Future Dividend Taxes

[Myth465]

I'm not complaining about unrealized gains not being taxed, I'm pointing out that companies that retain earnings win the class war just as handily.

 

You point out that the VAT is highly regressive but then so are dividend taxes.  People will only hold enough income paying stocks to fund their spending needs, and then put the rest in vehicles like Berkshire or is they own their own business they will just retain the earnings.

 

They will pay the same as under the VAT if managed correctly.  They are both regressive.

 

This is just not true. I would usually say disingenuous but this is a flat out lie. Poor people dont own stocks. Poor people dont live off investment income. Few people live off investment income. Its sort of a leisurely thing to own a company and live off dividends. If you take away retirement accounts most people dont own stocks. Stop extrapolating your situation to Joe 6 pack or most other Americans. The average guy has a W2 and a 1099 INT from Wells Fargo / JP Morgan and thats it. Maybe a kid and a house, some sort of pet, and a bit of debt.

 

You are one of the chosen few. Buffett is hiding wealth in Berkshire. If he doesnt sell Berkshire and donates it then he never used the benefit of the wealth. Whats your point? Its still income vs wealth. Realized vs non realized. Buy a company use it as an investment vehicle. DOnt pay dividends. Then donate your holdings to avoid paying taxes. Mission accomplished and taxation minimized.

 

Be careful though they have an investment company tax. So find a way to justify the accumulating capital. I think buying some sort of Manufacturing company will help with that.

[Guest kawikaho]

The difference is dividend taxes aren't mandatory.  A poor person, who more than likely does not have the wealth to generate much income from dividends, has the option to put money into other investment vehicles like tax free muni bonds.  A VAT tax is not an option.  And most poor people will spend the majority of their incomes on necessities that will be hit with the VAT.  Rich people, not so much.

 

VAT is highly regressive.  Dividends, not nearly as much.  Not even close.

[ERICOPOLY]

I have to admit that my attitude is influenced by the fact that I earned my paycheck just like everyone else, but I made different decisions with what was left over.

 

I chose math and computer science even though I was in way over my head intellectually.  I slugged it out at UCLA with computer science geeks who wrote their own operating system in Montessori,, even though I had only ever used a computer for writing term papers.  From this I put up with 10.5 sanity testing years at Microsoft. 

 

I feel like I am not the ruling elite.  I am living proof of social mobility despite what the media says.  The system isn't rigged to keep people earning 36k in the hole -- that was my starting salary.

 

If you raise cap gains and dividend taxes, you make it harder for somebody to follow in my footseps.  You create a barrier to social mobility.

[ERICOPOLY]

I'll bet a plumber makes more than I made.  My peak salary was 104k.

 

Even policemen perhaps, counting overtime.  At Microsoft I worked so much more than 40 hrs, but that's included in the salary.

[Myth465]

You have definitely earned your keep and made the best decisions in terms of increasing your wealth. You have earned a place squarely in the upper middle class to rich (if you are paying the death tax you are rich). We however do need Joe and Jane 6 pack to do well. Someone has to consume. Not everyone can make $100k in our society. For every promotion you got there had to be 6 others who didnt. Someone will have to flip the hamburgers, iron the shirts, sweep the floors, and wash the cars. If everyone had a college degree and was hard working we still wouldnt have enough $100 k jobs. I travel for work and meet people in third world countries who have masters degrees and drive school buses.

 

We cant succeed without them. Your capital allocation skills arent worth much on a desert island. I think you have have an extremely skewed view on the average American. I am single, no kids, 27, and make a bit more than half of what your peak earnings were. I just got an 8% raise, but made more on Monday in unrealized gains than my entire raise. I could likely have more in unrealized equity gains in my portfolio than I make all year in earned income.

 

The average American though is not like you or I. They make $40 - $50 K average in Combined income and spend slightly more than they make. This is household income - Man, Women, and child. I joke all the time that I am poor and dont see how a person raises a salary on my income. I have a small apartment, and a 10 year old car, but people do it every day. In my opinion its not fair for me to get $1 million, put it in a stock yielding 5%, make $50k a year and live off it paying 15% in taxes while someone making 60k who has to work day to day pays more than that than that if you include payroll taxes.

 

$104k puts you fairly close to the top 10%. If you were married and your wife brought in decent cash then maybe 8 or 9%. You may not feel rich, but you are a rich American, and a very rich person Globally. I dont feel rich because I look towards Buffett and Prem, but compared to most I am doing pretty good.

 

http://en.wikipedia.org/wiki/Household_income_in_the_United_States#Median_income

 

I also think that the income breakdowns are highly skewed as they should be. People should make more and enrich themselves as they enrich society, but they should pay more in taxes without screaming bloody murder. The government needs income. We are no longer in a surplus and you have to tax the people who have the income in ways that dont fuck up the economy.  

 

 

-----

 

Here is an interesting post about the real tea party. The guy is a conservative and not a socialist if that helps some members.

 

http://capitalgainsandgames.com/blog/bruce-bartlett/1647/truth-about-tea-party-original-one?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CapitalGainsAndGames+%28Capital+Gains+and+Games+-+Wall+Street%2C+Washington%2C+and+Everything+in+Between%29

 

t bears repeating that the colonists were not objecting to the financial burden of the tea tax. Or any other tax, for that matter. Instead, they were making a point about political legitimacy. They were more than willing to pay taxes imposed by their own representatives. But they were utterly unwilling to pay taxes imposed by Parliament -- a more or less alien power, given the lack of colonial representation.

 

Historian T.H. Breen recently made that point in an article for The Washington Post. Even after the Tea Party, he noted, colonists in Massachusetts continued to pay taxes originally levied by the Crown. But instead of sending the money to British authorities, they gave it to one of their own leaders. "Anyone who misses this point risks missing the fact that ordinary American patriots accepted the legitimate burdens of supporting a government in which they enjoyed genuine representation," wrote Breen.

[nodnub]

I'll bet a plumber makes more than I made.  My peak salary was 104k.

 

Even policemen perhaps, counting overtime.  At Microsoft I worked so much more than 40 hrs, but that's included in the salary.

 

Did you also receive stock grants or options? Or raises that exceeded the inflation rate? Neither of these would be likely for an average Joe. Once you start making 6 figures it's easy to anchor to this and forget that most people don't come close to that even after working for 20 years.

 

http://www.simplyhired.com/a/salary/search/q-plumber/l-seattle,+wa

These salary figures are for 2010...  I'm not sure what your last year of employment was but if it was a while ago then the numbers might not be an apples to apples comparison due to inflation.

 

 

[ERICOPOLY]

I'm also biased due to my extensive ties to Australia where the top marginal tax rate is 48% and it's assessed on earned income over $50k. Then they have a very high regressive GST (govt sales tax).  But you know what?  People there seem happier and better taken care of than here. 

 

You say a VAT is regressive, but so are property taxes... Can we agree to get rid of that tax?

 

But Australia has avoided being completely socialist by being very capital friendly.  And it works... They have less social unrest and lower unemployment.  Despite the higher tax the people get more of the really important things like better education and guaranteed health care.  I think they pull this off because the government just takes it out of their paychecks instead of letting them collectively waste it on stuff they want but don't need.

 

My relatives there are a mix of teachers, engineers, entrepreneurs, and people without degrees who just scrape by.  But none of them are unhappy.

[ERICOPOLY]

I was initially a psych major.  After calculating that I would likely wind up being a barista with a masters making $20k, I then chose to major in math and be a statistician.  A few months into that major I realized that if I could learn programming then I would make a lot more money early on and invest it.

 

It was very calculated.  I took the harder road because it payed more.  Psych major was easy and those people sat around socializing while I labored in the computer lab on Saturday nights.

 

This is like arguing that surgeons are just "fortunate" to make more money, as if med school graduates deserve no more than a psych major.

 

My total payout from stock options was $80k roughly, before tax. At the rate I was saving money it amounted to 3 years savings.

[Guest kawikaho]

We are birds of a feather.  Did math and chemistry and went to work in Silicon Valley for ten hard ass years slaving away--man, I'm still burnt out from those years and it's been over a year since I left the area.  Started off at $56k/yr and ended around $120k/yr.  Still, towards the end, I was working way more than 40 hrs/wk.  Sometimes, I put in 80 hrs/wk easy.  Regardless, I do not mind paying my fair share in taxes.  I guess that's where we differ.

 

People can be upwardly mobile without dividends or capital gains.  My parents and my wife's parents did it.  They are immigrants that came to the U.S. and Canada with zero capital.  They did fine with no knowledge of tax shelters, capital markets, and finance.  They're not wealthy or millionaires, but they're comfortable with steady incomes.  You're an outlier.  Assuming the proposed tax reductions, what you did could make it easier for some folks to get rich quick, but it could also devastate people in ways that taxes could never do.  I know people who lost millions of dollars "playing the stock market" during the 2000's.  It could go either way.  So, your idea of social mobility, by reducing or eliminating capital gains and dividend taxes, could encourage people to take unnecessary risks.  I'm not for it.

[ERICOPOLY]

You guys are not seeing the beauty of the dividend franking system in Australia.

 

The whole point of the system is to provide an incentive for corporations to pay the 30% tax.  If they pay the tax then their dividend only gets taxed at 9%.  If the corporation pays a dividend that exceeds the corporation's taxable income, then the dividend will be taxed at 48%.

 

So there is no benefit to sheltering all corporate income from taxes.

 

Here in the US Buffett points out that it's unfair how some companies pay no tax or little tax.  The trick is to reward the companies that pay taxes by reducing their dividend tax rate.

[ERICOPOLY]

Kawihako... People get devastated all the time trying to start their own businesses -- should we try to discourage entrepreneurship simply because they might wipe out their savings?

[ERICOPOLY]

The personal savings accounts that Bush proposed was a very elegant solution.  You could put in as much as you want and it would grow tax deferred.  Withdrawals could be made at any time and only then were you taxed -- it in effect gives the individual control over paying his own dividend and would be taxed as regular income.

 

This solves the unfairness issue of being taxed on income you are merely reinvesting and on capital gains that you are merely reinvesting.  It is stupid that if I sell Berkshire I need to pay tax when I reinvest it only moments later.  Before you get outraged by my attitude on this, first ask yourself why you do not get riled up by the fact that real estate investors can make a tax-deferred exchange?

[Guest kawikaho]

And people get devastated from buying cars and driving them fast, so what's your point?  You were talking about lowering dividend taxes and capital gains to provide a means for social mobility.  I say that's bullshit.  It provides YOU with an easier means to accumulate wealth without paying your fair share.  And if it creates an incentive for people to take on more risk, I don't think it accomplished anything of worth for society.  

 

Besides, most businesses don't fail because of taxes.  You can verify this from the SBA website.  Every business my dad ever started wasn't a success because he had to pay taxes.  They were successes because of all the hard work and effort he put into it, and making lots of smart decisions about what to do and what line of business to get into.  And he did all of this in Hawaii, which is not a small business friendly state. 

 

 

 

[claphands22]

Ericopoly,

 

What do you think of the cost of living in Australia? On of my good friends from Melbourne constantly complains about the high cost of living. He said housing prices are absurd because of land constraints, Australians fascination with real estate and first time home buyer subsidies. Also, he said most Australians tend to buy variable interest rates on their mortgage loans instead of fixed rates; and people are constantly aware of the interest rate. I'd image some major issues if interest rates rise from their current historic lows 

 

I would be keen to move to Australia for all the reasons you provided. Yet, from what I understand (at least in Melbourne) urban sprawl is intense, there are heavy water restrictions and public education is really bad unless your child goes to a proper private school or one of the few good public schools.

 

Also, Australia seems to be highly dependent on their resources.  If China's economy stops demanding all of Australia's metals because their current infrastructure bubble pops  - things could get very ugly there.

 

Any thoughts on Australia?

[ERICOPOLY]

Yes their housing situation is a clear bubble if you ask me.  I agree they depend on China too much.  Most of my cousins have their children in public schools so I'd say it's like here where differences are local.

 

[ERICOPOLY]

Kawihako you asked me what my point is, so let me gently remind you that you know people who lost millions trading stocks in the market . Go back and read that post of yours and it will explain why I needed to remind you that every entrepreneur bears that risk too.

[Guest misterstockwell]

 

This is not a very useful response. Childish name calling is the reason why our political system / discourse is in the tatters. Luckily this inst the 70s and socialist doesn't quite have the ring to it is used to.

 

  You used figures from a study done by this group. I think it only fair to show what is behind the group--that is, they were formed to support Obama's policies. They want to redistribute wealth. They are hugely biased.

 

 

 

Again why should you live off your dividend income at 15% while Joe and Jane 6 pack pay 25% on their earned income. Thats the question. But alas its easier to talk about the principles of double taxation and call me an anti free market comi socialist. Everyone wants a tax break.

 

I understand where you guys are coming from but lets cut the bullshit and just call it what it is. Greed, its not a bad thing. You cant have a market without it and fear.

 

You seem to be fine with the double taxation thing. I'm not. The corporation already paid tax on that money. Why should it be taxed again at 44%? I paid taxes just like Joe SixPack for many years.  I still do. I get far fewer tax breaks than Joe does. Your whole premise is ludicrous. Where does the Constitution state that wealth should be redistributed? Please show me. Please show me where it advocates a progressive tax on citizens. JOe SixPack demands breaks left and right. He wants his mortgage reduced. He wants free health care. You speak as if the common man is one hard working poor sap who can't get a break. In reality, the average Joe borrowed far too much for toys and houses he couldn't afford in the first place, and wants to be bailed out.

 

.

 

Revenues are down, expenses are up. I dont think there is much in the budget you can honestly cut without all hell breaking loss. If you care about the future of the country then all options need to be on the table. Taxes need to go up, military and entitlements need to be rationally cut. Americans need to make decisions instead of having thier pie and eating it too. Even the great conservative savior that Repulicans have a permanent hard on for (Reagan) raised taxes 6 times.

 

When my money aint covering my expenses. I cut spending and try to get a raise.

 

In times of financial crisis, you don't massively increase the spending of money you don't have, nor do you create new programs that require even more spending. Common sense 101.

[rmitz]

Wealth for the Common Good, which represents many of these individuals, was organized to help rebalance our economic system. Our goal is to contribute to the public debate on taxes and support President Obama and Congress in creating a more progressive tax code.

 

Socialists

 

You say "Socialists" like it's a bad word.  It's not.  It's just another system, one I don't really agree with very much, but there are some good points.

 

I've been doing research on historical tax rates lately and I can tell you right now that, for the rich, our rates are historically *extremely* low, certainly relative to the taxes the middle class pays.  To a degree, these historically low rates have created an incentive for bilking the shareholders with exorbitant pay packages for average CEO performance.

[rkbabang]

It really sucks, 99% of people don't optimize their taxations because they just don't know. Why not make it equal for every income types? It just does not make sense.

 

I'm a "taxation is theft" kind of guy, but I do agree that if there is going to be taxation it should be equal for every income type.  This way people invest in one thing and not another for market reasons not tax reasons.  Taxation, if it exists at all, should be flat and simple and apply equally to everyone and every type of income.  The tax codes, in any country I know of anyway, are none of these things right now.  They use tax policy to punish some, to reward others, as a social engineering tool to incentivize certain behaviors and disencentivize others, etc. It forces people to do things with their money they wouldn't otherwise have done, which screws up the monetary signals in the economy and reduces economic efficiency and is just one of the many causes of the massive boom-bust cycles we endure.

 

--Eric

 

 

[rkbabang]

We're all bound by a social contract to pay taxes.  If you don't like it, you should move to a more tax friendly country instead of acting like a parasitic leech or complaining like one.

 

"social contract".  I'm sorry, but I've never signed nor agreed to your contract, "social" or otherwise.  You think you can bind someone to a contract whether they like it or not and enforce that with violence?   You can't bind someone to a contract he has never signed nor agreed to. If I don't have the option to freely opt-out, then it isn't a contract at all, but an initiation of force against me.  See: No Treason, by Lysander Spooner.  There is only one social type contract I am willing to sign, it is called the Covenant of Unanimous Consent.   You can find it here: http://www.lneilsmith.org/new-cov.html.  

 

"parasitic leech". Funny you would use those terms. Those are the very terms I use to describe someone who thinks they have a right to bind others to "social contracts" against their will using deadly force if necessary to extract what those others have produced.  As well as those who live off of such violently aquired resources.

 

--Eric

 

[Munger_Disciple]

Ericopoly,

 

What is your current profession and is it easy to practice it in Australia if you decide to move there? From your discussion, Australia seems like an interesting place. I am a bit worried that it may follow the US path in the not too distant future just as the US seems to be following a European social welfare model with a lag.

[Myth465]

All this talk of Oz is interesting. Melbourne is my favorite city in the world (Sydney is more beautiful but sort of pretentious as they say). Aussies are the best types of travelers to meet. Very work to live type of people. It seems like the perfect blend of US Capitalist with European values.

 

With that said Oz reminds me more of Canada then anything and Canada and Oz are closer to Europe then the US. Oz has a high minimum wage, socialized medicine, and several other European programs. The economy is on a tear similar to Canada because Oz is the open pit of the world. It also happens to be right next to China and caulk full of Iron Ore and other medals / resources. They have all sort of resources and only have 20 million citizens. Like Canada its about the size of the continental US, but largely uninhabitable.

 

Beautiful place and people, but I think the resources and low population provides a different set of demographics and tax base that the US would be hard-pressed to copy.

 

I am for tweaking our system, but basically someone is going to have to pay up.

[rmitz]

We're all bound by a social contract to pay taxes.  If you don't like it, you should move to a more tax friendly country instead of acting like a parasitic leech or complaining like one.

 

"social contract".  I'm sorry, but I've never signed nor agreed to your contract, "social" or otherwise.  You think you can bind someone to a contract whether they like it or not and enforce that with violence?   You

 

Be honest.  If there wasn't that implicit social contract out there, most of us would already be dead.

[rkbabang]

We're all bound by a social contract to pay taxes.  If you don't like it, you should move to a more tax friendly country instead of acting like a parasitic leech or complaining like one.

"social contract".  I'm sorry, but I've never signed nor agreed to your contract, "social" or otherwise.  You think you can bind someone to a contract whether they like it or not and enforce that with violence?   You

Be honest.  If there wasn't that implicit social contract out there, most of us would already be dead.

 

You have a much more pessimistic view of humanity than I do.  I don't think my neighbors would turn into Ruthless Bloodthirsty Savages, simply because the IRS and other government agencies have stopped stealing from them and they have to find a private company to pick up their trash.

 

--Eric

 

[rmitz]

You have a much more pessimistic view of humanity than I do.  I don't think my neighbors would turn into Ruthless Bloodthirsty Savages, simply because the IRS and other government agencies have stopped stealing from them and they have to find a private company to pick up their trash.

 

--Eric

 

I don't think that extreme would be accurate, but you just have to look around you for examples of the Tragedy of the Commons.  You don't have to look very far for situations in natural disasters where ordinary citizens start looting and stealing, either because they need supplies to live, or they just feel like it. 

 

Will people pay money to fund roads?  Some will, enough won't; it would certainly be enough to make a difference.  You can go through an entire list of these sorts of things which create a better environment for people and society in general.

 

Accounting for externalities is a huge issue when you try to fully walk down the libertarian path.  Suppose someone decides they just want to let the trash pile up in their backyard to save money?

 

Is government wasteful, and does it support things you or I wouldn't?  Of course it does.  That doesn't mean we should throw out the baby with the bathwater.