capital gains

Why Keep The Capital Gains Tax Break?

Dave Johnson — Thu, 19 Jan 2012 05:29:13 -0500

Mitt Romney's ultra-low tax rate on his ultra-high income is reviving questions about the breaks and perks that the wealthiest of the 1% receive from the rest of us. One of these is a special low tax rate for investments -- as if anyone needed special tax incentives to induce them to make a bundle.

High Incomes At The Top

How much does Romney make? We won't know until we get a chance to see his tax returns -- if we do -- but Romney described his $374,328 income from speaking fees last year as "not very much." If $374K is "not very much" of his income ... well ... at least we can understand why he feels he can casually make $10,000 bets as if he was just pulling a dime from his pocket.

In his post What Mitt's Taxes Could've Paid For (If Not For Those Cushy Tax Breaks), Richard Eskow writes,

1,470 households made more than a million dollars and yet paid nothing -- zero, zip, nada -- in Federal income tax in 2009.

[. . .] The top 25 hedge fund managers in the US made $22 billion in 2010.

Low Taxes At The Top

Mitt Romney's admission that he probably pays a 15% tax rate shows us what is going on. For you or me, when our taxable income passes about $35,000, we start paying a 25% rate, much higher than Mitt pays on his millions on income. (That doesn't mean we pay 25% on money up to $35K, which is what most people think. It means any additional money we make after the $35K is taxed at that higher rate rate. If we make $35,001 we only pay an increase of ten cents. That's how tax brackets work.)

Lots Of Money To Use To Attack The Deficits

This special low tax rate on capital gains is sucking a lot of money out of We, the People's ability to pay for our schools, military, infrastructure, etc, which is part of why we are borrowing so much. How much? Continuing to steal from Richard Eskow's post,

As we wrote earlier, eliminating these tax breaks would add as much as $44 billion to our bottom line in the next ten years. Or to put it another way:

Ending cushy breaks for these 25 billionaires could also reduce the deficit by as much as $44 billion. Paging all deficit hawks!

In 2008 the taxable income of everyone earning above $100,000 was $3.4 trillion. If we concentrate our tax reform on the upper end of that spectrum -- the Romneys, not the folks in the $100-$400 thousand range -- we know that every percentage point in increased collection comes out to another $34 billion per year. That ain't chicken feed.

Why The Low Capital Gains Tax Rate?

The justification for a special tax rate for gains from investing capital is supposed to be to provide an incentive to invest. But there is already a really good incentive to invest: to make a bundle of cash. Piling a special "incentive" on top of making a bundle of cash creates market distortions - moving investors away from deciding where to put their money based on the value and merits of the investment and toward tax-reduction schemes.

The necessary precondition for investing capital is having capital. So a tax break on the return from investing capital is by definition a break for the well-off. Here is the reality: capital gains are taxed at a lower rate because most of the income of the 1% is from capital gains, and most of the income of the 1% is from capital gains because the tax rate is lower. The "incentive to invest" should be making a good investment, period.

I'll bet you $10,000 that getting rid of this tax break helps fix the deficit, and leads to a saner investment climate. (Of course, I'm kidding, I think that is a lot of money.)

A Riddle that Brings Joy to Mega Rich Hearts

Sam Pizzigati — Sat, 17 Sep 2011 20:40:02 -0400

The Census won't count it. The IRS won't tax it, at anywhere near full freight. What is it? It's enough, all by itself, to keep grand fortunes constantly soaring.

Can we start the century over?

Economically, new Census Bureau income stats released last week suggest, our 21st century so far rates as the worst century in American history. We are hurtling backwards — at an alarmingly rapid rate.

The typical American household income, $53,164 in 2000 after adjusting for inflation, stood at just $49,445 last year. Incomes for the typical working-age household — under 65 — have dropped over 10 percent since 2000.

The number of Americans living in poverty, meanwhile, is rising. In 2000, 11.3 percent of Americans rated as officially poor. Last year, 15.1 percent fit the poverty definition — under $22,314 for a family of four — and almost half those in poverty, 44.3 percent, had incomes less than half the poverty threshold.

What about households at the other end of the income spectrum? The annual Census Bureau figures on incomes at our tippy top have never been particularly helpful. Census statisticians, to protect the confidentiality of the households they survey, “topcode” income categories — at $1.1 million.

We know, as a result, exactly how many American households made under $10,000 last year or between $50,000 and $60,000. But we have no clue, from the annual Census figures, how many made over $5, $10, or $20 million.

The even bigger shortcoming with the annual Census stats: The Census income survey doesn’t count “capital gains,” the profits from the sale of stocks, bonds, and other assets. Capital gains just happen to make up the single biggest category of income America’s super rich pull in every year.

In fact, as the Washington Post reminded us last week, capital gains make up nearly 60 percent of the income that goes to America’s 400 highest-earning taxpayers. Since the early 1990s, over 80 percent of all capital gains have gone to America’s richest 5 percent — and almost half to the richest 0.1 percent.

None of this capital gains income shows up in the new Census income figures released last week, the prime reason why the Census data show the average income of America’s top 5 percent, adjusted for inflation, down over the past decade, down even more sharply than incomes in America's statistical middle.

Top 5 percent households took home an inflation-adjusted $320,000 in 2001, according to the Census figures out last week, and only $288,000 in 2010.

But these totals bear only a passing resemblance to the sums households in the top 5 percent have actually been raking in. We know that for a fact, thanks to statisticians at the IRS. Their IRS annual reports do include capital gains income.

What sort of difference does this inclusion make to America's income picture? A quite substantial one.

Between 2001 and 2008, the IRS stats show, the top 5 percent's share of America's national income rose from 31.99 percent to 34.74 percent. The Census Bureau annual data have the top 5 percent share, for these same years, falling from 22.4 percent to 21.5 percent.

A distressing irony lurks in all these numbers. The Census Bureau doesn't count capital gains income. The IRS doesn't tax it — at anywhere near the tax rate that applies to ordinary income. In real life, this preferential treatment for capital gains serves to make the super rich ever richer.

The world of professional baseball offers a particularly vivid example. In 2010, all Major League players will pay a 35 percent tax on any salary over $373,650. Any Major League owner who sells his franchise this year, by contrast, will pay just a 15 percent tax on the capital gains mega millions he makes on the sale.

That's not, of course, the fault of the IRS. Over the past three decades, Presidents and members of Congress, both Democratic and Republican, have opted to lower the capital gains rate — and kept it low.

Still, capital gains only make up part of our national inequality story, and the latest Census figures, even without any capital gains data, do have important inequality stories to tell.

One such story: According to the new Census stats, the nation's income divide between households at the 95th percentile — that is, households making more than all but the nation’s top 5 percent — and households at the 20th and 50th percentiles has, in modern times, never been higher.

Back in 1968, households at the 20th percentile made an inflation-adjusted $18,251. Households at the 95th percentile that year took home $156,316. In 2010, 20th-percentile households had incomes only slightly higher, just $20,000. The much more robust 2010 income at the 95th percentile: almost $181,000.

Overall income inequality, the new Census Bureau annual income report concludes after presenting stats like these, definitely “is increasing.”

Much, much faster, unfortunately, than the Census stats show us.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up at Inequality.Org to receive Too Much in your email inbox.

10 Years Of Capital Gains Tax Cuts Proves: Rich Win, You Lose

Dave Johnson — Mon, 12 Sep 2011 14:06:36 -0400

Why are "capital gains" taxes so much lower than taxes on other income? The reason capital gains taxes are lower is because most of the income of the rich is from capital gains. And the reason most of the income of the rich is from capital gains is because capital gains taxes are lower.

Our System

"Capital gains" are the gains, or profits, made from the investment of capital -- the big pools of money that a few of us have the great responsibility and burden of being stuck with. The theory is that the few among us who have bundles of money (capital) use that money to start businesses or buy stocks or property (or race horses) and thereby "create jobs." (For more on how businesses and the wealthy "create jobs," click here and then click here.)

If the value of the business or property (or race horses) goes up those wealthy few make even more money (gains). This ability to obtain these huge gains is a benefit offered to those who have lots of money in the first place. Thus the term "capital gains." These gains are differentiated from the gains the rest of us make from ... working ... because the rest of us do not have the intelligence and wisdom of having those huge pools of money to invest.

Incentives

In our system the income gained from these investments by these wealthy few is therefore taxed at a special very, very low rate, because they have the wisdom and intelligence to have large sums of money available to invest, and the rest of us do not. This low rate is considered an "incentive" to those who have these large accumulations of money, to try to persuade them to make these huge profits. They require these "incentives" to make huge profits, because otherwise they might not be interested in making the huge profits that can result from owning most of the property and stock and race horses (and yachts and private jets and multiple homes and million-dollar cars.) So that is why they must be given the incentive of these very special low tax rates - to persuade them to make investments that reap huge profits that they otherwise would not want to make.

Government Interference

Of course, the wealthy usually complain when government gets involved in creating "incentives" and "picking winners and losers" in ways that help We, the People, saying government interference distorts decision-making. But when the "incentive" is special low tax rates to persuade the wealthy to invest and make huge profits, that's different. Because it is, that's why. Shut up. Hey, look over there!

Job Creation

This reaping of huge profits from "efficiencies" like downsizing, laying people off and making the remaining workers do 2 jobs each in the same amount of time, outsourcing, buying companies and firing everyone and then selling off the pieces, offshoring, force reductions, firing people and then bringing them back as "contractors" at half the pay, relocating factories out of the country where people don't have the protections of democracy, replacing workers with machines, etc. is called "creating jobs."

Effect Of Cutting Capital Gains Taxes

In 2001 these special low tax rates for the very rich "job creators" were made even lower. This was done in order to provide even more incentive for them to make even more profits from their large accumulations of property, houses, cars, yachts, private jets and race horses, so that these "producers" - the "job creators" - would produce even more and create even more jobs. (Click here for more on who and what really creates jobs.) The result of these 2001 tax cuts was spectacular: eight years of the lowest economic growth and lowest job-creation rate since WWII, followed by the collapse of the entire financial system and mass layoffs of millions of us.

So the 2000s brought upon us an even greater need to provide incentives for the producers to create jobs! In fact, each time these incentives are increased and jobs do not result there is even greater pressure to provide even more incentives to the "job creators." A great system, this, if you're already rich, no? The worse things get, the more you get, because you had the wisdom and intelligence to be sitting on a huge pile of cash. Brilliant! (See Did The Rich Cause The Deficit?)

So with all this in mind, today the Washington Post looks at these super-low tax rates for those who have large accumulations of money, in Capital gains tax rates benefiting wealthy feed growing gap between rich and poor,

For the very richest Americans, low tax rates on capital gains are better than any Christmas gift. As a result of a pair of rate cuts, first under President Bill Clinton and then under Bush, most of the richest Americans pay lower overall tax rates than middle-class Americans do. And this is one reason the gap between the wealthy and the rest of the country is widening dramatically.

[. . .] Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.

Repeat, "about half of all the capital gains have gone to the wealthiest 0.1 percent."

The Washington Post story explains the strongest reason why it is so important for legislators to pass these lower tax rates to "incentivize" the wealthiest to invest and make huge profits:

Some lawmakers who have backed low tax rates on capital gains have later been hired by the financial industry.

So you see, it is very clear why it is very, very important for members of Congress to make sure that there is a special very, very low rate of taxation for the wealthiest few. And the result?

The 400 richest taxpayers in 2008 counted 60 percent of their income in the form of capital gains and 8 percent from salary and wages. The rest of the country reported 5 percent in capital gains and 72 percent in salary.

Yes, that is the very same 400 wealthist who have more wealth than 60% of all Americans combined. (That's right, I had it wrong when I wrote that it was more than 50%, it is now more like 60%.)

So here is how it is: the rich are rich because they are smarter than the rest of us. And what is the proof that they're smarter than the rest of us? That's easy:

Because they're rich!

Take a moment to browse a collection of pictures of the job-creating results of these special exemptions from taxation enjoyed by these wealthiest, in Nine Pictures Of The Extreme Income/Wealth Gap. And read more about the ideology behind this idea that the wealthy are "producers" who "create jobs."

Wall Street Whiners Threaten to Wreck the Economy-- Again

Zach Carter — Sun, 26 Sep 2010 18:10:38 -0400

I agree with everything Paul Krugman has to say about Max Abelson's excellent run-down of the Wall Street whinery, but his critique stops a little too short. Abelson's piece emphasizes that Wall Street isn't really upset about any policies the Obama administration has adopted, since, as I and many others have noted, the Obama administration has been very friendly on that front. What they're upset about-- at least what they say they're upset about-- is the jargon. Obama called bailed-out bankers "fat cats" after they paid themselves obscene bonuses with taxpayer money. To the bankers Abelson quotes, this amounts to some kind of unfair discrimination. That's absurd-- the bailout barons Obama criticized had wrecked the economy and then paid themselves like princes for profits secured by taxpayer largesse. Those who did not benefit from such largesse have no reason to feel slighted by the critique, and those who did benefit have no reason to be complaining from their second homes in the Hamptons.

But what I find most interesting is that the cry-babies in Ableson's story actually threaten to wreck the economy over this rhetoric. The key passage is at the end of Ableson's piece:

Wall Street's emotions have consequences. "If, as a result of this anger, credit becomes unavailable, particularly for small and mid-size businesses," Mr. Schwarzman wrote in The Washington Post this year, before his Poland blunder, "then at best the economy will slow and, at worst, we will find ourselves in a dire situation." He said bankers felt under siege and were responding by "becoming conservative," a lovely little pun about lending and politics.

Credit does not just magically become "unavailable" because of "anger." Some class of angry people has to decide not to make credit available.

There are plenty of reasons why bankers might decide not to extend loans, but feeling "under siege" because the president called you a fat cat of isn't one of them. No sane businessperson would let those feelings overwhelm her decision-making process when the bottom line is at stake. If there were evidence that regulations were going to change dramatically and banks would have to keep more capital on hand to cushion against losses, there's a case to be made that banks might not be eager to extend loans as a result (not a very good case, though, since banks could just raise capital in the markets to support profitable lending opportunities). But freaking out because the President calls you a fat cat and preemptively shutting down your business makes, well, no sense.

Another of Abelson's anonymous Wall Street sources repeats the insanity:

"He's pissing on us and Wall Street and bankers and capitalism; then we have gotten afraid," the executive who turned CNBC on mute said. "We then are not investing in maybe what we should invest in."

What, exactly, are this guy and his friends afraid of? That Obama might call him another name that he likes even less than "fat cat?" Obama has proposed a couple of tax changes for some types of Wall Street revenue and some types of hedge fund pay-- but the fear of higher taxes wouldn't be grounds to invest less, or invest improperly. Bumping up the capital gains rate from 15 percent to 20 percent doesn't alter the incentive structure at all-- it isn't going to push any bankers or traders out of the investment business.

So these brats are saying one of two things with their tantrums. Either Wall Street is dominated by completely irrational fools who will wreck their businesses after hearing a dirty words, or this is a threat: Treat us like superhuman royalty, or we'll wreck the economy. If the first case is true, then these guys are paying themselves enormous sums of money to be total idiots-- something the "well operators" that one of Abelson's anonymous Wall Street sources spits on never do. If the second is true, then we have another excellent reason to keep these sharks out of economic policy debates.

UPDATE: Also note the use of anonymous sources in Abelson's story. Usually that anonymity protects somebody from something-- in financial journalism, anonymity usually protects a source who divulges a trading strategy or a lobbying tactic that ought to be a company secret. But these guys are just whining, and asking for Abelson not to tell anybody who they are. At least some members of the Wall Street whinery are ashamed of themselves.

Tax Tricks: Is Corporate Income Taxed Twice?

Dave Johnson — Wed, 21 Apr 2010 01:21:48 -0400

Conservatives claim that income from corporate dividends is "taxed twice" -- first when the corporation pays its taxes (if it does pay taxes), and then when the recipient of dividends pays taxes on that income.

They don't claim, however, that when you pay your plumber the plumber shouldn't have to pay taxes because you already paid taxes on your income. That's different, I guess, because you and your plumber both have to work. Income from working has no such considerations of favor.

This "taxed twice" argument was used by George W. Bush as a reason to reduce the tax rates on income received from corporate dividends. (He also said that taxing dividends is a tax on retired people. Heh.) This "taxing twice" is unfair, they say, even though owners of corporations receive many special advantages under our laws. One such advantage is limited liability, meaning that the owners are not liable to pay the company's debts, fines if the company violates rules or laws or court judgments if the company harms anyone. But Congress fell for it, possibly because of the amazing power of alliteration, and reduced taxes on the income from corporate dividends to no more than 15%. Fortunately this tax cut -- which mostly applies to the very rich -- expires soon.

Meanwhile the income that regular people receive from actually working is taxed at the rate of regular old income taxes. That's right, income from working is taxed at a higher rate than income from not working, with conservatives arguing that it shouldn't be taxed at all! In fact, in some areas they have completely succeeded; if your income comes from inheriting money in 2010 you won't pay any income tax at all!

Another huge tax break that is mostly just for rich people is the capital gains tax rate. The claim is that income that comes from selling an investment (rather than from working) should have a vastly lower rate as an incentive to invest. That rate currently tops out at 15%. There is no explanation why 15% is optimal for providing such an incentive, and not some other rate lower than regular income taxes, like maybe 5% less than your regular income tax. Apparently the reasoning is that only getting a 5% tax break if you make a fortune from an investment isn't enough to make the investment worthwhile. Of course potential huge profits from a successful investment are not sufficient reason to invest so the rich must be bribed further to open their wallets. (I guess the rich really are different from you and me.)

Tax breaks like these -- once again, only on income that is received for not working -- free the rich from concern and worry that they might be asked to pitch in and pay for the infrastructure that enabled their wealth -- and give them more energy to complain about the terrible budget deficits caused by people who worked for a living collecting the Social Security they paid into all of their working lives once they retire.

Declining Tax on Wealth

Alexander Sewell — Fri, 17 Oct 2008 11:24:51 -0400

The 1986 Tax Reform Act set the top rate at 28 percent and later legislation lowered it to 20 percent in 1997 and to 15 percent in 2003.

Capital Gains Reduction

Alexander Sewell — Fri, 17 Oct 2008 00:00:00 -0400

Congress already reduced the capital-gains tax rate from 20 to 15 percent in 2003

Capital Gains Tax

Armand Biroonak — Fri, 17 Oct 2008 00:00:00 -0400

Capital Gains Reduction For Top 5%

Alexander Sewell — Wed, 15 Oct 2008 00:00:00 -0400

Households earning over $200,000 a year would receive 93 percent of the benefits from the McCain capital gains tax cut. In fact, two-thirds of the tax cut would go to individuals earning over $1 million a year.

Unfair Taxes, Benefit Wealthy, Hurt Middle Class

Alexander Sewell — Wed, 15 Oct 2008 00:00:00 -0400

Today, the top federal income-tax rate for ordinary income is 35 percent, meaning that earned income is taxed at a rate 2 1/3 higher than income from capital gains