Re: A common-sense approach to capital gains taxes nusbaum@delni.enet.com claims that capital gains should be taxed exactly the same as other types of income. Sounds "fair", why treat it different? Well, for one thing, is it really income at all? Most people who encounter the tax do so when they sell their house. Typical situation: a family bought a house in the 1950's or 60's. It was very expensive at $30,000, which was the most expensive thing they ever purchased: it was 4 times the annual family income. Now they want to sell to move to a small apartment since the kids have left home. Inflation has raised the price of housing (along with almost everything else), and they sell it for $200,000 (4 times their annual family income!). So they have a capital gain of $170,000 to pay taxes on, probably at the top rate since the year they sell they are those RICH that everyone wants to "soak". They may need to live the rest of their live on this money (plus social security), but it wouldn't be "fair" to let them keep it. The house situation is so obviously unfair that two special exemptions to the normal capital gain are made. But these create their own problems. There is a "one time only" deduction of $130,000 from the capital gain of a house IF the seller is over some arbitrary age (58, I think). If the amount of the deduction is not adjusted for inflation it soon becomes too little to matter much. A more serious problem stems from the other exemption: if the money from the sale is spent on ANOTHER house, you don't have to pay the tax. This has the effect of driving UP the price of housing in the areas where people move. Sell a modest 2 bedroom house in California or Boston for $500,000, and move to the mid-west, there the same size house costs much less. But you MUST spent it or pay the tax. Does this make any sense? Remember that the house, or any other form of investment, was bought with income that had already had taxes paid on it. In that sense, this is taxing it a second time. And much of the "gain" is just the loss of purchasing power due to inflation. If people just blow their money on consumption or at the Casino they won't have to pay this tax. Maybe the government needs the money to function. But capital gains tax is strange that way. When the RATE was lowered from 28% to 20% in the early 1980's the REVENUE collected rose dramatically. When the rate was raised back to 28% in 1987, revenue fell. Tony Snow had a column on this in USA TODAY, Nov 28, 1994. A letter criticizing the Snow column was printed a few days later. The critic pointed out that when the economy did well, the capital gains tax produced the high revenue and when the economy slowed down the revenue fell. This tax is on investment, and lowering it makes investment more attractive. Investment is a big factor in WHY the economy does well. The critic reminds me of the "expert" who announces that they have discovered that, contrary to popular belief, the moon is more important than the sun. Why? Well the moon shines at night when we need the light. The sun just shines during the daytime, when we can see well enough. ,,,,,,, ____________________ooo__(_O O_)__ooo_________________________ (_) UPDATE: Subject: Re: there is no budget surplus Date: 7 Oct 1998 01:18:57 GMT From: "Dennis Wallick" Newsgroups: alt.politics.economics, sci.econ References: 1 , 2 jim blair wrote of the $70 billion budget surplus for YF 1998, but Social Security collected $100 billion more that it paid out. But the $100 billion was "borrowed" from the Social Security Trust Fund. So this is just Uncle Sam lending money to himself. Or moving money from one pocket to another. "Dennis Wallick" >The $100 billion is credited to the Social Security Trust Fund in Special >U.S. Treasury Department Obligations. When the Social Security system >needs them because payments are greater than Social Security taxes (about >2012), the obligations will be paid by the Treasury (with interest). The effect on the US econmy is that $70 billion was withdrawn from circulation: that was money collected in taxes (of all kinds) in excess of what was spent. During a time of excessive growth, or of inflation this could be good; but today that is not so clear. We are probably entering a period of deflation. >The only difference between this unified budget surplus and a deficit is >that the Treasury Department will pay off $70 billion more in public >obligations than it sells. Every year the Treasury Department buys and >sells hundreds of billions of dollars in government bonds. The impact of a >surplus this small on the economy is simply lost in the wash. Hi, Yes I suppose that a mere $70 billion is not really enough to matter. Sorry, I grew up back in the days when that would be considered "real money", and haven't yet adjusted to the modern realities. Just a year ago, the federal budget was projected to have a several billion dollar deficit for the fiscal year that just ended. Why did the Office of Budget and Management misjudge? They did not expect the huge increase in REVENUE from the capital gains tax when the RATE was cut recently from about 39% for many people to about 20% for most (depending on circumstances). (The personal residence exemption was also raised to $250,000 for an individual or $500,000 per married couple.) This is just another example of the "experts" being confounded by what is obvious to supply side economists. "Dennis Wallick" >OMB and the US Treasury forecast the current surplus *BEFORE* the capital >gains tax cut was proposed. No one was confounded by the one-time sell of >which occurs when capital gains tax rates are reduced; even Marxists >realize that profit taking takes place. What confounded the "experts" was >why there was such a big surge in tax receipts before those changes were >proposed -- big enough to create a surplus in the unified Federal budget. Now here you have things wrong. I was just reading in the New York Times of October 1 1998 that just last year the projection was that the budget would not show a surplus until 2002 (page A23). In September 1997, the Congressional Budget Office projected a $57 billion deficit for 1998; it turned out to be the $70 billion surplus. See also this from a 9 September 2001 post by Grinch: >Looking back at past budget projections we can see that as late as >1997, *well* after those 1993 "responsible" Clinton/Rubin/Summers tax >hikes went into effect, the CBO was projecting deficits rising as far >as the eye could see -- from $115 billion in 1997 to $167 billion in >2001 to $278 billion in 2007, resulting in an increase in the publicly >owned national debt of $2.2 trillion over that time. > >OTOH, the CBO projections released last week, reflecting the Bush tax >cut, slowed economy and other recent fiscal developments, project a >$3.4 trillion surplus over the next 10 years with all publicly owned >debt available for redemption being retired. And the capital gains tax cut took effect on transactions after May 7, 1997. See: http://www.dtonline.com/promises/chap2.htm#tips So 5 months AFTER the tax cut took effect, the Congres was still being given estimates of a deficit for the fiscal year that just ended with a $70 billion surplus. And the error in the projection was because it did not consider the effect of the capital gains tax cut. ,,,,,,, ____________________ooo__(_O O_)__ooo_________________________ (_) Jim Blair (jeblair@facstaff.wisc.edu) University of Wisconsin, Madison (USA). For a good time, call http://www.geocities.com/capitolhill/4834 "This message is brought to you using biodegradable binary bits and 100 % recycled bandwidth." Subject: Re: there is no capital gain? Date: Sat, 17 Oct 1998 20:44:09 -0500 From: kenfran Organization: Arkansas.Net (501) 375-0160 Newsgroups: alt.politics.economics, sci.econ References: 1 , 2 , 3 , 4 , 5 , 6 > > Gary Forbis wrote: > > > > Even the Republicans expected the blip based upon the cut in capital > > gains. > Hi, You mean the SUPPLY SIDE Republicans (like Jack Kemp) expected the increase in tax revenues with the cut in rate. But not the "conventional" Republicans. (and $70 BILLION is just a "blip"? ;-) > >This is why they wouldn't allow OMB projections ten years into > > the future when working towards a balanced budget in 2002. Like having the weather man predict the weather ten years into the future? How accurate do you think predictions about 1975 were, made in 1965?? > > > If you hold capital gains you do not pay taxes on them. If presented > > with the opportunity to pay 20% rather than 39% and knowing this > > rate could increase back up at any time one will take the 20% and > > adjusts one's basis upwards. There will be some increased economic > > activity but most will be felt during the clearing process. Yes, the high tax encourages people to hold "old investments"; the lower rate is encouraging investors to sell the "old investments" and switch the money to "newer investment". I expect the effect to be more effective use of investment money, and higher long term economic growth. Note that this is not the first time that a cut in the capital gains tax has generated more revenue. The big increase in federal revenue was not a suprise to ME, just to the "experts". kenfran : Remember that it also results in a big DROP in tax revenue later. Especially since the people who sold and re-bought to lock in the capital gains tax rate will probably have no capital gains in the present stock market situation. (For example, the Russell 2000 dropped 37% from April to October.) Hi, The "one time surge" in revenue from a capital gains tax cut is predicted from a "static" theory that neglects the dynamics of the economy. It has no evidence to support it, but that does not seem to reduce its popularity with economists who reject the entire supply side concept. A previous cut in the capital gains tax was during the Reagan administration. The tax produced revenues of: 1979 $10.6 billion (rate 28%) 1980 $11.0 billion 1981 $11.4 billion 1982 $11.8 billion 1983 $16.8 billion (rate reduced to 20%) 1984 $20.1 billion 1985 $23.7 billion 1986 $46.7 billion 1987 $27.7 billion (rate increased to 28%) 1988 $31.1 billion 1989 $37.4 billion 1990 $29.3 billion 1991 $26.5 billion 1992 $27.5 billion .....missing some years here. Anyone want to fill them in? Just email me. 1996 $62 billion (rate 28%) 1997 $79 billiob (rate reduced to 20% effective May 1997) 1998 $89 billion 1999 $110 billion The rise to $16.8, or maybe to $20.1 billion following the rate cut was the "one time surge" your theory predicted. The "big drops" (from about $11 billion!!) were predicted for 1985 and 1986. To be fair, the 1986 surge was probably due to people cashing in in anticipation of the increase scheduled for 1987. Note that Reagan reduced the rate from 28% to 20% and then let it go back to 28% as capital gains were taxed as ordinary income. Bush tried hard to cut the rate back to 20% but could not get Congress to do it. But Clinton cut the rate back to 20% with little opposition. -- =========================================== I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. ... corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. --Abraham Lincoln, Nov. 21, 1864 (Letter tto Col. William F. Elkins) Don't sweat it Abe. Wealth DID become more concentrated around 1900, but we survived. And it is less concentrated now than then. See: http://www.geocities.com/capitolhill/4834/rich.gif ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 AND: > Gary Forbis wrote: > > But don't forget, in Forbes' flat tax plan capital gains was exempt, that > > is 0%, nada, zip, nothing, zilch. jim blair: That seem fair to me, considering that the usual case is that the capital gains are on money that have already been taxed once. John Flanery Hmmm, I buy a 30yr bond when interest rates are high. Rates drop, and I sell the bond for more than I paid. How has this gain already been taxed? Hi, Is the money that you used to buy that 30 year bond from your income? That is, your "after taxes income"?? Money that you could have spent on a trip to Europe instead of buying that bond? What I mean is that you have already paid taxes on the money that you invested (and put at risk of losing). Milton Tinkoff Organization: Silicon Graphics Inc., Mountain View, CA Newsgroups: sci.econ, alt.politics.economics, alt.journalism, misc.taxes References: 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 Milton Tinkoff >That's true, and you don't pay capital gains taxes on the money that you >invested. The "gain," the difference between what you sold it for and >how much you paid, is what is being taxed. Hi, Yes the tax is paid only on the (nominal dollar) gain. I have two objections to that, fairness and practical. And they are intertwined. If investment is GOOD, and the source of future economic growth, why discourage people from investing, and ESPECIALLY from investing their after tax income in projects that prove to be successful? Or discourage them from saving for retirement? The pattern has been that a reduction in the capital gains tax has resulted in increased federal revenue from the capital gains tax. Dosen't this suggest to you that it has been "too high"? And on the fairness side, the tax is on the inflated dollar value gain. During a period if high inflation, much of the "gain" that is taxed is not "real". Do you think it fair to tax people because inflation has reduced the value of their money? And for investments made in increments over many years (as for example most retirement money) it would be a practical impossibility to "correct" the inflation portion of the gain from the "real" portion. Each increment went into the retirement fund at a different time over a period of many decades, and money is withdrawn at different times over several decades. No retired person would be able to figure out their income taxes. -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 Subject: Income, Capital Gains & Savings Date: Tue, 28 Sep 1999 22:59:28 GMT From: oldnasty@mindspring.com (Grinch) Organization: Happy Skeptics of America Newsgroups: sci.econ References: 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 On Fri, 1 Oct 1999 18:48:28 +0100, "jean-claude kommer" wrote: >..... I am looking for the opinion of a real economist on the >following: >Suppose that you earn $1 million a year in income, and you realize $1 >billion additionnal from selling some of your assets and you pay >capital gains tax on that, then your disposable income is greatly >negative and your savings ratio is also greatly negative. It does >matter for economic statistics, you are certainly rich by anybody >standards with that type of "income" but you are very poor indeed >statistically in terms of the normal definition of disposable >income. Right or wrong? Basically right. Capital appreciation and capital gains are not counted as economic "income". A moment's thought shows why. The value of a capital asset is the discounted current value of the future income that it is expected to generate. So if you count as income both the discounted current value of the future income now, and then also the future income itself when it is received later, you will double count the income. Thus, capital gains are not included in national income in the National Income and Product Accounts compiled by the BEA. http://www.lib.virginia.edu/socsci/nipa/ http://www.bea.doc.gov/bea/an/0398niw/maintext.htm "Capital gains and losses are not increments to or drafts upon the heap of goods produced by the economic system for consumption or for stock destined for future use, and hence they should be excluded." -- Simon Kuznets, granddaddy of the nationnal accounts. Even for tax purposes, the US Supreme Court has ruled three times that capital gains are not income subject to income tax as "income" is generically or economically defined. These cases held that appreciation in an asset's value by itself is not income, for the reasons given above, and also that the realization of a capital gain on a sale is not income because it merely converts wealth from one form to another, from a real asset to cash, without changing it in amount. "Such advance in value is not income at all, but merely increase of capital and not subject to tax." -- Lynch v. Turish, 247 U.S. 221 In response, Congress enacted a statutory definition of income that includes capital gains for tax purposes -- exercising its ability to enact a statutory definition of anything that pretty much includes fill-in-the-blank. Ever since then, the tax rate on capital gains has been kicked all over the tax-rate field by the contesting teams. It's been changed dozens of times. I don't know that there's ever been any logic behind any particular tax rate other than that of the politics of the moment. (Taxation of capital gains is double taxation of income to the extent that both the discounted current value of future income and the future income itself are taxed. This becomes very clear when one looks at capital gains earned and taxed in the bond market.) The fact that capital gains are not economic income also largely accounts for the very low-to-negative personal savings rate that's been reported recently Capital gains are not included as income in the NIPA by the BEA. But when a person realizes a capital gain and pays tax on it, the tax payment is a personal expenditure. So "dis-saving" results in the national accounts from the transaction -- there's an expenditure with no offsetting income. Of course, if any part of the after-tax net from the gain is consumed rather than re-invested, that is additional dis-saving in the national accounts. And there've been a whole heap of capital gains realized during the last few years. In a booming economy the official personal savings rate number is further depressed by other quirks in the way the BEA calculates it. For instance, the full cost of a car purchase is counted as consumption even though the car has a useful life of several years, so only a small portion of the cost should be considered current consumption with the rest being counted as consumption over the following years of the car's life. Thus, a big year for the auto industry mathematically depresses the savings rate, and a poor year inflates it. The BEA is aware of these quirks and says it is going to fix them. But in the meantime they assist the capital gain accounting rules in creating the apparent decline in the personal savings rate. Adjust for both and the personal savings rate is about the same now as it has been for the last 20 years. It follows that if one is very worried about the low personal savings rate there's an easy solution: Engineer a recession that knocks a few thousand points off the stock market and unemploys Detroit. Mathematically, the savings rate couldn't help but rebound. It would probably do wonders for the trade deficit as well.