Perry to propose a flat tax

[GenMarshall]

A flat tax is a horrible idea. It give the rich more of an excuse to hold onto their incomes while making the poor pay through their noses. A progressive tax is far more fairer.

But it will increase unemployment because a lot of accountants and lawyers would be out of work.

Yeah, because you will outsource them to the slums of east Bejing or Calcutta .

 

[Antilogic]

The reason for the lower capital gains rate is because its taxed by sale and trade and not by year unfortunately. It creates a lock-in effect and makes people not want to trade because if you want to trade 50 shares of company A for 50 shares of B, you have to pay the tax on 50 shares of A first, therefore you would only be able to buy 40 shares of B now. It discourages trading because in that case, it might just be better to keep company A's shares instead of losing 35% first and then buying B's shares.

Correct me if I'm wrong, but this is only on the profit over the original value of the investment, right? So if I buy some stock for $10 a share, sell at $9 a share and thus realize a loss, the money would not be taxed? And if I sold at $11 a share, the tax would be levied on the $1 per share profit?

EDIT: After posting, I realized this is probably something you have to write off or claim on your return.

The idea I have is that it would make sense to radically simplify the tax system in one stroke - by eliminating all deductions (except a large personal exemption), counting all income including capital gains as income, and cutting out all the brackets all at once. The countless thousands of pages of tax code would be replaced with a new code containing few hundred, and all tax returns would be a single page in length, plus supporting documents.

So this sort of tax would just be a vastly simpler scheme overall, and by including all income and exempting ~25k/person, I doubt it would be any less progressive than the convoluted one we have today. I suspect it would also markedly reduce overhead just by being far simpler.

The point I'm trying to make is: changing the brackets does not contribute to this goal of simplicity. It's the changes to deductions, types of income, etc. that does.

When people fill out a tax return (by paper, let's do this old school), they get some adjusted gross income, look at a table in the booklet, and then write down that number. Changing the formula by which those tables are calculated does not significantly affect the complexity of filling out a tax return on the taxpayer's side nor does it significantly affect the complexity on the IRS's side.

This is why I'd like to see a reduction in the number and types of deductions, but more brackets. Why only 3 now? Why do we treat individuals making a $500k a year the same as $1m a year? Or $5m or $10m a year?

 

[Archbob]

Correct me if I'm wrong, but this is only on the profit over the original value of the investment, right? So if I buy some stock for $10 a share, sell at $9 a share and thus realize a loss, the money would not be taxed? And if I sold at $11 a share, the tax would be levied on the $1 per share profit?

Yes, you are right, it is only on profits. Selling and banking on the cash isn't the issue. Its when you trade stocks, you are also taxed on the profit. Because you can't trade stock A for its full value for stock B, you are less willing to trade and just hold stock A if its appreciated in value since you bought it.

I'd entirely favor cap gains being the same rate as income if they taxed it as appreciate per year instead of when you sold or traded the stock.

Yeah, because you will outsource them to the slums of east Bejing or Calcutta

Accountants and Tax lawyers are a few of the things that I really can't outsource. If the tax code were simple, they'd be eliminated entirely.

 

[GenMarshall]

Accountants and Tax lawyers are a few of the things that I really can't outsource. If the tax code were simple, they'd be eliminated entirely.

Wrong, if the tax codes were simplified. You still need accountants for your money activities not related to taxes. So no, accountants won't be eliminated entirely if taxes are simplified since they do more than just your taxes.

As for tax lawyers, I'm sure a lawer (Where are you FredLC?!!), I'm sure someone in that field would chirp in on that subject.

 

[Bootstoots]

The point I'm trying to make is: changing the brackets does not contribute to this goal of simplicity. It's the changes to deductions, types of income, etc. that does.

When people fill out a tax return (by paper, let's do this old school), they get some adjusted gross income, look at a table in the booklet, and then write down that number. Changing the formula by which those tables are calculated does not significantly affect the complexity of filling out a tax return on the taxpayer's side nor does it significantly affect the complexity on the IRS's side.

This is why I'd like to see a reduction in the number and types of deductions, but more brackets. Why only 3 now? Why do we treat individuals making a $500k a year the same as $1m a year? Or $5m or $10m a year?

I'll agree that changing the deductions and types of income is more important than creating a simple, linear tax rate. For what it's worth, I'd be fine with some sort of nonlinear function that approaches some maximum tax rate asymptotically, and then use that as the basis of tax tables or something.

I suspect, however, that most people consider a flat tax with a large personal exemption to be both relatively fair and very easy to understand. I think this sort of proposal could be a politically viable idea, and it might make monkeying with the tax rate behind the scenes (e.g. fiddling with the formula for some political reason) harder to do without the public noticing. Also, this scheme seems to have a fair amount of support from conservatives who object to other varieties of progressive tax, and that's a plus when you're trying to get a radical overhaul passed that involves eliminating all the loopholes that the rich benefit from.

But it will increase unemployment because a lot of accountants and lawyers would be out of work.

That's fine by me. I don't see convoluted bureaucracy as an especially worthwhile way of creating jobs.

 

[Bootstoots]

A flat tax is a horrible idea. It give the rich more of an excuse to hold onto their incomes while making the poor pay through their noses. A progressive tax is far more fairer.

This so-called flat tax is actually a progressive tax. The first $25k of income is tax-free, so essentially it's a two-bracket system with 0% for income below $25k and x% above that. The poor wouldn't have to pay any tax at all.

 

[El_Machinae]

Respectfully, El Mac, that argument is kinda ridiculous. It's a flat tax on taxable income, so if you exempt an initial amount of income from taxation, it's still a flat rate on the rest. We're kind of damned if we do, damned if we don't, those of us who support a flat tax. We say we want a flat tax, we're accused of being brutal to people in low income brackets. We say, okay fine then exempt whatever the poverty level is from taxable income, and then "oh, but that's not a flat tax anymore, it's graduated just like we have now."

That said, even though I fervently support a flat tax, I can't support Perry. Still standing with Mitt.

Yeah, no problem. It's just a perception thing. People can see it as flat if they want, or see it as not flat if they want. If it has to be packaged as a 'flat tax' to get people to like it, then I figure that's okay. As long as people realise that it's flat with an exemption, they have no problem envisioning what the proposal really is. It's not deceiving anyone. But, like a Necker cube, perspective still matters.

Your heuristic argument makes sense but there are data on this: see September 2010 PNAS for a study using very large sample of Americans. Abstract:

Source: Kahneman and Deaton, "High income improves evaluation of life but not emotional well-being," PNAS September 21, 2010.

We can sort of recover El_Mac's original claim for incomes over $75,000 and for emotional well-being, but not for the specific case of life satisfaction.

I'm going to consider my initial point completely salvaged, I just had the wrong numbers. And then, due to framing effects, my $40k opening bid doesn't look preposterous
(thanks)

 

[bhsup]

Oh, also, I think this plan would work best of a separate FICA tax is abolished and the normal income tax rate is adjusted to take care of social security as well. This has the added advantage of removing the $125K cap on income that is FICA taxed. Of course, to go along with that, those making over $125K should now be getting more in social security retirement payouts. This, coupled with taxing ALL forms of income equally (like capital gains), leads to a much fairer and equitable tax system.

EDIT: Oh yeah, and abolish the damned EIC. Call it what it is, welfare, and have those that need it sign up for a separate welfare program.

 

[Cutlass]

Love him or hate him, Rick Perry will go all in next week with a flat tax proposal that will likely propel him to the nomination or end his chances entirely.

The plan starts with tossing the current tax code. Combined with Perry's tort reform stance you can clearly see huge opposition forming across the tax and legal professions.

But flat tax systems are associated with growth and might be the only path that can get the economy moving without the risks of massive defict spending.

One plan that has made the rounds includes exemptions for the first $25K in personal income. This element is advertised as a way to prevent the plan from being regressive.

I'd like to hear from those here who think a flat tax could be beneficial and what structure it should take, as well as hearing from opponents.

I don't see how this changes everything for Perry. It's pretty ordinary for Republicans, really.


As for benefit, there's no reason to think that there would be any benefit. Simplifying the tax code would have some benefit, but that would be counteracted by the negative economic effects of a flat rate. It certainly can in no way be expected to cause an economic surge.

 

[mrt144]

The reason for the lower capital gains rate is because its taxed by sale and trade and not by year unfortunately. It creates a lock-in effect and makes people not want to trade because if you want to trade 50 shares of company A for 50 shares of B, you have to pay the tax on 50 shares of A first, therefore you would only be able to buy 40 shares of B now. It discourages trading because in that case, it might just be better to keep company A's shares instead of losing 35% first and then buying B's shares.

What. Have you ever traded stock? Capital gains are not withheld on each transaction by your broker. The conundrum is selling assets to cover capital gains taxes creating a capital gain in itself when filing your taxes.

 

[JollyRoger]

Hey, I personally would be fine with a true flat tax with no exemptions at all. But the social liberals cry about that.

Many conservatives with children and a mortgage would cry about it once the realized the consequences.

Can't really comment about Perry's plan before I see it, but here's a guess: some combination of capital gains, interest, dividends, and inheritance won't count as "income". The "flat" tax systems proposed by people like Perry invariably consider wages as income at little else - so while everyone is looking at the rates and the "fairness" of "flatness"., they miss that the politician is redifining income in a way to give the top end a break. Just look at Cain's 9-9-9 plan - wages end up getting hit by all three 9's, dividends by only 2 and capital gains by only 1.

Its when you trade stocks, you are also taxed on the profit.

I agree that capital gains should not be taxed at the trade - they should lose the deferral and be taxed as they occur. Thus if you hol stock A and its valklue is $10 on January 1 and $15 on December 31, you should be taxed on the $5 gain and not get the special treatment of deferral given by the current tax code. Also, get rid of the favorable rates. Sitting at your keyboard making trades should be taxed at least as heavily rate-wise as a honest day's work.

 

[El_Machinae]

I quite dislike that idea, of taxing capital gains if the gains haven't been realised. Unless I am wrong, there's not really all that many ways of using stock to purchase material assets, without losing those stocks or selling them. A stock can be made to pay a dividend, but then the dividend is taxed. The bid/ask on Dec 31 is not really a fair metric, either.

 

[JollyRoger]

I quite dislike that idea, of taxing capital gains if the gains haven't been realised. Unless I am wrong, there's not really all that many ways of using stock to purchase material assets, without losing those stocks or selling them. A stock can be made to pay a dividend, but then the dividend is taxed. The bid/ask on Dec 31 is not really a fair metric, either.

I agree, I was just demonstrating that capital gains types are getting a benefit in timing. Since the tax basis in stocked is stepped up at death, the estate tax is justified in that wealth that has been built by unrealized capital gains has escaped taxation and will escape taxation thanks to stepped up basis. Of course, those that claim they are "ending the death taxes" ae usually getting rid of stepped up basis, so they are not really getting rid of anything, just changing the calculation.

If you have stock, you do noty have to liquidate to pay taxes - you can alway put the stock up as collateral for a loan to pay your taxes if you believe the stock will outperform the interest on the loan.

 

[katipunero]

The reason for the lower capital gains rate is because its taxed by sale and trade and not by year unfortunately. It creates a lock-in effect and makes people not want to trade because if you want to trade 50 shares of company A for 50 shares of B, you have to pay the tax on 50 shares of A first, therefore you would only be able to buy 40 shares of B now.

is this really how CGT on trading shares works though? correct me if i'm wrong here, but why would i pay taxes on my 50 shares of Company A while i still hold on to them as assets?

as far as i know, the taxable event in the trading of shares occurs only when there's a disposal or sale of assets, and subject to whether there is actual gain or loss that's realized.

even if the value of my shares in company A tripled i still won't have to pay any CGT until after i sell and dispose them. i don't have to pay any taxes yet before i purchase the stocks of Company B!

in your example, i have to pay taxes on my assets (shares from Co. A) FIRST before i can trade them and buy 50 shares of company B irrespective of the actual gain or loss realized in the sale or exchange. which means, according to you, that having paid taxes prior to the purchase, therefore with less money than i first started out with, i can now only purchase 40 shares of company B, or ten shares less. that's a strange CGT effect if there ever were such a thing

It discourages trading because in that case, it might just be better to keep company A's shares instead of losing 35% first and then buying B's shares.

this is even weirder. you report capital gain or losses monthly, quarterly, yearly or probably over a long term and pay the capital gain tax on these periods...not per transaction. capital gains tax is not part of the purchase price unlike sales tax. you don't lose money per trade because of CGT. losses and gains are added into an aggregate for the quarter or year, and because of this you might not even have to pay any taxes at all after offsets are made.

lastly, as far as i know, there's no added benefit in keeping shares from any company for tax reasons. a few people might even suggest to dispose of your shares as capital assets at a loss so you can harvest, rice, farm deductible losses for the year or on a deferred basis.

 

[katipunero]

I quite dislike that idea, of taxing capital gains if the gains haven't been realised. Unless I am wrong, there's not really all that many ways of using stock to purchase material assets, without losing those stocks or selling them. A stock can be made to pay a dividend, but then the dividend is taxed. The bid/ask on Dec 31 is not really a fair metric, either.

stock dividends are generally not taxable as they represent only a proportional or fractional increase of a stockholder's interest in the corporation.

there are exceptions of course like when the stocks declared and distributed as dividends are to be bought by the corporation at a stated time, or when there's an option to get stocks or cash as dividend and the stockholder opts to get the stocks, or when the stock dividends are preferred or bundled with a right to special bonuses or preferences because in any of these cases actual value in money is earned by the stockholder...

and yes, there are clever ways to use stocks to shore up material assets for the corporation to use for its operation without losing or selling any of those stocks. welcome to the wonderful world of tax-free exchanges, tax-free mergers and acquisitions.

 

[JollyRoger]

stock dividends are generally not taxable as they represent only a proportional or fractional increase of a stockholder's interest in the corporation. to be bought by the corporation at a stated time, or when there's an option to get

Fractional increase = income. Traditionally, dividends have been taxed at two levels - first, the corporation pays taxes on its profit. A paid dividend is not deducteable from the coproration's taxable income. In the hands of the shareholder, they also represent income. The justification for this is that you have transferred the profit from a entity where it is at risk to lawsuits against the corporation to a person that has limited liability. This withdrawing of the money from risk of lawsuit justifies the dividend at the shareholder level as a type of transfer tax.

 

[katipunero]

Fractional increase = income. Traditionally, dividends have been taxed at two levels - first, the corporation pays taxes on its profit. A paid dividend is not deducteable from the coproration's taxable income. In the hands of the shareholder, they also represent income. The justification for this is that you have transferred the profit from a entity where it is at risk to lawsuits against the corporation to a person that has limited liability. This withdrawing of the money from risk of lawsuit justifies the dividend at the shareholder level as a type of transfer tax.

hmmm. stock dividends =/= income as i know it. usually corporations declare stock dividends because they don't have cash to pay its stockholders otherwise they might be penalized an additional tax for or charged with illegally retaining or accumulating earned profits for purposes of tax evasion.

thus, even if a company increases its stocks and shares and distributes them as dividend, without a corresponding increase in capital stock, which is usually the case, the shareholder simply retains his interests and earns no income no matter if he is issued an additional billion or trillion shares as stock dividends.

the transfer of risk theory is interesting. but i don't think this applies to stock dividends generally because the stockholder does not really receive anything in cash, just imaginary numbers and a faux gold font certificate on a piece of paper.

and, going by your assumption that fractional increase = income, then that sort of defeats the idea of transferring risks and sheltering assets because by dint of the fractional increase being considered as income, the stockholder suffers an increase in liability in the long run as a result.

sure stockholders have limited liability, but they do carry a liability up to the extent of their interest in the corporation. so any increase in that interest, treated as both increases in equity and income in your theory, eventually means an increase in liability by the stockholder to corporate creditors and obligations if after liquidation the corp is utterly insolvent.

 

[JollyRoger]

sure stockholders have limited liability, but they do carry a liability up to the extent of their interest in the corporation. so any increase in that interest, treated as both increases in equity and income in your theory, eventually means an increase in liability by the stockholder to corporate creditors and obligations if after liquidation the corp is utterly insolvent.

First, I thought we were talking cash dividends, not dividends in the form of additional shares, but if we weren't then I agree that stock dividends ae not necessarily income.

As for limited liability - a shareholder is only at risk for the investment they put in the company. Even if the value of their stock increases, then only amount they lose in a liquidation is the sum total of assets they actually put into the company. Unless the corporate veil can be pierced, no one is coming after their assets held in an individual capacity, including profits or increase in value of the corporations transferreed to the shareholder in the form of a dividend.

 

[Mark1031]

There is no good reason to tax income at all. What should be taxed is property/assets. The more property you have the more government services you require. A 2% flat property tax is all that would be needed. See here http://forums.civfanatics.com/showthread.php?t=436033.

 

[Archbob]

this is even weirder. you report capital gain or losses monthly, quarterly, yearly or probably over a long term and pay the capital gain tax on these periods...not per transaction. capital gains tax is not part of the purchase price unlike sales tax. you don't lose money per trade because of CGT. losses and gains are added into an aggregate for the quarter or year, and because of this you might not even have to pay any taxes at all after offsets are made.

Well, the thing is that you don't pay any capital gains that I'm aware of until you sell or trade the stock, even if you refer it. You can basically defer it forever if you don't sell or trade it. They just need to take out the deferring altogether and tax it yearly or quarterly, like income. Basically it really shouldn't be any different from income tax. Didn't Clinton sign the 15% into law?