• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

A 69% Capital Gains Tax Hike ...

DanM

Math Student
Pelosi's 5.4% income surtax would hit capital gains and dividends.
Our job is to read bad legislation so you don't have to, and on that score we may demand combat pay for plowing our way through the House health-care bill that passed on Saturday. This thing has economic booby traps everywhere, such as favors for the tort bar (see below) and the largest capital gains tax increase in at least a half-century.

House Democrats are funding their new entitlement with a 5.4% surtax on incomes above $500,000 for individuals and above $1 million for joint filers. The surcharge is intended to snag the greatest number of taxpayers to raise some $460.5 billion, and so the House has written it to apply to modified adjusted gross income. That means it includes both capital gains and dividends.

That surtax takes effect on January 1, 2011, or the day the Bush tax rates of 2001 and 2003 expire. Today's capital gains tax rate of 15% would bounce back to 20% because of the Bush repeal and then to 25.4% with the surtax. That's a 69% increase, overnight. The last time investors were hit with anything comparable was 1986, when the capital gains rate jumped to 28% from 20%, a 40% increase, as part of the Reagan tax reform that lowered income tax rates.


The 1986 experience was not a happy one. Tax revenues from capital gains surged before the increase took effect in 1987, as investors moved to cash in at the lower rate. Revenues then plummeted. Total realized capital gains didn't again reach their 1985 level of $172 billion until 1996. By 1992, the federal government was barely getting more in revenue ($29 billion) at the 28% rate than it did in 1985 ($26.5 billion) at the 20% rate.

Rate reductions, as in 2003 when Republicans cut the rate to 15% from 20%, have typically had the opposite effect. Treasury receipts from capital gains climbed to an estimated $117.8 billion in 2006 from $49 billion in 2002.

While the rising stock market through this period played a role, so did the "unlocking" effect from a lower rate that reduces the friction of taxes on decisions to buy or sell and thus report a capital gain. Both the economy and the Treasury also benefitted when Bill Clinton agreed to reduce the rate to 20% from 28% as part of his budget deal with Newt Gingrich in 1997.

Candidate Obama acknowledged this reality in April of 2007, when he backed away from his original proposal to nearly double the capital gains rate to 28%, and instead suggested 20%. He also promised to eliminate the tax entirely for small business. "I'm mindful that we've got to keep our capital gains tax to a point where we can actually get more revenue," he said at the time.

While families of all income levels realize capital gains, Internal Revenue Service data from 2007 show that 58% of overall capital gains revenue was reported by taxpayers with adjusted gross income above $1 million and would be subject to the new 25.4% rate. The actual percentage of revenue subject to the penalty would be higher when counting individuals with income above $500,000.

Some readers may think that this 5.4% surtax can't possibly make it into a final Congressional bill due to Senate opposition, but we wouldn't be so sure. Mr. Obama hasn't said so much as a discouraging word about the House bill. And we've seen in the past 10 months that when Mr. Obama's campaign promises clash with the priorities of House liberals, the liberals always win.


http://online.wsj.com/article/SB10001424052748704402404574527781844595304.html

Thoughts?
 

DanM

Math Student
Even from a utilitarian standpoint, it doesn't make sense. I read somewhere that tax revenue declines as the capital gains tax increases. I'll try to find it.
 
This is a populist move - "let's those filthy rich pay because the rest of us is struggling". There are just so much hidden loopholes in any piece of legislation nowadays I don't even trust my own shadow if I'm a politician.
Our country budget deficit is just out of control any legislation is temporary at best.

Sure, why *not* let them pay? After all, capital gains don't accrue until you *cash out*. So the only people punished are those who really add no societal value aside from adding liquidity to the market. And considering that "those filthy rich" make most of their incomes *from* capital gains rather than income to begin with, aka their investments in firms, real estate, and so on, their weighted average tax rate is less than that of a regular working person's.

Warren Buffett himself decried this loophole for quite a while.

Edit: and considering the 10/90 rule (10% of the population control 90% of the wealth), and if 90% of the wealth is in investments of one sort or another, then by raising taxes on the majority of wealth without affecting the majority of people, it's a win-win.

Edit: Odds are, even with the capital gains tax, where else will the rich put their money? In fact, putting your money anywhere aside from cash counts as investing it, and thereby subject to capital gains. And if the rich move it to cash (and spend it), then it circulates through the economy and trickles down, allowing others to get higher income and pay more taxes.

It's a populist move, and it's a socialist move. But in reality, I don't think it'll change much. The rich will want to get richer, and no tax will stop them. That said, they'll probably elect other congressmen and perhaps a new president to repeal this tax hike.
 

GoIllini

Market Crises= Gray Hair
This is a populist move - "let's those filthy rich pay because the rest of us is struggling". There are just so much hidden loopholes in any piece of legislation nowadays I don't even trust my own shadow if I'm a politician.
Our country budget deficit is just out of control any legislation is temporary at best.
I would be 100% in favor of an increase in tax on capital gains and interest if the money were used to pay down the debt.
The people with the biggest exposure to a default by the feds or inflationary policies of the government are people with INVESTMENTS. They should be helping to protect the currency more than people without investments.

Perhaps the most effective tax would be a 5% surcharge on all USD-denominated interest.

I do think most Americans are pretty common-sense folks. They know we can't afford $1 Trillion healthcare reform right now.
 
I do think most Americans are pretty common-sense folks. They know we can't afford $1 Trillion healthcare reform right now.

Luckily, nobody's talking about $1 Trillion healthcare reform right now. According to the non-partisan Congressional Budget Office, the Affordable Health Care for America Act (HR 3962) will cost $892 billion over 10 years, which is more than 10% less than $1 trillion. Not only that, but "enacting H.R. 3962 would result in a net
reduction in federal budget deficits of $109 billion over the 2010–2019 period." Cheaper than you feared, AND it accomplishes your number one goal, which is reducing the federal deficit. Plus, it insures millions of previously uninsured people, which probably only interests socialist hippies and liberal wackos, but bears mentioning nonetheless.

http://www.cbo.gov/ftpdocs/107xx/doc10710/hr3962Dingell_mgr_amendment_update.pdf

Or, perhaps we could enact some real cost-containment measures, like repealing the health insurance anti-trust exemptions, or setting up some sort of public option to create competition. After all, "[t]he federal budget is on an unsustainable path, primarily because of the rising cost of health care."

http://www.cbo.gov/publications/collections/health.cfm

I, too, think Americans are pretty common-sense folks. That's why I think health care reform is going to eventually pass.
 
Luckily, nobody's talking about $1 Trillion healthcare reform right now. According to the non-partisan Congressional Budget Office, the Affordable Health Care for America Act (HR 3962) will cost $892 billion over 10 years, which is more than 10% less than $1 trillion. Not only that, but "enacting H.R. 3962 would result in a net
reduction in federal budget deficits of $109 billion over the 2010–2019 period." Cheaper than you feared, AND it accomplishes your number one goal, which is reducing the federal deficit. Plus, it insures millions of previously uninsured people, which probably only interests socialist hippies and liberal wackos, but bears mentioning nonetheless.

http://www.cbo.gov/ftpdocs/107xx/doc10710/hr3962Dingell_mgr_amendment_update.pdf

Or, perhaps we could enact some real cost-containment measures, like repealing the health insurance anti-trust exemptions, or setting up some sort of public option to create competition. After all, "[t]he federal budget is on an unsustainable path, primarily because of the rising cost of health care."

http://www.cbo.gov/publications/collections/health.cfm

I, too, think Americans are pretty common-sense folks. That's why I think health care reform is going to eventually pass.

Common sense has nothing to do with voting a law. It's all about negotiation between the 2 parties. So far I don't see any of the 41 GOP voting for it. The rest is just hope and speculation ...
 

GoIllini

Market Crises= Gray Hair
Luckily, nobody's talking about $1 Trillion healthcare reform right now. According to the non-partisan Congressional Budget Office, the Affordable Health Care for America Act (HR 3962) will cost $892 billion over 10 years, which is more than 10% less than $1 trillion. Not only that, but "enacting H.R. 3962 would result in a net
reduction in federal budget deficits of $109 billion over the 2010–2019 period." Cheaper than you feared, AND it accomplishes your number one goal, which is reducing the federal deficit. Plus, it insures millions of previously uninsured people, which probably only interests socialist hippies and liberal wackos, but bears mentioning nonetheless.
My point is that it's still $900 Billion in spending that we could be using to pay down the deficit.

Let's raise taxes without the extra spending. We've had 10 years of borrow and spend; we need 10 years of tax and save to make up for it. Enacting these tax hikes without the health coverage is a good start.

Or, perhaps we could enact some real cost-containment measures, like repealing the health insurance anti-trust exemptions, or setting up some sort of public option to create competition. After all, "[t]he federal budget is on an unsustainable path, primarily because of the rising cost of health care."

http://www.cbo.gov/publications/collections/health.cfm
Exactly. So why are the feds taking responsibility for more healthcare than just medicare? The correct course of action is to end the medicare program, give retirees a rebate to make up for the money they paid in, and eliminate a system that's about to get our country into tens of trillions in debt. The last thing we want to do is to have the government get into hundreds of trillions in debt trying to extend coverage to people under 65.

I, too, think Americans are pretty common-sense folks. That's why I think health care reform is going to eventually pass.
Some form of healthcare reform; absolutely. I would look for funding for:

1.) A cooperative system that empowers individuals to take responsibility for their own healthcare as a pool without government or for-profit interference. This is how Blue-Cross Blue Shield originally started. This will also keep the government out of potentially trillions in liabilities.

2.) Research to come up with safer and less costly alternatives to existing advanced treatments, potentially reducing the growth in healthcare costs by 1-2% annually.

3.) Funding to encourage healthier lifestyles for children and adults.

Such reform can ultimately accomplish what this $900 Billion bill- which encourages increased consumption- intends to accomplish in the big picture- probably for 1/10th or even 1/20th the cost. We can make healthcare more affordable in the long-term; the only thing is that the nation is broke and we can't afford to actually COVER tens of millions of Americans right now.

If we eliminate medicare and medicaid and wait ten years, I'm pretty sure we can be in much better fiscal shape for universal coverage.

Simply put: $90 Billion/year (almost 4% of tax revenues) in new entitlements isn't feasible right now when we are having trouble meeting our existing entitlements. It's much better to just raise tax revenues by 4% and not spend the proceeds- this would put an 8% dent in the deficit. Cutting medicare and medicaid on top of that would go most of the way to eliminating it.

Whoops, forgot to mention the expatriation part. I know it is not very common but it does happen.
It was more common back in the '70s when taxes were at 70% on the rich.

We need to raise taxes, and I'm pretty sure we can keep most of the rich people in the country if we at least do it fairly. If there is an across-the-board 50% increase in everyone's taxes, I don't think the rich are going to leave for Bermuda in a fit of rage because their marginal tax rate went from 35% to 52.5% while his middle-class neighbor's went from 25% to 37.5%.
 
We need to raise taxes, and I'm pretty sure we can keep most of the rich people in the country if we at least do it fairly. If there is an across-the-board 50% increase in everyone's taxes, I don't think the rich are going to leave for Bermuda in a fit of rage because their marginal tax rate went from 35% to 52.5% while his middle-class neighbor's went from 25% to 37.5%.

Therein lies a problem. The current administration wouldn't raise taxes across the board like that. Even then, big spending (medicare, medicaid, social security) should be cut before taxes are increased. Again though, it's not likely at all that that would happen.
 

GoIllini

Market Crises= Gray Hair
Therein lies a problem. The current administration wouldn't raise taxes across the board like that. Even then, big spending (medicare, medicaid, social security) should be cut before taxes are increased. Again though, it's not likely at all that that would happen.
The only politically feasible solution would be to cut spending and raise taxes at the same time. Everyone knows we have a problem with the budget and conservative and liberal agendas will have to suffer at the same time.

I also think it's difficult to just cut social security. Somehow, medicare will feel "fairer" to most people because they only paid 1.35% of their income for medicare coverage. If we give everyone over 45 a medicare refund check, we can probably get the feds out of their trillions of dollars of responsibilities for less than the cost of a single year of medicare.
 
Top