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The tax code enables and reinforces outlier wealth using tired arguments like "encouraging investment" and "double taxation." United States centric observation

by ghouse 7y ago

The tax code enables and reinforces outlier wealth using tired arguments like "encouraging investment" and "double taxation." United States centric observations: For example, charging lower tax rates on capital gains than ordinary income promotes a concentration of wealth to people with wealth. Suggesting this is purposeful policy for society to encourage investment is comical -- what else would wealthy people do with the wealth? Store it under the mattress? Or spend it (in which case that would accelerate the velocity of money, also good for society). Capital gains taxes are only on the gains -- income that had not yet been taxed. Actual double taxation is a wealth tax. Similar tax policy that results in concentration of wealth are: 1) 1031 transfers (where income on sale of real property isn't taxed so long as the proceeds are used to purchase real property), 2) Qualified Small Business Stock (where federal tax isn't paid on gains of sale of small business stock) 3) Economic Opportunity Zones (where tax is deferred on gains so long as the gains are invested in an Opportunity Zone, and all additional gains aren't taxed).

jogjayr 7y ago
> charging lower tax rates on capital gains than ordinary income I don't have a problem with the idea. It recognizes that income derived from investments is riskier than income from a paycheck, and applies a discount. The problem is with the execution. Why is the top rate for cap gains only 20% - even if you earn $10b, but 37% for a mere $510k in ordinary income? Surely there should be some amount of cap gains that can be taxed at 37%. Maybe it's $5m instead of $510k (to recognize the riskiness of the income stream) but it shouldn't cap out at 20%. Simply put, why aren't there more tax brackets for cap gains and other investment income?
- ghouse 7y ago
  > It recognizes that income derived from investments is riskier and applies a discount. It's unclear why as a matter of tax policy we want to discount taxes because risk is taken. If an investment results in a loss, that loss is permitted to offset gains elsewhere.
  - jogjayr 7y ago
    Because the policy doesn't just cover a diversified investment portfolio where a loss on one transaction offsets other gains. Small business owners put a significant chunk of savings and all their time into their business. What gains are they going to write down if their business goes under?
    - danaris 7y ago
      Is there a reason we can't classify a wholly-owned business differently from shares of stock, for tax purposes?
- take_a_breath 7y ago
  == Simply put, why aren't there more tax brackets for cap gains and other investment income?== Because the people who make large capital gains are the ones funding political campaigns and helping to write the laws.
- tracer4201 7y ago
  Working for someone, even at a FAANG, inherently also has risks. You don’t know the manager, the org, the team, etc when you first join. You have some ideas about the culture perhaps, but we take risks in our careers all the time. The argument that one is riskier than the other and therefore entitled to lower tax rates doesn’t make sense to me. Sure, investing in an asset might be riskier if you’re randomly throwing darts, but I thought these folks were all about personal responsibility. To be clear, I work at a FAANG. My total comp was is near half a million, a significant chunk of which is equity. The only risk I take is not cashing out immediately and waiting a year for the long term capital gains tax. I don’t necessarily provide more output or value than someone like a teacher. The equity I sold this year was in the hundreds of thousands and I paid less taxes on it than what most teachers probably pay. It doesn’t make any sense, and this system in my opinion isn’t sustainable. The inequality is going to lead to conflict.
  - mercutio2 7y ago
    Off-topic: Why would you wait a year to sell your RSUs? You already pay income tax on the RSUs when they vest. If you sell them immediately, you’ll have a de minimis capital gain or loss. Unless you actually would have turned around and bought your company’s stock with a bonus, you should really just sell immediately and ignore the trivial capital gain (or loss). For ESPP it can make sense to hold, but even then, only if there was a huge increase in value since the beginning of the holding period, so perhaps that’s what you meant (but ESPP is capped at a very low amount, so that would be a tiny portion of your hundreds of thousands in RSUs).

by ghouse 7y ago

jogjayr 7y ago

> charging lower tax rates on capital gains than ordinary income I don't have a problem with the idea. It recognizes that income derived from investments is riskier than income from a paycheck, and applies a discount. The problem is with the execution. Why is the top rate for cap gains only 20% - even if you earn $10b, but 37% for a mere $510k in ordinary income? Surely there should be some amount of cap gains that can be taxed at 37%. Maybe it's $5m instead of $510k (to recognize the riskiness of the income stream) but it shouldn't cap out at 20%. Simply put, why aren't there more tax brackets for cap gains and other investment income?

ghouse 7y ago
> It recognizes that income derived from investments is riskier and applies a discount. It's unclear why as a matter of tax policy we want to discount taxes because risk is taken. If an investment results in a loss, that loss is permitted to offset gains elsewhere.
- jogjayr 7y ago
  Because the policy doesn't just cover a diversified investment portfolio where a loss on one transaction offsets other gains. Small business owners put a significant chunk of savings and all their time into their business. What gains are they going to write down if their business goes under?
  - danaris 7y ago
    Is there a reason we can't classify a wholly-owned business differently from shares of stock, for tax purposes?
take_a_breath 7y ago
== Simply put, why aren't there more tax brackets for cap gains and other investment income?== Because the people who make large capital gains are the ones funding political campaigns and helping to write the laws.
tracer4201 7y ago
Working for someone, even at a FAANG, inherently also has risks. You don’t know the manager, the org, the team, etc when you first join. You have some ideas about the culture perhaps, but we take risks in our careers all the time. The argument that one is riskier than the other and therefore entitled to lower tax rates doesn’t make sense to me. Sure, investing in an asset might be riskier if you’re randomly throwing darts, but I thought these folks were all about personal responsibility. To be clear, I work at a FAANG. My total comp was is near half a million, a significant chunk of which is equity. The only risk I take is not cashing out immediately and waiting a year for the long term capital gains tax. I don’t necessarily provide more output or value than someone like a teacher. The equity I sold this year was in the hundreds of thousands and I paid less taxes on it than what most teachers probably pay. It doesn’t make any sense, and this system in my opinion isn’t sustainable. The inequality is going to lead to conflict.
- mercutio2 7y ago
  Off-topic: Why would you wait a year to sell your RSUs? You already pay income tax on the RSUs when they vest. If you sell them immediately, you’ll have a de minimis capital gain or loss. Unless you actually would have turned around and bought your company’s stock with a bonus, you should really just sell immediately and ignore the trivial capital gain (or loss). For ESPP it can make sense to hold, but even then, only if there was a huge increase in value since the beginning of the holding period, so perhaps that’s what you meant (but ESPP is capped at a very low amount, so that would be a tiny portion of your hundreds of thousands in RSUs).