4 ms·

Capital gains tax is clearly lower than income tax. So why did you change your mind?

by ck_one 3mo ago

nickff 3mo ago
Not the commenter you replied to, but one thing to note is that capital gains tax (at least in the context of investments in corporate equities) is applied after corporate taxes. Profits and reinvested earnings are taxed as profits, and they're two of the key components to valuing an equity. As such, when comparing income tax and capital gains, you should add the impact of corporate taxes. Incidentally, corporate taxes are why many small business owners pay themselves wage income, rather than doing stock buybacks or dividends.
- saghm 3mo ago
  If the income was earned through dividends, maybe this would be a reasonable argument. Most of the time stock just gets bought and sold by investors rather than the company itself though, so it's not clear why corporate tax would have anything to do with this. Sure, the stock price should somehow be tied to the actual value of the company, but for a while now it's been mostly indistinguishable from a Ponzi scheme other than a few companies that do sometimes decide to buy back some stock, which makes it slightly less sketchy but if the value is from the company buying it back, it's a lot closer to debt or a bond, which is not at all how anyone treats it.
  - nickff 3mo ago
    I agree that in a bull market, many corporations are not purchased and sold at book value. That said, we are on the largest bull-run in history, so we shouldn’t treat this as the norm, and base all our long-term decisions on the current situation.
    - saghm 3mo ago
      So if I'm understanding correctly, your argument is that it doesn't make sense to make people who make more money pay the same rate of taxes as regular people do because we should ignore the fact that they've been doing it for longer than ever before?
      - nickff 3mo ago
        I’m saying that we shouldn’t base our tax policy on a bubble. The dot-com bubble was treated like a solution to the federal deficit, and it wasn’t.
- tonyedgecombe 3mo ago
  I've often wondered why we don't abolish corporation tax and instead tax capital gains and dividends like normal income.
  - nickff 3mo ago
    This would be my personal preference, as I believe that voters often overlook the impact of corporate taxes, and there are just too many (different) taxes.
  - daedrdev 3mo ago
    Because capital gains taxes really discourage selling which gums up the economy
    - triceratops 3mo ago
      Wouldn't prices of assets just rise to compensate? People still need liquidity.
      - nickff 3mo ago
        From what I understand, this lack of liquidity is not an issue in ‘financial markets’, but can be a problem for other assets such as housing.
- panzagl 3mo ago
  So if I buy and sell Pokeman cards I shouldn't have to pay any tax because WotC pays corporate taxes?
  - nickff 3mo ago
    I am not saying that one party paying taxes means that no counter-party should. I am just saying that the impact of different structures should be accounted for.
- topgrain2 3mo ago
  > Incidentally, corporate taxes are why many small business owners pay themselves wage income, rather than doing stock buybacks or dividends. You've been sold some BS. Usually this is because you're required to take a "reasonable" wage for your role in a company. Otherwise I guarantee you every independent contractor out there (among others) would be operating in a way that made 100% of their income business profit, rather than wages, as it has enormous tax advantages. Approximately everybody tries to find out the least they can take as wage income without pissing off the IRS, and sets their "wage" to whatever that is.
  - nickff 3mo ago
    Many locales have laws that do not allow remuneration above the 'reasonable wage', to prevent tax circumvention by having employers spread wage payments across multiple family members of employees, but I am not familiar with any jurisdiction with a minimum reasonable wage law or regulation. Could you please link some source for the claim that business owners are required to accept a 'reasonable wage'?
    - topgrain2 3mo ago
      https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself https://www.irs.gov/businesses/small-businesses-self-employe...
      - nickff 3mo ago
        Yes, that is intended to disallow officers from avoiding taxes by being compensated via ‘loans’ and other means. I can’t find any case where dividends or buybacks were found to be violations of that rule. https://cpataxteam.com/blog/s-corp-owners-are-you-paying-yourself-a-reasonable-salary-heres-how-the-irs-defines-it/#A_common_issue_distributions_with_little_or_no_payroll https://cpataxteam.com/blog/s-corp-owners-are-you-paying-you... Do the math for yourself. Paying corporate taxes on profits, then dividend taxes on what gets paid out is not a savings versus paying income+payroll tax (which comes from money that is treated as an expense at the corporate level).
Schiendelman 3mo ago
Their income would be capital gains regardless of whether they use these methods or not.

Capital gains tax is clearly lower than income tax. So why did you change your mind?

by ck_one 3mo ago

Capital gains tax is clearly lower than income tax. So why did you change your mind?

Not the commenter you replied to, but one thing to note is that capital gains tax (at least in the context of investments in corporate equities) is applied after corporate taxes. Profits and reinvested earnings are taxed as profits, and they're two of the key components to valuing an equity. As such, when comparing income tax and capital gains, you should add the impact of corporate taxes. Incidentally, corporate taxes are why many small business owners pay themselves wage income, rather than doing stock buybacks or dividends.

saghm 3mo ago
If the income was earned through dividends, maybe this would be a reasonable argument. Most of the time stock just gets bought and sold by investors rather than the company itself though, so it's not clear why corporate tax would have anything to do with this. Sure, the stock price should somehow be tied to the actual value of the company, but for a while now it's been mostly indistinguishable from a Ponzi scheme other than a few companies that do sometimes decide to buy back some stock, which makes it slightly less sketchy but if the value is from the company buying it back, it's a lot closer to debt or a bond, which is not at all how anyone treats it.
- nickff 3mo ago
  I agree that in a bull market, many corporations are not purchased and sold at book value. That said, we are on the largest bull-run in history, so we shouldn’t treat this as the norm, and base all our long-term decisions on the current situation.
  - saghm 3mo ago
    So if I'm understanding correctly, your argument is that it doesn't make sense to make people who make more money pay the same rate of taxes as regular people do because we should ignore the fact that they've been doing it for longer than ever before?
    - nickff 3mo ago
      I’m saying that we shouldn’t base our tax policy on a bubble. The dot-com bubble was treated like a solution to the federal deficit, and it wasn’t.
tonyedgecombe 3mo ago
I've often wondered why we don't abolish corporation tax and instead tax capital gains and dividends like normal income.
- nickff 3mo ago
  This would be my personal preference, as I believe that voters often overlook the impact of corporate taxes, and there are just too many (different) taxes.
- daedrdev 3mo ago
  Because capital gains taxes really discourage selling which gums up the economy
  - triceratops 3mo ago
    Wouldn't prices of assets just rise to compensate? People still need liquidity.
    - nickff 3mo ago
      From what I understand, this lack of liquidity is not an issue in ‘financial markets’, but can be a problem for other assets such as housing.
panzagl 3mo ago
So if I buy and sell Pokeman cards I shouldn't have to pay any tax because WotC pays corporate taxes?
- nickff 3mo ago
  I am not saying that one party paying taxes means that no counter-party should. I am just saying that the impact of different structures should be accounted for.
topgrain2 3mo ago
> Incidentally, corporate taxes are why many small business owners pay themselves wage income, rather than doing stock buybacks or dividends. You've been sold some BS. Usually this is because you're required to take a "reasonable" wage for your role in a company. Otherwise I guarantee you every independent contractor out there (among others) would be operating in a way that made 100% of their income business profit, rather than wages, as it has enormous tax advantages. Approximately everybody tries to find out the least they can take as wage income without pissing off the IRS, and sets their "wage" to whatever that is.
- nickff 3mo ago
  Many locales have laws that do not allow remuneration above the 'reasonable wage', to prevent tax circumvention by having employers spread wage payments across multiple family members of employees, but I am not familiar with any jurisdiction with a minimum reasonable wage law or regulation. Could you please link some source for the claim that business owners are required to accept a 'reasonable wage'?
  - topgrain2 3mo ago
    https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself https://www.irs.gov/businesses/small-businesses-self-employe...
    - nickff 3mo ago
      Yes, that is intended to disallow officers from avoiding taxes by being compensated via ‘loans’ and other means. I can’t find any case where dividends or buybacks were found to be violations of that rule. https://cpataxteam.com/blog/s-corp-owners-are-you-paying-yourself-a-reasonable-salary-heres-how-the-irs-defines-it/#A_common_issue_distributions_with_little_or_no_payroll https://cpataxteam.com/blog/s-corp-owners-are-you-paying-you... Do the math for yourself. Paying corporate taxes on profits, then dividend taxes on what gets paid out is not a savings versus paying income+payroll tax (which comes from money that is treated as an expense at the corporate level).

Schiendelman 3mo ago

Their income would be capital gains regardless of whether they use these methods or not.