The 1 Percent Solution - Soak the Rich

[Maggie]

Explain, your thoughts when you have a moment.

[Kung Wu]

Person B (the investor) has invested about $1,000,000 in order to earn $100,000 (using a 10% return on investment to keep the math simple). Where did that $1,000,000 come from? At some point he _earned it_ just like person A did. And when he earned that money, he paid the same tax rate as anyone else who had wages or salaries (regular income). Now he is investing _after tax_ dollars.

It is also possible he inherited it. However his father and mother paid taxes on that $1,000,000 then. At some point that $1,000,000 which is being invested has already been taxed.

He may have won a lottery, in which case his winnings are taxed as normal income and he pays a very high tax -- much higher tax than person A.

Invested monies (except for relatively small amounts) are _already taxed income_ placed at higher risk, which fuel the economy. If you try and tax money earned on after tax dollars at a pretax rate, you deter the investor from taking the risk (you have substantially reduced the reward).

[ShockBand]

But what if that million to start out was already from previous investment proceeds? So if you make all your money from investments you should never pay any tax on it? BTW, I think that argument is the one most likely to tick off average joe worker, because it implies the mentality that those who invest, typically the wealthier, should be taxed differently (and perceived to be at lower rates than salary/wage, whether that is true or not in reality can be cloudy). Most average workers get very irritated at the notion that the financially privileged get even more privilege on taxes. I know reality and perception don't match, and as complex and goofy as our tax system is, it is hard to sort out easily.

[Kung Wu]

Feelings? C'mon @ShockBand:! :) We just can't get away from philosophy on a pure mathematical problem.

Philosophically, I believe in a capitalistic society where we hope, reward, and even beg Average Joe to become wealthy by investing his money wisely.

That said, this is a math problem and living within one's means, saving and investing wisely is the _only_ way Average Joe can become wealthy too! Average Joe cannot earn his way into wealth by salary alone.

If you punish investors you have punished Average Joe _more_ than you have Wealthy Fred. Wealthy Fred will get spooked by higher taxes (you are taking away his reward on the risk) and simply sit on cash. That crushes an economy by causing it to stagnate. Meanwhile Joe has no choice but to take risks if he wants to get ahead and you are punishing him with high taxes on money he has already been taxed on. Yet Fred refuses to pay those high rates by not putting substantial amounts of money at risk. He already has plenty, why risk giving it all away when the government is going to take all the reward out of the equation? Stagnation.

It's happening today. Banks are refusing to loan money. Why? Because they are getting free money from the Federal Reserve. They are putting NONE of their money at risk and making a nice 3% return for doing so -- so go and try and get a small business loan Mr. Joe, and when you are laughed out of the bank you will have learned what investors sitting on cash can do to an economy.

Also, I didn't say it shouldn't be taxed. I said it is not the same thing as ordinary income, nor should it be because it has already been taxed once at those rates. It should be taxed at a much lower rate, keeping the investor incentivized to keep the economy flowing while not punishing them for having earned(!), saved, and invested wisely.

Back to philosophy: Isn't having a working economy more important than feelings?

[ShockBand]

BTW, I do think there is merit to the argument that investments should be taxed at a lower rate, but to the general populace for whom investment is a mystical world for the "elite", such a notion is a tough sell because on simple straight up numbers it appears unfair. It rings of the trickle-down theory where if investors gain the good will work its way down through the system, in theory. Most average joes just feel peed on, though, whether that actually be the case or not.

Thanks to the way mass media and social media have changed dialogue, the differing sides and viewpoints just end up shouting at each other. We get so embittered at the other side and it turns politics into a sea of arse kissing and favor currying coupled with how many ways we can screw the other side, all resulting in a whole hell of a lot not getting done. Real dialogue and debate have fallen to sound bites, attacks, and insults.

Since I have a tendency to p off both the liberals and conservatives I know, what the heck does that make me? Confused? And, no, not that kind of confused, George Takei. Not that there is anything wrong with that.

[Maggie]

Person B (the investor) has invested about $1,000,000 in order to earn $100,000 (using a 10% return on investment to keep the math simple). Where did that $1,000,000 come from? At some point he _earned it_ just like person A did. And when he earned that money, he paid the same tax rate as anyone else who had wages or salaries (regular income). Now he is investing _after tax_ dollars.

It is also possible he inherited it. However his father and mother paid taxes on that $1,000,000 then. At some point that $1,000,000 which is being invested has already been taxed.

He may have won a lottery, in which case his winnings are taxed as normal income and he pays a very high tax -- much higher tax than person A.

Invested monies (except for relatively small amounts) are _already taxed income_ placed at higher risk, which fuel the economy. If you try and tax money earned on after tax dollars at a pretax rate, you deter the investor from taking the risk (you have substantially reduced the reward).

A small point that I didn’t have time to post yesterday. In your scenario, you shouldn’t be focused on the $1M but rather on the $100K gain. The person would have paid taxes on the $1M but not on the gain. Now that gain will be treated differently under the current tax code depending upon how it was realized. I believe if it was realized through say dividends or interest it would be treated as ordinary income; if the gain was realized through the sale of stock, for example, then it would be treated as a capital gain.

[Kung Wu]

A small point that I didn’t have time to post yesterday. In your scenario, you shouldn’t be focused on the $1M but rather on the $100K gain. The person would have paid taxes on the $1M but not on the gain. Now that gain will be treated differently under the current tax code depending upon how it was realized. I believe if it was realized through say dividends or interest it would be treated as ordinary income; if the gain was realized through the sale of stock, for example, then it would be treated as a capital gain.

The question is: Is it fair?

The answer is: It is almost a mathematical certainty that Person B has paid the same tax rate (probably _more_) than Person A at some point in his life (there are rare and minor exceptions). Now, in retirement (or at the beginning if he was extraordinarily savvy/lucky), Person B is rewarded by getting to play the vital roll of fueling the economy by investing. It _is_ all about the $1M if you are discussing fairness. It is all about the $100k if you are discussing the health of the economy.

[Maggie]

The question is: Is it fair?

The answer is: It is almost a mathematical certainty that Person B has paid the same tax rate (probably _more_) than Person A at some point in his life (there are rare and minor exceptions). Now, in retirement (or at the beginning if he was extraordinarily savvy/lucky), Person B is rewarded by getting to play the vital roll of fueling the economy by investing. It _is_ all about the $1M if you are discussing fairness. It is all about the $100k if you are discussing the health of the economy.

I am not quite following you; but it could be I have not had any caffeine this morning and I slept all of 2 hours last night.

Is what fair? If person B is receiving a 10% return on his $1M investment (which is excellent by the way) through interest and/or dividends then he is treated the same as a person earning a regular salary. Are you asking whether or not this is fair? Are you saying that this is a disincentive to invest? If the gain; however, is to be treated as a capital gain then B’s $100K is taxed at a lower rate. But there is no double tax in either case (unless the money was subject to estate tax at some point, which is a different discussion – but even then the double tax is arguably on the $1M certainly not the subsequent $100K gain); so I think it is ultimately about the $100K not the $1M.

[pinstripers]

what?

[Kung Wu]

I am not quite following you; but it could be I have not had any caffeine this morning and I slept all of 2 hours last night.

Is what fair? If person B is receiving a 10% return on his $1M investment (which is excellent by the way) through interest and/or dividends then he is treated the same as a person earning a regular salary. Are you asking whether or not this is fair? Are you saying that this is a disincentive to invest? If the gain; however, is to be treated as a capital gain then B’s $100K is taxed at a lower rate. But there is no double tax in either case (unless the money was subject to estate tax at some point, which is a different discussion – but even then the double tax is arguably on the $1M certainly not the subsequent $100K gain); so I think it is ultimately about the $100K not the $1M.

No, that was the original question that @ShockBand: asked that started this whole topic. I never said it was double taxed. I said that the two incomes are different in nature and that Person B has already paid his fair share that Person A is bitching about.

[Kung Wu]

Now a new topic: The answer is Fair Tax. Sales taxes at 20% rate with _no income tax_ at all.

Person buying $1M home pays $200k in taxes on it (one time). Person buying $100k home pays $20k in taxes on it (one time). Income was never taxed. Both players pay at an equal rate according to the lifestyle they choose. Want a $10M jet? Cool, pay a $2M tax (one time), have fun, fuel the economy. Both people are incentivized to invest because there is no income taxes --> very robust economy. Gotta run.

[Maggie]

No, that was the original question that @ShockBand asked that started this whole topic. I never said it was double taxed. I said that the two incomes are different in nature and that Person B has already paid his fair share that Person A is bitching about.

Okay. Sorry. I know you didn’t say there was a double tax (although there could be) but you seemed to infer one existed in this scenario. I was trying to figure out what you think is unfair, if anything, about the current code.

I agree Person B did pay his “fair” share (probably more than his “fair” share in my opinion given how progressive our tax code is) on the $1M but he is not going to be taxed on that money (invested or not) again until he dies. This is where you lost me because you wrote:

“Also, I didn't say it shouldn't be taxed. I said it is not the same thing as ordinary income, nor should it be because it has already been taxed once at those rates. It should be taxed at a much lower rate, keeping the investor incentivized to keep the economy flowing while not punishing them for having earned(!), saved, and invested wisely.”

But Person B is still earning income. Now its nature is technically different and, as I pointed out, depending on how that income is realized it may be treated differently. I agree with you that Person A shouldn’t be complaining; but are you saying all income from investments should be treated differently than ordinary income?

[Maggie]

Now a new topic: The answer is Fair Tax. Sales taxes at 20% rate with _no income tax_ at all.

Person buying $1M home pays $200k in taxes on it (one time). Person buying $100k home pays $20k in taxes on it (one time). Income was never taxed. Both players pay at an equal rate according to the lifestyle they choose. Want a $10M jet? Cool, pay a $2M tax (one time), have fun, fuel the economy. Both people are incentivized to invest because there is no income taxes --> very robust economy. Gotta run.

If you want to eliminate the income tax, etc. and institute some form of a consumption tax – as you know I am open to that idea.

[ShockBand]

The fair tax, consumption based and PROPERLY implemented, could do tremendous good. It is just so different it scares the bejeebers out of most people, politicians included. I think some of that comes from the thought that it would be a European style VAT tax, which I know the fair tax is not. The fair tax has issues that would require careful thought and debate, and since that notion and Congress rarely go together lately, it probably won't happen.

BTW, my original intent was to consider GAIN made from investments (like Maggie refers to) not the whole pile itself. Maggie states it better than I did.

Good discussion, all.

[Kung Wu]

Right, I knew exactly what you meant from the very get go. :)