Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Someone needs to learn the difference between income tax and capital gains / dividend. Money was already taxed going into the investment.

Oh boy. You don't pay tax on the initial investment, only the gain.

Has turbotax made everyone complete tax idiots????

pp means that the dollars you invested were already taxed once (unless you're investing through a retirement account). That's the economic and policy rationale for lower capital gains taxes.

In the case of dividends, the the profit is taxed twice -- once at the corporate level, and again when it is distributed.

E.g., A company has two shareholders and earns $100. The tax is $35. So, $65 is distributed evenly between the two partners as a dividend. They each receive $32.50, and then pay taxes again on that amount.

That's the double taxation argument.

Plenty of room to argue in there. Bain, for example, isn't a company but a partnership, so the $100 profit isn't subject to the $35 tax. However, some of its portfolio companies might be.

Thanks for explaining that so clearly. Question - Say I'm the shareholder. The company first makes money and pays a tax. Then I make money and pay a tax. Well the money is taxed twice but each recipient is only taxed once, correct? That seems fair to me. Or am I missing something?

OK let's put capital gains aside, because that actually doesn't fit this description of double taxation.


There are two pieces to this: policy, and legal liability. First policy:

Taxation of dividends is in part a policy issue, and the policy is whether the government should use tax policy to encourage or discourage investment. A company can choose to invest its cash in opportunities providing jobs and economic growth. Or it can cash out and pay money back to the investors. High capital gains taxes discourage investment, and low capital gains taxes encourage investment. But on the flip side, low or no dividend tax encourages companies to pay out cash to investors rather to invest.

So if you want a tax policy that encourages investment (and that is what we were sold when capital gains taxes were reduced), leave the dividend tax in place. If on the other hand you want a tax policy that does not artificially promote or discourage investment, make the capital gains rate equal to the income tax rate, ensuring that individuals are not biased by tax policy, and then eliminate dividend taxes. Unfortunately we have a situation where the Republicans argued for capital gains tax reductions until share prices crashed, and then they went after dividends. Everyone would like to have more and pay less, but it doesn't work that way.


Now, legal liability:

I know that this one is going to be hard to digest, but I'll try to put it in concrete terms. When you invest in a stock of a public corporation, it is a no-strings attached investment. If that company goes under, gets sued, whatever, your stock becomes worthless. BUT (and this is big) no one can come after you for more money. Most people cannot even imagine what this means, because everything they have invested in has been a public company. But if you are in a partnership, it's a different situation entirely. You receive your distributions tax free, and then pay them on your 1040 (ie, no double taxation). But the tradeoff is that you are on the hook if something goes tragically wrong with the partnership.

Suppose for example, you bought shares in General Motors Partnership. Guess who's on the hook if the company can't meet its debt obligations, payments to its pension fund, etc.? You. And not just for the amount of your initial investment. They get to come after you for more money. That wipes company that just went under? If it was a partnership and you owned shrares, the parents of those dead children could come after your personal assets. Or the imploded law firm in this area, Howrey. If that was a partnership that you had an interest in, the creditors could come after you.

There are other investment vehicles like venture capital funds and hedge funds which also have similar risks (capital calls). So this idea of a no-strings investment, where your exposure is no greater than the initial investment, is somewhat unique. And the price that you pay for this is that a company is an arms-length instrument, operating on its own, taxed on its own, and sued on its own. If you eliminate dividend taxes, you create a no-tradeoff instrument that allows people to operate partnerships without personal liability. And that undermines accountability.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Thank you for explaining to the idiots why capital gains tax is lower than income tax, it's because you are using post taxed income to buy another investment. The only pre-tax investment is 401k, ira, tsp, retirement accounts etc...

It would be nice if people would get their heads out of their asses and realize the difference between income tax and capital gains and why they are a different rate. The whole mitt romney pays capital gains tax vs income tax is bunk. Take romney's income tax rate on his 500k and then compare that to obama's.

If that's so obvious then why is interest on savings accounts still taxed the same as wage income?

Taxing cap gains differently from ordinary income causes as much economic distortion as it claims to resolve, plus its a recipe for tax evasion. Not to mention what "post-taxed" income do you think Zuckerberg used to buy his shares in facebook? Or the heirs to the Mars candy fortune, who have spent the last 20 years and more money than any 10 of us will earn in a lifetime on trying to get the tax law changed in their benefit?

Now you're getting into a different area of tax policy: Active investment versus passive investment, as well as risk.

It is true the interest you earn is subject to double tax. But, earning interest is a passive activity, with little or no risk. As such, the policymakers decided it doesn't merit a tax inducement.

Investing in stocks, on the other hand, is riskier and more active. It's an "investment" rather than a return on "savings."

That's the rationale, anyway. I'm not endorsing, just trying to explain.

I have never in my life heard that explanation and it makes little sense. Investment can be financed through debt or equity. The idea that we are going to give preferential tax treatment to equity investments because it is "riskier" is bad economics and bad tax policy.

The fact is that most of these special tax rules exist because people have the political pull to get them, and they make up these bogus explanations after the fact (or to get the preferential treatment in the first place). There was a while when cap gains and ordinary income rates were the same but it didn't last long thanks to the lobbyists/wealthy.

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Thank you for explaining to the idiots why capital gains tax is lower than income tax, it's because you are using post taxed income to buy another investment. The only pre-tax investment is 401k, ira, tsp, retirement accounts etc...

It would be nice if people would get their heads out of their asses and realize the difference between income tax and capital gains and why they are a different rate. The whole mitt romney pays capital gains tax vs income tax is bunk. Take romney's income tax rate on his 500k and then compare that to obama's.

If that's so obvious then why is interest on savings accounts still taxed the same as wage income?

Taxing cap gains differently from ordinary income causes as much economic distortion as it claims to resolve, plus its a recipe for tax evasion. Not to mention what "post-taxed" income do you think Zuckerberg used to buy his shares in facebook? Or the heirs to the Mars candy fortune, who have spent the last 20 years and more money than any 10 of us will earn in a lifetime on trying to get the tax law changed in their benefit?

Now you're getting into a different area of tax policy: Active investment versus passive investment, as well as risk.

It is true the interest you earn is subject to double tax. But, earning interest is a passive activity, with little or no risk. As such, the policymakers decided it doesn't merit a tax inducement.

Investing in stocks, on the other hand, is riskier and more active. It's an "investment" rather than a return on "savings."

That's the rationale, anyway. I'm not endorsing, just trying to explain.

Anonymous wrote:

Anonymous wrote:Thank you for explaining to the idiots why capital gains tax is lower than income tax, it's because you are using post taxed income to buy another investment. The only pre-tax investment is 401k, ira, tsp, retirement accounts etc...

It would be nice if people would get their heads out of their asses and realize the difference between income tax and capital gains and why they are a different rate. The whole mitt romney pays capital gains tax vs income tax is bunk. Take romney's income tax rate on his 500k and then compare that to obama's.

If that's so obvious then why is interest on savings accounts still taxed the same as wage income?

Taxing cap gains differently from ordinary income causes as much economic distortion as it claims to resolve, plus its a recipe for tax evasion. Not to mention what "post-taxed" income do you think Zuckerberg used to buy his shares in facebook? Or the heirs to the Mars candy fortune, who have spent the last 20 years and more money than any 10 of us will earn in a lifetime on trying to get the tax law changed in their benefit?

Anonymous wrote:Thank you for explaining to the idiots why capital gains tax is lower than income tax, it's because you are using post taxed income to buy another investment. The only pre-tax investment is 401k, ira, tsp, retirement accounts etc...

It would be nice if people would get their heads out of their asses and realize the difference between income tax and capital gains and why they are a different rate. The whole mitt romney pays capital gains tax vs income tax is bunk. Take romney's income tax rate on his 500k and then compare that to obama's.