goes into effect - so it is relevant). 1) I'm betting the odds are >95% (conservatively) that either Bernie/Hillary wins. 2) If either wins, I'm guessing there is >95% (conservatively) that capital gains increases. There's a very high chance we will see noticeably higher cap gains taxes in 2-4 years (possibly lower corporate tax rate as well).

 

This isn't going to add any immediate value. Much like a large DTA that is being valued at $0 by the market, it's just a bonus. No different than some folks only investing when they can identify a catalyst, I like to invest with many small tailwinds.

Link to comment
Share on other sites

Munger has been calling for drastic ST CG increase to dent the prevalent casino mindset. Power of incentives.

 

 

This is true that the casino mindset would be dampened. It's also true that in this case Munger and Buffett wouldn't be as successful. One man's gamble is another man's investment.

 

I hate how rich old farts, having made their money, want to pull up the ladder.

Link to comment
Share on other sites

I think this is so path-dependent that the best and least error-prone way to forecast this is to think about it as you would forecast the price of oil - by using the current price/rate (of course the other way is to do as you have done and looking at historical averages).

 

I can see where you are coming from, but I think it's pretty safe to plan for the tax rate to change (anything you buy now will probably be sold by the time this change goes into effect - so it is relevant). 1) I'm betting the odds are >95% (conservatively) that either Bernie/Hillary wins. 2) If either wins, I'm guessing there is >95% (conservatively) that capital gains increases. There's a very high chance we will see noticeably higher cap gains taxes in 2-4 years (possibly lower corporate tax rate as well).

 

This isn't going to add any immediate value. Much like a large DTA that is being valued at $0 by the market, it's just a bonus. No different than some folks only investing when they can identify a catalyst, I like to invest with many small tailwinds.

 

I disagree that the odds are so knowable and so tilted in that direction for either probability, but I don't dispute the rationality and cogency of what you are saying, if it were true that those odds were knowable and tilted in that way.

Link to comment
Share on other sites

Munger has been calling for drastic ST CG increase to dent the prevalent casino mindset. Power of incentives.

 

 

This is true that the casino mindset would be dampened. It's also true that in this case Munger and Buffett wouldn't be as successful. One man's gamble is another man's investment.

 

I hate how rich old farts, having made their money, want to pull up the ladder.

 

Also remember that all activists are bad, income taxes are the same thing as payroll taxes (including the employer's portion), and the double taxation of dividends should be ignored.

 

Oh and, all private equity firms are bad unless they partner with you, in which case they're wonderful.

Link to comment
Share on other sites

I think this is so path-dependent that the best and least error-prone way to forecast this is to think about it as you would forecast the price of oil - by using the current price/rate (of course the other way is to do as you have done and looking at historical averages).

 

I can see where you are coming from, but I think it's pretty safe to plan for the tax rate to change (anything you buy now will probably be sold by the time this change goes into effect - so it is relevant). 1) I'm betting the odds are >95% (conservatively) that either Bernie/Hillary wins. 2) If either wins, I'm guessing there is >95% (conservatively) that capital gains increases. There's a very high chance we will see noticeably higher cap gains taxes in 2-4 years (possibly lower corporate tax rate as well).

 

This isn't going to add any immediate value. Much like a large DTA that is being valued at $0 by the market, it's just a bonus. No different than some folks only investing when they can identify a catalyst, I like to invest with many small tailwinds.

 

Have you seen any poll numbers that show Sanders leading in hypothetical general election match ups??  I find it hard to believe that a non-charismatic, poorly financed, old Socialist would be likely to win a national election.  I think he would lose by double digits personally. 

 

Just because Hillary is leading hypothetical match-ups now does not mean she will once it is head to head.  She has shown herself to be a poor campaigner.  Regardless, why do you think a Republican House would support this?  Why would a Republican Senate support it?  Sure Republicans have 5 tough seats to protect (IL, NH, WI, OH, and PA) and Democrats have only two (NV, CO),but Democrats have to gain 4 to change control.  Their path in the House even harder.  In other words your 95% seems outrageously high.  Democrats are not 95% favorites to win the presidential election, and I don't see a Republican boosting cap gains tax.

 

Link to comment
Share on other sites

I think this is so path-dependent that the best and least error-prone way to forecast this is to think about it as you would forecast the price of oil - by using the current price/rate (of course the other way is to do as you have done and looking at historical averages).

 

I can see where you are coming from, but I think it's pretty safe to plan for the tax rate to change (anything you buy now will probably be sold by the time this change goes into effect - so it is relevant). 1) I'm betting the odds are >95% (conservatively) that either Bernie/Hillary wins. 2) If either wins, I'm guessing there is >95% (conservatively) that capital gains increases. There's a very high chance we will see noticeably higher cap gains taxes in 2-4 years (possibly lower corporate tax rate as well).

 

This isn't going to add any immediate value. Much like a large DTA that is being valued at $0 by the market, it's just a bonus. No different than some folks only investing when they can identify a catalyst, I like to invest with many small tailwinds.

 

Have you seen any poll numbers that show Sanders leading in hypothetical general election match ups??  I find it hard to believe that a non-charismatic, poorly financed, old Socialist would be likely to win a national election.  I think he would lose by double digits personally. 

 

Just because Hillary is leading hypothetical match-ups now does not mean she will once it is head to head.  She has shown herself to be a poor campaigner.  Regardless, why do you think a Republican House would support this?  Why would a Republican Senate support it?  Sure Republicans have 5 tough seats to protect (IL, NH, WI, OH, and PA) and Democrats have only two (NV, CO),but Democrats have to gain 4 to change control.  Their path in the House even harder.  In other words your 95% seems outrageously high.  Democrats are not 95% favorites to win the presidential election, and I don't see a Republican boosting cap gains tax.

 

My thoughts exactly. And there's a lot that can happen between then and now.

 

I sure miss InTrade.

Link to comment
Share on other sites

http://www.oddschecker.com/politics/us-politics/us-presidential-election-2016/winner

http://www.oddsshark.com/entertainment/us-presidential-odds-2016-futures

 

Current odds are ~77.8%. Since historically it has been ~50/50 for each party, but in 2016 looks to be a sure thing for democrats (just stating what appears to be a fact), I'm guessing 95% is not a ridiculous opinion within oddschecker.com's office. 95% could very well imply popular votes of 52% D/47% R/1% I. That would be close to a landslide! That's why I say 95%. Even if you use 77.8% instead of 95%, thats ~50/50 chance of becoming a major topic 1 year from now. Not a bad reason to hold quality stocks.

Link to comment
Share on other sites

and the double taxation of dividends should be ignored.

 

All corporate earnings are pretty much double taxed.

 

Taxed twice when dividend is paid...

 

or...

 

Taxed twice when capital gain is realized.

 

Example:

BAC earns net income of $1.20 per share

Dividend of 20 cents is paid (taxed twice)

Capital gain of $1 is realized when shares are sold (taxed twice)

 

The stock rose by $1 in recognition of retained earnings that were already taxed.

 

Pretty shitty isn't it.

 

 

 

 

Link to comment
Share on other sites

Clinton has just announced that she plans to further increase the capital gains tax to ~28% ST and up to 20% LT.

 

She didn't announce an increase in ST cap gains rate -- if she were to do that, she would be taxing it at a rate higher than ordinary income.  Short-term (ST) capital gains today are taxed at ordinary income tax rates.

Link to comment
Share on other sites

http://www.oddschecker.com/politics/us-politics/us-presidential-election-2016/winner

http://www.oddsshark.com/entertainment/us-presidential-odds-2016-futures

 

Current odds are ~77.8%. Since historically it has been ~50/50 for each party, but in 2016 looks to be a sure thing for democrats (just stating what appears to be a fact), I'm guessing 95% is not a ridiculous opinion within oddschecker.com's office. 95% could very well imply popular votes of 52% D/47% R/1% I. That would be close to a landslide! That's why I say 95%. Even if you use 77.8% instead of 95%, thats ~50/50 chance of becoming a major topic 1 year from now. Not a bad reason to hold quality stocks.

 

I must not understand the link or how odds work because most of the odds on a Democrat win appear to me to be lower than ~77.8%.  I see 6 out of 10 (4/6) and 11 out of 19 (8/11) as the most common and that includes the book's profit margin.  Republican numbers look to be above 40%.  So 60/40 seems closer to reality.  I couldn't track with the rest of your post and more importantly it ignored the assertion of Sanders being likely to win (its Hillary's polling strength not the party's that is making Dems favorites) and completely ignores the likelihood of flipping Congress.  Another factor is the necessity of getting someone like Schumer behind it.    If multiple items need to happen, odds can only decline.       

Link to comment
Share on other sites

I have a couple of reasons for why LT cap gains and dividends are taxed at lower rates than regular income.

 

1)  Risk-adjusted tax rates

Employees earning a wage are not risking their capital.  They take home a paycheck, but how much money did they risk losing in order to earn the paycheck?

 

Should an investor get taxed at the same rate as earned income when he's risking a total loss of perhaps many multiples of that expected income?  What if you pay 40x earnings for a growth company that soon goes kaput?  You were risking 40x your expected earnings.  That's like a McDonald's janitorial worker losing $1,200,000 in order to try to earn a $30,000 pay check.  That's what it feels like to lose 40x your expected earnings.

 

 

2)  Are capital gains tax rates indeed lower??? 

What if you earned only a 10% capital gain over a 4 year holding period when inflation was running 2% per annum.  You get taxed 20% on the entire capital gain, but that wipes out 100% of your real earnings.  Since when is a 100% tax on your real gain considered low???

 

 

 

Link to comment
Share on other sites

Clinton has just announced that she plans to further increase the capital gains tax to ~28% ST and up to 20% LT.

 

She didn't announce an increase in ST cap gains rate -- if she were to do that, she would be taxing it at a rate higher than ordinary income.  Short-term (ST) capital gains today are taxed at ordinary income tax rates.

 

The proposal is expected to add a mid tier (1 to 3 years) at a rate of at least 28%

Link to comment
Share on other sites

Clinton has just announced that she plans to further increase the capital gains tax to ~28% ST and up to 20% LT.

 

She didn't announce an increase in ST cap gains rate -- if she were to do that, she would be taxing it at a rate higher than ordinary income.  Short-term (ST) capital gains today are taxed at ordinary income tax rates.

 

The proposal is expected to add a mid tier (1 to 3 years) at a rate of at least 28%

 

That's pretty terrifying. 

 

Look at the stock market valuations these days.  What if you hold an index ETF that only returns 4% and inflation rate runs at 2%.  Those aren't implausible numbers.

 

That leaves you with a real pre-tax capital gain of just 2%.  Yet it is taxed at 56% rate, not 28%.

 

And that tax rate goes up to 84% if the index ETF only gains 3% in a year of 2% inflation.

 

Why doesn't somebody propose that only real capital gains are taxed, and just tax them at the ordinary income tax rates?  So bloody simple and fair.  It isn't hard to adjust your cost basis with the government CPI data.  However I do believe there is a lot of risk that you can lose your money and rates should reflect that -- which is a good reason to make the tax rate less than the income tax rate.  Capital gains are hardly a given -- who shares when we lose?

 

 

 

Link to comment
Share on other sites

Clinton has just announced that she plans to further increase the capital gains tax to ~28% ST and up to 20% LT.

 

She didn't announce an increase in ST cap gains rate -- if she were to do that, she would be taxing it at a rate higher than ordinary income.  Short-term (ST) capital gains today are taxed at ordinary income tax rates.

 

The proposal is expected to add a mid tier (1 to 3 years) at a rate of at least 28%

 

That's pretty terrifying. 

 

Look at the stock market valuations these days.  What if you hold an index ETF that only returns 4% and inflation rate runs at 2%.  Those aren't implausible numbers.

 

That leaves you with a real pre-tax capital gain of just 2%.  Yet it is taxed at 56% rate, not 28%.

 

And that tax rate goes up to 84% if the index ETF only gains 3% in a year of 2% inflation.

 

Why doesn't somebody propose that only real capital gains are taxed, and just tax them at the ordinary income tax rates?  So bloody simple and fair.  It isn't hard to adjust your cost basis with the government CPI data.  However I do believe there is a lot of risk that you can lose your money and rates should reflect that -- which is a good reason to make the tax rate less than the income tax rate.  Capital gains are hardly a given -- who shares when we lose?

 

Because everyone that owns stocks is a millionaire and all bankers and their analysts working in 2008 should be in federal prison. But seriously, I agree with a lot of what you've posted. I hate the double taxation. I'm not sure what system I'd propose, but I don't understand how there can be capital gains taxes in the first place. The company or investors should get credits to offset any double taxation while keeping some minimum rate.

Link to comment
Share on other sites

Clinton has just announced that she plans to further increase the capital gains tax to ~28% ST and up to 20% LT.

 

She didn't announce an increase in ST cap gains rate -- if she were to do that, she would be taxing it at a rate higher than ordinary income.  Short-term (ST) capital gains today are taxed at ordinary income tax rates.

 

The proposal is expected to add a mid tier (1 to 3 years) at a rate of at least 28%

 

That's pretty terrifying. 

 

Look at the stock market valuations these days.  What if you hold an index ETF that only returns 4% and inflation rate runs at 2%.  Those aren't implausible numbers.

 

That leaves you with a real pre-tax capital gain of just 2%.  Yet it is taxed at 56% rate, not 28%.

 

And that tax rate goes up to 84% if the index ETF only gains 3% in a year of 2% inflation.

 

Why doesn't somebody propose that only real capital gains are taxed, and just tax them at the ordinary income tax rates?  So bloody simple and fair.  It isn't hard to adjust your cost basis with the government CPI data.  However I do believe there is a lot of risk that you can lose your money and rates should reflect that -- which is a good reason to make the tax rate less than the income tax rate.  Capital gains are hardly a given -- who shares when we lose?

 

Because everyone that owns stocks is a millionaire and all bankers and their analysts working in 2008 should be in federal prison. But seriously, I agree with a lot of what you've posted. I hate the double taxation. I'm not sure what system I'd propose, but I don't understand how there can be capital gains taxes in the first place. The company or investors should get credits to offset any double taxation while keeping some minimum rate.

 

It's not complicated.

 

The corporation merely needs to declare how much US corporate taxes were paid on a per-share basis.  Of those taxes paid, the corporation needs to declare how much were retained and how much were paid out as dividend.

 

The shareholder merely needs to take that as a credit so he isn't double taxed.

 

It's an easy problem to fix.  The Australians do exactly this -- for dividends.  They call it a "franking" system for dividends.  Completely eliminates double taxation of dividends.

 

This ensures that the Australian dividend is taxed at the Australian income tax rate.  So if your personal income tax rate is 45% and the corporation already paid 28% Australian tax on the money returned as a dividend, you would only owe the difference:  17%.  You get a full credit for what the corporation already paid.

 

Not a terribly hard problem to solve.  Corporations could screw their shareholders and elect not to do the extra work of declaring this stuff if they so choose.  It doesn't have to be compulsory and create a headache for corps that don't want to help their shareholders.  But for those who do want to help us shareholders, then why not allow?

 

Makes it all fair and ends all the debates.

Link to comment
Share on other sites

http://www.oddschecker.com/politics/us-politics/us-presidential-election-2016/winner

http://www.oddsshark.com/entertainment/us-presidential-odds-2016-futures

 

Current odds are ~77.8%. Since historically it has been ~50/50 for each party, but in 2016 looks to be a sure thing for democrats (just stating what appears to be a fact), I'm guessing 95% is not a ridiculous opinion within oddschecker.com's office. 95% could very well imply popular votes of 52% D/47% R/1% I. That would be close to a landslide! That's why I say 95%. Even if you use 77.8% instead of 95%, thats ~50/50 chance of becoming a major topic 1 year from now. Not a bad reason to hold quality stocks.

 

I must not understand the link or how odds work because most of the odds on a Democrat win appear to me to be lower than ~77.8%.  I see 6 out of 10 (4/6) and 11 out of 19 (8/11) as the most common and that includes the book's profit margin.  Republican numbers look to be above 40%.  So 60/40 seems closer to reality.  I couldn't track with the rest of your post and more importantly it ignored the assertion of Sanders being likely to win (its Hillary's polling strength not the party's that is making Dems favorites) and completely ignores the likelihood of flipping Congress.  Another factor is the necessity of getting someone like Schumer behind it.    If multiple items need to happen, odds can only decline.     

 

Do you really think Dem/Rep winning the election is 60/40 right now? That just seems ridiculously optimistic considering Donald Trump is leading polls for the Republican nomination right now. Obviously Jeb Bush or someone else (Romney?) will move ahead as we get closer, but it really isn't close right now between parties. I think it's pretty obvious the Republican party is undergoing some major changes of their party stances and is becoming more fragmented (relatively). As mentioned, the majority of Americans are going to vote their party no matter who runs or what they do (maybe 85% of all voters are already decided, regardless of what they say. The actual # doesn't matter as long as we agree it is high). 75/25 seems considerably more realistic (and I still think the actual odds are closer to 95/5, by party). Part of the reason the R's have such a high aggregate % is because they have 20+ candidates at the moment vs 2 realistic candidates for the Ds. Right now Clinton is 3.5x more likely than Bush to win => 77.8% odds of victory (3.5/4.5). This may seem cherry picking, but it's exactly how the media quotes probability of victory (since only 2 candidates can ultimately run).

 

Using an actual example, prior to the 2012 election it seemed obvious that Obama was going to win. Looking at the polls however, Romney actually led 49%/48% over Obama the night before the election, but most odds sites had Obama as the favorite with an implied probability of 83.3%! This would have been even higher if not for the nearly 50/50 split in whom America was voting for, which likely kept Romney's odds down (Buffett called Obama's victory over a year ahead of time).

 

http://discovertheodds.com/what-are-the-odds-your-candidate-will-win-the-2012-presidential-election/

 

You may claim hindsight bias but nearly everyone was predicting Obama 6-18 months out because of the similar factors I have mentioned with the current dem candidates. Republicans have even worse candidates now (according to public opinion/polls), Obama has a large approval rating (up ~150% in 12 months), and dems have the top 2 candidates (2012 all over again?!). I didn't mean to make this political. Yes, anything can happen in the next 12 months. I understand the president can't actually pass these tax changes. However, the republicans controlled congress the last 4 years and Obama still raised the capital gains tax. I don't think it is worth predicting exactly how this is going to happen (we are going to be exactly wrong - like any detailed prediction). I do think history has shown that major campaign promises generally come to fruition somehow during the candidate's term (Obamacare was passed with a Republican congress - they aren't mortal enemies no matter how the media portrays them). I think I have shown enough evidence that it is at least worth considering the potential effects of the tax change.You are right, a R may win and this bill may never see light of day, but I think the odds are really high that it will. At some point, we have all agreed that the odds are >30% that my scenario will occur (assuming 50% chance of passing if brought up), so it seems worthwhile to consider any possible effects regardless of your personal views or predictions.

 

I didn't mean to make this political and I certainly hope it doesn't come across as me taking a stance. I personally don't have a political affiliation. I'm just trying to anticipate events that are reasonably likely to occur and can alter how I evaluate investment opportunities.

Link to comment
Share on other sites

This isn't a political discussion.  It is about how logical the thought process behind your comments are.  My point is not one party over the other, it is that you are way over estimating odds in Democratic favor, ignoring all the other factors that have to happen for the capital gains tax to be raised (complete change in Congress, Schumer going against Wall Street, etc.) And you put all that at 95%.  To be blunt I am saying that is absurd.  (I don't say this because I am partisan, I am saying this as a Political Studies major, and student of politics for 30 years).  The odds of Democrats winning the Senate is probably 50/50.  Winning the House is probably below 15%.  Schumer going against Wall Street probably is less than 50% and maybe way lower.  He has historically done their bidding. Since they are not separate events you can't just multiply the odds of each, but regardless, logic tells us that the odds are well under 50% for complete control going to the Democrats.

 

1. Your method of calculating 77.8% odds is improper and I refer you to the link above. Instead of clicking on winner in your link, may I suggest clicking through to winning party tab.  It shows you a more accurate %. 

http://www.oddschecker.com/politics/us-politics/us-presidential-election-2016/winning-party

2. As I said before you are equating Hillary's strength with Democratic strength, yet have no facts to support that.  I do think the parties are close. 

3. If you think Obamacare was passed by a Republican congress then, no offense, you are way out of your circle of competence. It wasn't. It had zero Republican votes in the House or Senate.

   

 

 

Link to comment
Share on other sites

2)  Are capital gains tax rates indeed lower??? 

What if you earned only a 10% capital gain over a 4 year holding period when inflation was running 2% per annum.  You get taxed 20% on the entire capital gain, but that wipes out 100% of your real earnings.  Since when is a 100% tax on your real gain considered low???

 

Ding!

Link to comment
Share on other sites

  • 2 weeks later...

Munger has been calling for drastic ST CG increase to dent the prevalent casino mindset. Power of incentives.

 

 

This is true that the casino mindset would be dampened. It's also true that in this case Munger and Buffett wouldn't be as successful. One man's gamble is another man's investment.

 

Would it, though? With the current tax rate, nobody wins at the casino, everybody still plays. Would increasing the house fee really stop everybody from rolling the dice?

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...