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1) the lottery has a negative expected value, investment does not. In the long run, this is a qualitative difference. 2) That is federal income tax, you've mis

by ouid 10y ago

1) the lottery has a negative expected value, investment does not. In the long run, this is a qualitative difference. 2) That is federal income tax, you've missed state, medicare and social security, and are also completely discounting the fact that the capital gains rate is bounded from above by the income tax rate. 3) most importantly, 165000/year isn't very much money. It is plenty to generate personal wealth. Most of the actual income in america is made well in excess of 165k/year, and much of that income is in the form of capital gains. If you need a better breakdown, I can't do it better than this https://fivethirtyeight.com/datalab/the-top-1-percent-earns-a-lot-from-cashing-in-on-investments/ https://fivethirtyeight.com/datalab/the-top-1-percent-earns-...

prostoalex 10y ago
The article you linked concludes that "the wealthiest 1 percent are an outlier: 36 percent of their income comes from capital gains". As the graph suggests, that number quickly decreases to 10% and 5% when the group encompasses the wealthiest 5% and 10%. So for those three groups the income not subject to capital gains tax constitutes 64%, 90% and 95%. This is before the capital gains are even broken down into long-term vs short-term (which are taxed at plain old income tax rates). I am still not seeing what led you to believe that the effective tax rate will be significantly lower. > That is federal income tax, you've missed state Mmm, okay. Well, I am not a CPA and not sure about other states, but California makes it easy by treating any capital gains (long-term or short-term) as income, so (at least for CA) the effective tax rate of someone relying on long-term capital gains will be pushed up, not down. I agree though that if some other states have favorable treatment of long-term capital gains, the numbers would look different. > medicare and social security Both are subjects to wage limits, and at $166,000 (which will be a higher value once the state tax is incorporated) we're well past those limits. > the lottery has a negative expected value, investment does not. In the long run But a capital gains requires a sale, which means the position has been exited, and there's no long-run. True, it might be a partial sale of an asset, and in some case the proceeds of a sale are invested into another position, but at this point you're pretty much betting the new assets will increase in value and be a candidate for a sale. Hence my lottery comment.

by ouid 10y ago

prostoalex 10y ago

The article you linked concludes that "the wealthiest 1 percent are an outlier: 36 percent of their income comes from capital gains". As the graph suggests, that number quickly decreases to 10% and 5% when the group encompasses the wealthiest 5% and 10%. So for those three groups the income not subject to capital gains tax constitutes 64%, 90% and 95%. This is before the capital gains are even broken down into long-term vs short-term (which are taxed at plain old income tax rates). I am still not seeing what led you to believe that the effective tax rate will be significantly lower. > That is federal income tax, you've missed state Mmm, okay. Well, I am not a CPA and not sure about other states, but California makes it easy by treating any capital gains (long-term or short-term) as income, so (at least for CA) the effective tax rate of someone relying on long-term capital gains will be pushed up, not down. I agree though that if some other states have favorable treatment of long-term capital gains, the numbers would look different. > medicare and social security Both are subjects to wage limits, and at $166,000 (which will be a higher value once the state tax is incorporated) we're well past those limits. > the lottery has a negative expected value, investment does not. In the long run But a capital gains requires a sale, which means the position has been exited, and there's no long-run. True, it might be a partial sale of an asset, and in some case the proceeds of a sale are invested into another position, but at this point you're pretty much betting the new assets will increase in value and be a candidate for a sale. Hence my lottery comment.