4 ms·

I posted elsewhere that it would make sense to allow individuals to apply some smoothing to their yearly income to reduce the impact that progressive brackets h

I posted elsewhere that it would make sense to allow individuals to apply some smoothing to their yearly income to reduce the impact that progressive brackets have on highly variable incomes. so let me rephrase my statement about capital gains. it doesn't make sense to treat LTCG as income unless we first make significant changes to the way we assess income tax in the first place. obviously this would be a lot more complicated. imo the existing cap gain rules is a somewhat reasonable solution for a tax system that mostly looks at each year in isolation. the 15% rate is really not much of a concession to a retirement saver who has held a lot of those assets for decades and has experienced meaningful inflation. but the whole system leaves a lot to be desired.

dragonwriter 6y ago
> so let me rephrase my statement about capital gains. it doesn't make sense to treat LTCG as income unless we first make significant changes to the way we assess income tax in the first place. I disagree. LTCG as income without smoothing makes exactly as much sense as taxing regular income without smoothing does. Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them. (Likewise, indexing capital asset basis values for inflation is a third thing that there is a good case for, but neither of the other two things depends on it to be a good idea; I’d oppose furthering the favoring of capital by doing it without first taxing capital income as income, though.) > obviously this would be a lot more complicated. Smoothing doesn’t have to add significant complication. The essence can boil down to: (1) a taxpayer may freely recognize any amount of as-yet-unrealized income for tax purposes in any tax year and pay appropriate income tax on it. Any amount of the unused balance may be freely applied to reduce taxable income in any future year to no less than $0 (with one exception, see below.) Unused balances are indexed for inflation. (2) a taxpayer may defer to the following year recognition of any amount of income over the greater of the top of the lowest marginal rate bracket or prior year taxable income (after applying any deferrals or advance recognition), with thr caveat that no more than 90% of any previously-deferred income may be deferred again. (3) In final taxes after death, all remaining advance/deferred amounts are applied, with negative taxable income resulting in a refund calculated by applying the minimum marginal rate to the balance.
- leetcrew 6y ago
  > I disagree. LTCG as income without smoothing makes exactly as much sense as taxing regular income without smoothing does. > Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them. in theory yes, in practice no. the current system treats the common case where wages slowly increase pretty well. people with highly variable income get screwed, but it's much more common to get a yearly 2-5% salary bump. in contrast, assets are much more likely to be sold in chunks. I haven't realized any capital gains over $100 in the last five years. but soon I will have to liquidate a large portion of my holdings for a down payment on a house. having those gains taxed at my highest marginal rate would be far worse than the fact that I can't smooth out my yearly raises. it would almost double my taxable income for the year. aside from that, I agree with what you wrote. I would certainly vote for your solution.

dragonwriter 6y ago

> so let me rephrase my statement about capital gains. it doesn't make sense to treat LTCG as income unless we first make significant changes to the way we assess income tax in the first place. I disagree. LTCG as income without smoothing makes exactly as much sense as taxing regular income without smoothing does. Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them. (Likewise, indexing capital asset basis values for inflation is a third thing that there is a good case for, but neither of the other two things depends on it to be a good idea; I’d oppose furthering the favoring of capital by doing it without first taxing capital income as income, though.) > obviously this would be a lot more complicated. Smoothing doesn’t have to add significant complication. The essence can boil down to: (1) a taxpayer may freely recognize any amount of as-yet-unrealized income for tax purposes in any tax year and pay appropriate income tax on it. Any amount of the unused balance may be freely applied to reduce taxable income in any future year to no less than $0 (with one exception, see below.) Unused balances are indexed for inflation. (2) a taxpayer may defer to the following year recognition of any amount of income over the greater of the top of the lowest marginal rate bracket or prior year taxable income (after applying any deferrals or advance recognition), with thr caveat that no more than 90% of any previously-deferred income may be deferred again. (3) In final taxes after death, all remaining advance/deferred amounts are applied, with negative taxable income resulting in a refund calculated by applying the minimum marginal rate to the balance.

leetcrew 6y ago
> I disagree. LTCG as income without smoothing makes exactly as much sense as taxing regular income without smoothing does. > Yes, there’s a strong case for smoothing. There’s, independently, a strong case for not structurally favoring capital income and not structurally disfavoring labor income. While it is desirable to address both of those (and doing so simultaneously would be a good idea since there is no conflict), there is no dependency between them. in theory yes, in practice no. the current system treats the common case where wages slowly increase pretty well. people with highly variable income get screwed, but it's much more common to get a yearly 2-5% salary bump. in contrast, assets are much more likely to be sold in chunks. I haven't realized any capital gains over $100 in the last five years. but soon I will have to liquidate a large portion of my holdings for a down payment on a house. having those gains taxed at my highest marginal rate would be far worse than the fact that I can't smooth out my yearly raises. it would almost double my taxable income for the year. aside from that, I agree with what you wrote. I would certainly vote for your solution.