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What do you mean by after tax? Capital gains are literally that, value increase of assets. How is that after tax? Also, if you’re going to discount inflation

What do you mean by after tax? Capital gains are literally that, value increase of assets. How is that after tax? Also, if you’re going to discount inflation, don’t you have to do the same for annual salaries which are very much worth less under any significant inflation?

nullc 5y ago
Your income comes from a company which pays it with pretax money, you pay taxes on that money and then invest it in shares, companies earn money, pay taxes on the profits, and gain value (dividends/share buybacks/self-investment). The sum of corporate taxes and gains taxes are close in magnitude to income tax. So a dollar goes into a corp, it either: (1) gets paid to you, you pay your marginal income tax rate on it (say 28%), the corp doesn't pay a tax on it because you're an expense they deduct. or (2) they pay corporate tax on it (21%) and then it turns into gains for you and you pay LTCG on it (15%) = ~33%. (and no, it's still automatically lower than your marginal income tax rate when you're in a higher tax bracket: LTCG goes up to 23.8% when you have sufficiently high investment income) ... and if you don't qualify for LTCG on that cap gain, you get taxed at your income tax rates on it even though you, as a (tiny) owner of the company, already paid corp taxes on.
- alex_young 5y ago
  Well, first it appears that you’re discussing the underlying asset, and not the gains. The asset is presumably still there at the end of any gains, right? Additionally you appear to be assuming that all capital investments ‘came from’ a paycheck and not some other source. Probably all of the underlying money in question in the original article was created through some kind of invention or productive work, not through Jeff Bezos investing his paycheck.
WalterBright 5y ago
Capital gains correspond with the increase in value of a company which ultimately corresponds with the increase in value due to profits after taxes. Salaries tend to rise with inflation. The tax brackets are indexed to inflation, so there's no inflation tax on them.
- alex_young 5y ago
  I’m not sure I follow. If capital gains are strongly correlated with profit after taxes, shouldn’t price to earnings ratios be somewhat similar? For instance, GM has a past year p/e of 13 and Tesla has a p/e of 943.
  - WalterBright 5y ago
    Higher p/e's are based on expected future earnings. The two converge sooner or later.

nullc 5y ago

Your income comes from a company which pays it with pretax money, you pay taxes on that money and then invest it in shares, companies earn money, pay taxes on the profits, and gain value (dividends/share buybacks/self-investment). The sum of corporate taxes and gains taxes are close in magnitude to income tax. So a dollar goes into a corp, it either: (1) gets paid to you, you pay your marginal income tax rate on it (say 28%), the corp doesn't pay a tax on it because you're an expense they deduct. or (2) they pay corporate tax on it (21%) and then it turns into gains for you and you pay LTCG on it (15%) = ~33%. (and no, it's still automatically lower than your marginal income tax rate when you're in a higher tax bracket: LTCG goes up to 23.8% when you have sufficiently high investment income) ... and if you don't qualify for LTCG on that cap gain, you get taxed at your income tax rates on it even though you, as a (tiny) owner of the company, already paid corp taxes on.

alex_young 5y ago
Well, first it appears that you’re discussing the underlying asset, and not the gains. The asset is presumably still there at the end of any gains, right? Additionally you appear to be assuming that all capital investments ‘came from’ a paycheck and not some other source. Probably all of the underlying money in question in the original article was created through some kind of invention or productive work, not through Jeff Bezos investing his paycheck.

WalterBright 5y ago

Capital gains correspond with the increase in value of a company which ultimately corresponds with the increase in value due to profits after taxes. Salaries tend to rise with inflation. The tax brackets are indexed to inflation, so there's no inflation tax on them.

alex_young 5y ago
I’m not sure I follow. If capital gains are strongly correlated with profit after taxes, shouldn’t price to earnings ratios be somewhat similar? For instance, GM has a past year p/e of 13 and Tesla has a p/e of 943.
- WalterBright 5y ago
  Higher p/e's are based on expected future earnings. The two converge sooner or later.