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I have read that the differential tax treatment of income and capital gains has given rise to various techniques for "transforming" ordinary income into capital
by millstone 10y ago
I have read that the differential tax treatment of income and capital gains has given rise to various techniques for "transforming" ordinary income into capital gains via "pass-through" entities [1]. This transformation is apparently quite labor intensive while being wholly non-productive (save for the favorable tax treatment).
I don't understand what these pass-through entities do at all - can someone explain it?
Naively it seems like differential tax treatment creates distortionary incentives. Maybe I quit being the sole proprietor of my business in order to day trade, thereby escaping payroll and income taxes. This replaces productive work with non-productive speculation - a loss for the economy and a country. What's the argument against this?
[1] https://tcf.org/content/commentary/10-reasons-to-eliminate-the-tax-break-for-capital-gains/ https://tcf.org/content/commentary/10-reasons-to-eliminate-t...
- mtanski 10y ago> Maybe I quit being the sole proprietor of my business in order to day trade, thereby escaping payroll and income taxes. [...] What's the argument against this? The argument is that, it doesn't work like you think. If you're day trading chances are you're generating short term gains (or losses). Mist day traders don't hold positions 1yr+. Second as a sole proprietor your still responsible for payroll taxes, or what becomes known as self employment tax. http://www.marketwatch.com/story/do-you-owe-the-self-employment-tax-2013-08-20 http://www.marketwatch.com/story/do-you-owe-the-self-employm...
- maxerickson 10y agoThe IRS has some information about trading as an income generating activity (it's a fuzzy line): https://www.irs.gov/taxtopics/tc429.html https://www.irs.gov/taxtopics/tc429.html Any proceeds are taxed as business income, not as capital gains.