Future Dividend Taxes

[Myth465]

A tortured 1200-page essay from the NY Times, (or any other elitist dismissal for that matter), doesn’t change the basic fact that 47% of American taxpayers receive all the benefits of the federal government without paying a dime.  Anything you get for free is not properly valued and waste is guaranteed. Our government is no exception.  Without simple incentives we sink deeper into an already unhealthy culture of entitlement.  

 

Look, you're just plain distorting the facts.  1) You never qualified that as "federal" anything.  2) Medicare and Social Security don't count as federal taxes in support of federal services now?  They aren't part of the "federal income tax", but clearly they are part of the federal tax regime.

 

Sound bites make for good TV (Pretty much all TV at this point is entertainment; you can't make money presenting facts in a responsible way), but while repeating falsehoods over and over again may sway the Hoi Polloi, you'll find us "elitists" are a tougher nut to crack.

 

And keep in mind here you're talking to someone who hates taxes!  I would love a smaller central government.  Scale back/change the war machine, first of all.  We can make all sorts of suggestions, but it's inherently a slow process, and politics make certain things impossible.  War, for example, has a HUGE lobby behind it, on multiple fronts.

 

Very Good info in this post. Thanks for taking the time to clarify things.

That is what is most interesting, I probably hate taxes or most other expenses more than any of you all. The only person who I have read about who is cheaper than me is Buffett.

 

I also know that things costs money and "our" not mines or yours has a cost and that cost needs to be paid in a way that keeps things moving along.

[nodnub]

The plumber that does house calls might be on salary for a small plumbing outfit at $50,000/year.  Of the $100/hour that you pay... the Co. has to pay for and store some inventory, cover benefits, pay for reception/dispatcher, etc.  They also have to pay for the plumbers van, and possibly rent space somewhere as well.  The overhead costs above and beyond base salary are significant.  Your house-call plumber might not be 100% utilized AND they usually don't bill for driving time.

 

even if the plumber is self employed he still has to pay for most of these overhead costs.  The billing rate can not be compared directly to the hourly rate for a regular full-time employee.

 

 

[Myth465]

rmitz,

I earned $35 an hour cash compensation at Microsoft for the amount of time they ultimately required of me.  Perhaps it's as much as $45 if you include benefits.  I think people waiting tables (at a busy restaurant) do better than that -- better, than can pocket most of their income in cash (tips) and not report it to the IRS.

 

Consulting at $65 is better than Microsoft at $45.  Even after the self-employment tax it works out better.

 

Ericopoly I would love to live in your world. The average waiter makes $100k, the average Plumper makes $140k.

Most accountants I know make around $20 an Hour or $55k after 3 - 4 years, sometimes it goes up to and sometimes stay flat depending on the city you are in. Small city, than thats about it.

 

Anchoring is true with investing and salary I guess. You are funny. On investments its facts and value. In political discussions its all anecdotal and facts dont matter or are fudged.

[Guest misterstockwell]

Did anyone see Myth's mother on CNBC today in that panel discussion on taxes? ;D If you saw it, you know which one I am talking about.....very progressive tax, no consumption tax, add a millionaire's tax, etc.  Mrs. Robin Hood.

[ERICOPOLY]

The average waiter makes $100k, the average Plumper makes $140k.

 

 

You'll find that I don't make any such claims.  I do claim that a real go-getter can accomplish this.

 

You are arguing that averages are far less than 100k.  Well, so are the averages for IT workers.

 

I busted my ass and made much more than average.

 

I was in Forks, Washington yesterday chatting with my fishing guide.  The town is full of people on welfare.  Most of the kids in town join the military and many wind up in Afghanistan (my guides son is in Afghanistan now).  There are not enough jobs and most are low paying government jobs.   An out of town lady with very little capital started a business there last year and is now making $80,000 a month out of her "Twilight" store and running "Twilight" tours of the town.  It turns out that somebody wrote a book about the town called Twilight (vampires) and a movie was made.  So there are all these people coming in as "Twilighters" -- tourists.  Explain to me why the locals in that town didn't have that opportunity?

 

The point is... you can piss and moan or you can have initiative.

 

You seem to imply that because I made $100k I am the only kind of person that can make it in America.  My friend at Microsoft (won't reveal his identity) was in only his second year on the job, had maybe not quite $20k to invest (two years of savings), but swung hard at those FFH options in 2006 and quit his job later that year.  He hasn't been employed since and is now worth enough money to trigger the inheritance tax next year.  I think he made about $3,500% after-taxes leading up to the bottom of the market last year, then in Chinese microcaps has made another 7 bagger on top of that.

 

Point being, you can turn $20k into $4.5m after-tax in just four years if you are determined instead of arguing about how you're poor if $20k is your life's savings.  

 

The difference is this... he believed he could do it and he put in the homework and risked his own capital.

 

I'll let you have your little victory that at $100k I was living wealthy in america -- it's a stupid thing to argue about... I could be retired now even if I only made $60k during those years.  

[Myth465]

Did anyone see Myth's mother on CNBC today in that panel discussion on taxes? ;D If you saw it, you know which one I am talking about.....very progressive tax, no consumption tax, add a millionaire's tax, etc.  Mrs. Robin Hood.

 

Even I laughed out loud on that. Must have been Amy Goodman or something.

 

---

 

Ericopoly - Well I dont even think we are talking about the same thing. You are talking about the American dream and the fact that people can make decisions right now which would increase their income in the future. Everyone else seems to be talking about averages and numbers.

 

I can understand your point if I had $1million in salary each year and $100 million in net worth. I would feel underpaid, and not too rich. Its all relative I guess. I however would still know that I was doing better than most.

 

At this point we can agree to disagree.

[ERICOPOLY]

The plumbers who work where I live (Bainbridge Island) charge more than $100 per hour.  If they can only make $50k per year maybe they are playing golf half the week.

 

I can only make $65 an hour for my labor if I start my own consulting business.

 

$100+ > $65

 

I don't know what you do in IT, I work in the field too, but $65 seems pretty low to me for a consulting arrangement.  It would be almost reasonable if you knew you would get full-time style work, but that isn't reality.  A rule of thumb I used to calculate what I'd need for a consulting rate would be to take your current rate, slap on 33% for benefits (true where I work), and then adjust it for a 50% utilization ratio, i.e. double it.

 

They charge a lot less in China you see.  The stuff I do telecommuting can just as easily be contracted out to people there.

 

They don't outsource plumbing to China. 

 

How much do you pay for a visit from your plumber?  I only pay the pizza delivery person a few bucks, so I know it isn't the onsite visit alone that costs money -- it's the labor.

 

I don't know what kind of work you do in IT, but outsourcing programming to China and India is not quite the same as consulting.  Companies looking for consulting work still want people local and on site.  

 

I will be working for a former manager of mine who started his own company with a few other partners.  He lives in Montana, his company is based out of Florida.

 

I will not be traveling or going onsite anywhere.  I will be doing programming and code reviews out of the office that I rent here on Bainbridge which I maintain anyway -- this office is cheap space I rent to get out of the house when I want to research investments.

 

I will not be working with any other companies.  This is a specific thing.  It's a bit like being a loosely coupled employee, only I don't have to be bored when there are no projects to work on.

 

Regardless, I will be making $65 an hour and I think it's an excellent wage.  Full time, it's $130k a year but it won't be full time because the work won't be continuous.  Just like a plumber... I'm not so different from a plumber.  A plumber can make $100+ per hour if he has his own business (mine is a sole-proprieter)... it was his fathers' business (he was the sole proprieter too).  My wife's family has been using them for a couple of generations (her family has been here on the island in the same house for four generations).  Point being, he doesn't work for anybody else, he only does plumbing work, and for every hour that he spends fixing my sink I will need to work nearly 2 hours.  It is what it is.

 

[Guest kawikaho]

The average waiter makes $100k, the average Plumper makes $140k.

 

I'll let you have your little victory that at $100k I was living wealthy in america -- it's a stupid thing to argue about...

 

*Cough* *cough* dick *ack* *cough*  :)

[ERICOPOLY]

The average waiter makes $100k, the average Plumper makes $140k.

 

I'll let you have your little victory that at $100k I was living wealthy in america -- it's a stupid thing to argue about...

 

*Cough* *cough* dick *ack* *cough*  :)

 

The straw man is dead.  Well done.

[Guest kawikaho]

Not making an argument there, just calling it like I see it.  That was a dick thing to say.

[ERICOPOLY]

Did anyone see Myth's mother on CNBC today in that panel discussion on taxes? ;D If you saw it, you know which one I am talking about.....very progressive tax, no consumption tax, add a millionaire's tax, etc.  Mrs. Robin Hood.

 

Even I laughed out loud on that. Must have been Amy Goodman or something.

 

---

 

Ericopoly - Well I dont even think we are talking about the same thing. You are talking about the American dream and the fact that people can make decisions right now which would increase their income in the future. Everyone else seems to be talking about averages and numbers.

 

I can understand your point if I had $1million in salary each year and $100 million in net worth. I would feel underpaid, and not too rich. Its all relative I guess. I however would still know that I was doing better than most.

 

At this point we can agree to disagree.

 

You're right, I am talking about the American dream -- class mobility.  I told you in the beginning not to believe what the media says about class mobility being dead in America.  Then I provided an anecdote about how I did it -- and that path to the American dream would be threatened by much higher taxes on investment capital.

 

I have been dropping all sorts of examples about how people from all wallks of life with the right mindset, drive, and initiative can scrap together the means to do what I did, if money and the freedom it brings is really important to them.  For most people it's not worth pursuing, perhaps they value other things and don't pursue the money as much as they could if they were as hungry as I was before I started studying programming.  You don't need a university education -- you can start your own plumbing business and work your way to my income level if you are successful.  You can work a second job in an upscale restaurant in the evenings and make excellent tips instead of watching TV -- the government statistics don't show this.  Not every waiter is in an upscale restaurant -- perhaps Kawihako didn't make the cut... I have no idea.  He was, after all, only in college with little experience.  There are a lot of other servers there who didn't do very well and he says they were there for 10 years... well, why were they not working at the places where you can't get a reservation and where the tips are very generous?

 

Against this you talk about how the government statistics say that the average person doesn't make that much.  Which is talking past each other, as you indeed recognize.  I am talking about people who are driven to succeed and what they can hope to make if they apply themselves in their line of work, in return I just get back the same tired line about what average people earn.

 

The important thing is in my job I wasn't making enough to raise a family and retire early unless I took a lot of initiative -- I would often for weeks on end in my early years come in at 9am, leave at 11pm, and then work weekends as well.  I could have instead had a normal 9-5 daytime job paying $25k, then pulled in another $30k at least working evenings earning tips as a waiter.  Same number of hours worked... and I would have actually had more money to invest the first few years with that approach because Microsoft started me so low in 1997 at $36k.  I was a base-level software tester.  Working that many hours per week, there was no room for a second job and Microsoft has an anti-moonlighting policy.  The only "second job" I would have was buying businesses on a fractional basis... passive investing.

 

Even assuming you have the stamina to work two jobs as a young single person instead of being out in bars running through your paycheck, working those nights and weekends as the waiter still won't make you rich.  You need to invest it and compound at a high rate after-tax.  In order to do that you need a tax code that is capital friendly.  Remember when I said that high investment taxes are a barrier to social mobility?  Ever since then you guys have been running this game of attacking a straw man over whether or not 100k is what an average worker in a number of industries can make.  So what... with the hours I worked a person with two jobs could have made roughly the same that I did for the first 4 years.  

 

[ERICOPOLY]

Not making an argument there, just calling it like I see it.  That was a dick thing to say.

 

You just said "dick" in two successive posts.

 

What were you expecting after the first time?  

 

Maybe if you had instead written "asshole" instead of "dick" in the first post it would have been more polite.  

[txlaw]

Wow, what a thread.

 

Eric, I am also intrigued about Australia's dividend franking system.  One of the great benefits of having such a system is that it would encourage companies to distribute their earnings rather than retaining them if they could not earn a better than average return on investment than the individual investor.  The dividend franking system would take away one argument (double taxation) that management always has to justify retaining earnings, which more often than not seems to be merely a way of boosting management's pay (more assets under management, greater salaries).  By making dividend payments the standard, it would also force the finance guys to run companies more conservatively, as most would have to take into account that a lot of their cash flow would be paid out to shareholders.  In some ways, I think we have had a "retained earnings" bubble for several decades due to the double taxation policy.

 

Having said the above, I don't think we can get rid of (or even reduce) the corporate tax rate until we change things about the individual tax system.  First, all investment income (dividend income and capital gains) should be taxed the same as earned income, subject to the highest FIT bracket the investor is in and subject to payroll taxes.  Unlike Australia's system, which I believe distributes credits to individuals at the corporate tax rate, I would build the system like so: (1) Corporations would accrue income tax liabilities at a very high rate, perhaps at 40%.  (2) At the end of the year, if the corporation distributes some of its retained earnings through a dividend, the tax provision would go down by excluding the dividend payments from income; (3) It would then be incumbent upon the individual who received the dividend to pay tax on that income at his highest FIT bracket rate plus payroll tax.  

 

So, Eric, your FUR dividend would get taxed at 40% plus payroll, while Myth's dividend would get taxed at a lower rate.  A teacher making $35K a year would have their FUR dividend taxed at the lowest rate plus payroll.

 

I would also add many more tax brackets, taxing the higher brackets at progressively higher rates.  For example, any annual income earned over $10 M should be taxed at 60% rates or even higher (note that the numbers I've used are arbitrary).

 

Actually, I think the ideal tax system is a progressive cash flow consumption tax.  Consumption would be taxed in a progressive manner, and savings and investment would not be taxed at all.  So let's say that over the course of the year, you earned $50K and you used $40K on consumption and put the rest in the bank.  You would pay some amount of tax on the $40K you spent over the year, which would probably be relatively low because we'd assume that this amount was used primarily for necessities rather than discretionary items.  On the other hand, if you earned $200K, put $100K into the bank and your brokerage account, you'd pay a higher tax rate on your $100K of consumption.  A cash flow consumption tax system would prevent Eric from taking advantage of tax shelters because debt financed consumption would be taxed.  The key is that savings and investment would not be taxed.

 

This sort of tax regime is administratively difficult to pull off at this time, however.  The tax authority would have to have a system where they could withhold tax over the year and redistribute cash back to you at the end of the year based on how much you consumed versus saved/invested.  I wouldn't be surprised if we would be able to pull of such a system in a couple of decades with new technology and administrative improvements. Many if not most tax law profs agree that a cash flow consumption tax would probably be the best for society in terms of the effect that taxes have on investment decisions and increasing societal welfare.

[Guest kawikaho]

Not making an argument there, just calling it like I see it.  That was a dick thing to say.

 

You just said "dick" in two successive posts.

 

What were you expecting after the first time?  

 

Maybe if you had instead written "asshole" instead of "dick" in the first post it would have been more polite.  

 

Semantics.

[ERICOPOLY]

Wow, what a thread.

 

Eric, I am also intrigued about Australia's dividend franking system.  One of the great benefits of having such a system is that it would encourage companies to distribute their earnings rather than retaining them if they could not earn a better than average return on investment than the individual investor.  The dividend franking system would take away one argument (double taxation) that management always has to justify retaining earnings, which more often than not seems to be merely a way of boosting management's pay (more assets under management, greater salaries).  By making dividend payments the standard, it would also force the finance guys to run companies more conservatively, as most would have to take into account that a lot of their cash flow would be paid out to shareholders.  In some ways, I think we have had a "retained earnings" bubble for several decades due to the double taxation policy.

 

Yes.

 

One thing that Myth pointed out is that my margin loan strategy would avoid taxes but is inefficient -- that I could probably do better.

 

That's what capital gains taxes and dividend taxes lead too.  Inefficient deployment of capital and stupid decisions.  Berkshire has held onto overvalued shares because after selling them and paying the tax the gap to exploit between market price and intrinsic value is eroded by a wide margin on the shares he's got a very low cost basis on.

 

This lack of interest selling (for tax reasons) coupled no doubt with corporations buying back shares at those prices to avoid a dividend distribution (for tax reasons) leads to distortion and is general not a very good result -- an unintended consequence of the tax code.

[ERICOPOLY]

txlaw,

One of the arguments in support of a reduced capital gains tax rate is to acknowledge that many capital gains are not "real" gains.

 

Initially, when Austrialia first installed their capital gains tax, they had a system of indexing your capital gains against inflation to address this problem.  It was complicated though because people can't agree on how to measure inflation.

 

Today they've just given up on trying to precisely compute the effect inflation has on capital gains and just throw out a rough estimate that, "in the aggregate", they're about 1/2 of your gains from inflation alone.  Of course, that's not accurate because during periods of low inflation they might be none of the capital gains, and during high inflation they might be much more than half.

 

But at least they tried.

 

So today in Australia your capital gains are taxed at 1/2 of the income tax rate.  So if you are making more than $50k, then your capital gains are taxed at 24%.

 

[ERICOPOLY]

Superannuation contributions are compulsory in Australia.  So you don't have the case where people spend money on frivolous things when they are young and don't think about saving until they are 50.

 

A superannuation fund is the same as an IRA here.  I think actually it is the same as a RothIRA because my retired aunt (schoolteacher) and uncle (civil engineer) live on their superannuation fund and they claim they pay no tax at all on the distribution.

 

[Myth465]

Also Eric I believe its possible for anyone to make it in America, but not for everyone to. God willing you, I and most of the on this board will end up either decently rich or very rich, if we arent there now. Thats the American / Western dream.

 

but I also believe the lifestyle of the people who do not for whatever reason (lack of opportunities, breaks, or effort) achieve this dream are worth considering. I follow the basic line of thinking proposed by Malcolm Gladwell in Outliers and by Warren Buffett. Your ability to allocate capital isnt worth much without a society that values that and like it or not you are never self made. Your parents, teachers, family, friends, or dumb luck / timing had something to do with your progress. Ben Graham obviously had something to do with your progress.

 

You are hard working but, not self made. If you were born in a Fevala in Brazil or Ciudad Juárez Mexico I doubt much would have come out of you.

 

---

 

TX that was very interesting. My problem with high Corporate taxes is they cause flight by Corporations. Its why companies are based in  Bermuda, Ireland, Swiss, and other low tax countries. America should have low Corporate taxes, high enforcement. I would like some sort of tax that hits applys to sales in America by foreign firms not based in America.

[ERICOPOLY]

Also Eric I believe its possible for anyone to make it in America, but not for everyone to. God willing you, I and most of the on this board will end up either decently rich or very rich, if we arent there now. Thats the American / Western dream.

 

Yes, not everyone.  People wouldn't like being rich if everyone was rich.  It would change nothing, wealth is relative.  Rich people can pay others to cook for them, take them fishing, etc...  well... who's going to do the work?

 

And you're right about the ovarian lottery.  But I'm not going to give my money to help Americans -- even the poor in America seem rich if you've traveled.

 

Last year I gave money to a local nonprofit (neighbor founded it) that grants scholarships to deserving students of Omatepe, Nicaragua (a sister island of the one I live on here in Washington).  My $6,000 total contribution will send one student through six years of medical school -- it costs $1,000 per year and that includes food+housing+supplies/books+tuition.

 

That's a career in medicine that I bought for somebody for the cost maybe 50-100 medical students in America?

 

That's value investing if you ask me.

 

The other charity that impresses me is the Central Asia Institute run my Greg Mortenson (author of Three Cups of Tea).

[txlaw]

One of the arguments in support of a reduced capital gains tax rate is to acknowledge that many capital gains are not "real" gains.

 

Initially, when Austrialia first installed their capital gains tax, they had a system of indexing your capital gains against inflation to address this problem.  It was complicated though because people can't agree on how to measure inflation.

 

 

Yeah, the adjusting for inflation is definitely a problem with taxing capital gains.  But they should still try to do it that way instead of coming up with some arbitrary number that can be gamed by affluent people who probably have disproportionate influence over the government.

 

[txlaw]

TX that was very interesting. My problem with high Corporate taxes is they cause flight by Corporations. Its why companies are based in  Bermuda, Ireland, Swiss, and other low tax countries. America should have low Corporate taxes, high enforcement. I would like some sort of tax that hits applys to sales in America by foreign firms not based in America.

 

Yeah, that's a good point.  You're right that a lot of operations are housed abroad in jurisdictions with low tax rates.  Actually, I'm not even sure how multinational corporations really figure out how much of their income is subject to US corporate income tax.

 

Perhaps there should be some combination of a VAT and corporate income tax.  This is complicated stuff. 

[rmitz]

I will be working for a former manager of mine who started his own company with a few other partners.  He lives in Montana, his company is based out of Florida.

 

I will not be traveling or going onsite anywhere.  I will be doing programming and code reviews out of the office that I rent here on Bainbridge which I maintain anyway -- this office is cheap space I rent to get out of the house when I want to research investments.

 

I will not be working with any other companies.  This is a specific thing.  It's a bit like being a loosely coupled employee, only I don't have to be bored when there are no projects to work on.

 

Regardless, I will be making $65 an hour and I think it's an excellent wage.  Full time, it's $130k a year but it won't be full time because the work won't be continuous.  Just like a plumber... I'm not so different from a plumber.  A plumber can make $100+ per hour if he has his own business (mine is a sole-proprieter)... it was his fathers' business (he was the sole proprieter too).  My wife's family has been using them for a couple of generations (her family has been here on the island in the same house for four generations).  Point being, he doesn't work for anybody else, he only does plumbing work, and for every hour that he spends fixing my sink I will need to work nearly 2 hours.  It is what it is.

 

Yeah, actually, in this scenario it's not that bad.  My numbers are what I'd estimate one would need to switch from a base salary to "make a living" as a consultant.  In this case, you're really an adjunct part-time employee, so that seems pretty reasonable.  Hope it'll be fun for you.

[rmitz]

Yeah, that's a good point.  You're right that a lot of operations are housed abroad in jurisdictions with low tax rates.  Actually, I'm not even sure how multinational corporations really figure out how much of their income is subject to US corporate income tax.

 

Perhaps there should be some combination of a VAT and corporate income tax.  This is complicated stuff. 

 

Yep, that's exactly why this is hard.  There's a reason sound bites don't cut it, and politicians aren't actually stupid; they just have a very different set of constraints.

[Myth465]

Yeah, that's a good point.  You're right that a lot of operations are housed abroad in jurisdictions with low tax rates.  Actually, I'm not even sure how multinational corporations really figure out how much of their income is subject to US corporate income tax.

 

Perhaps there should be some combination of a VAT and corporate income tax.  This is complicated stuff. 

 

Yep, that's exactly why this is hard.  There's a reason sound bites don't cut it, and politicians aren't actually stupid; they just have a very different set of constraints.

 

Good point but some are pretty stupid. Here is a good example. Ignoring the religion part the look on his face at the end is priceless and I am still waiting for a youtube clip of this mom lady.

 

[ERICOPOLY]

Yeah, that's a good point.  You're right that a lot of operations are housed abroad in jurisdictions with low tax rates.  Actually, I'm not even sure how multinational corporations really figure out how much of their income is subject to US corporate income tax.

 

Perhaps there should be some combination of a VAT and corporate income tax.  This is complicated stuff. 

 

Yep, that's exactly why this is hard.  There's a reason sound bites don't cut it, and politicians aren't actually stupid; they just have a very different set of constraints.

 

Good point but some are pretty stupid. Here is a good example. Ignoring the religion part the look on his face at the end is priceless and I am still waiting for a youtube clip of this mom lady.

 

 

That's why you'll never see Bill Maher on Fox -- they wouldn't dare invite him to a debate.

 

Thanks for the video, I will be laughing at that one the rest of my day.