Obama’s tax plan and the redistribution of wealth

[techboy]

You are apparently reading my post with the understanding that I am presenting something other than a socialistic economy, not entirely socialistic, but certainly moreso than we have today.

It's very annoying to call someone a socialist only to have him not understand it as a pejorative.

[JMS]

Are you seriously suggesting that the way to prevent bubbles is to discourage investment? That sure seems like another cure worse than the disease scenario to me, even granting the questionable proposition that tax breaks let to the tech bubble.

Not at all.. That's exactly what the federal governemnt does. They raise interest rates when they see the economy is overheating or one segment is boubling. The federal reserve chairman on occassion even speaks out about percieved boubles and how they are destabilizing to the market. Greenspand used to do it about Tech stocks all the time.

[AsburySkinsFan]

It's very annoying to call someone a socialist only to have him not understand it as a pejorative.

Funny isn't it?! The "socialist" tag used to sting more until about a month ago when Bush unveiled the 700 Billion dollar socialist bail out plan, that's when I realized that the Conservative version of Capitalism failed and it required a socialist answer to resolve, after that the badge has not chaffed nearly as much.

[DjTj]

I don't think so. Why would a tax break disproportionately affect some stocks and not others? That bubble had more to do with "this time it's different" psychological issues than tax breaks.

I don't see it.

During the tech bubble, all stocks rose in price. The tech stocks were affected disproportionately, but financial stocks, in particular, also did very well during that time.

Many conservatives credited the stock boom to Clinton's lowering of the capital gains rate in 1997. If the lower rate does encourage investment, you must admit that it also contributes to bubbles.

I'm apparently not familiar enough with the tax code to see where you're going with this. Why would Warren Buffett pay more taxes if he hires employees? It is they who are taxed, not he, right? In fact, wouldn't that lower his company's net income, reducing his tax bill?

Well, who "pays" the taxes is an academic point. Let's say that Warren Buffet's secretary can provide $50,000 worth of productivity, and that she is willing to do that for $30,000. She should be worth a $20,000 profit, but because of income taxes, Buffet will actually have to pay her $40,000. He thus only profits $10,000 from having a secretary.

Alternatively, he could think that buying $200,000 in shares of XOM could be worth a $20,000 profit over the course of the year. Capital gains taxes will only cut that by $5,000, so he will make $15,000 from buying the stock.

So if the secretary wants to compete with Buffet's investment opportunities, she will actually have to accept a lower wage. Even though they are both worth an extra $20,000 over the course of the year, because of taxation, Buffet will choose the stock.

Are you seriously suggesting that the way to prevent bubbles is to discourage investment? That sure seems like another cure worse than the disease scenario to me, even granting the questionable proposition that tax breaks let to the tech bubble.

The goal is not to discourage investment. The argument I am making is that we are currently distorting incentives by encouraging investment. Shouldn't we let the market decide whether labor or capital is more valuable?

[techboy]

Funny isn't it?! The "socialist" tag used to sting more until about a month ago when Bush unveiled the 700 Billion dollar socialist bail out plan, that's when I realized that the Conservative version of Capitalism failed and it required a socialist answer to resolve, after that the badge has not chaffed nearly as much.

The U.S. economy has been a hodge podge for a long time, and to blame this mess on economic conservatism is overly simplistic and perhaps a little naive.

With that, though, I realize that I have been suckered into a political thread, and am now going to bow out and take a nap. I find that I am evangelistic about proper investing and, uh, evangelism (), but while I used to be very politcal (to the point that I listened to CSPAN in my car), I just can't take it any more. I still have strong opinions (go libertarians!) and I still vote, but I just don't have the interest in arguing politics these days.

I don't know what possessed me to get into this (maybe the connection to finance, one of my hobbies), but I am now out.

[techboy]

During the tech bubble, all stocks rose in price. The tech stocks were affected disproportionately, but financial stocks, in particular, also did very well during that time.

Many conservatives credited the stock boom to Clinton's lowering of the capital gains rate in 1997. If the lower rate does encourage investment, you must admit that it also contributes to bubbles.

"Doing well" does not equal "bubble".

Well, who "pays" the taxes is an academic point. Let's say that Warren Buffet's secretary can provide $50,000 worth of productivity, and that she is willing to do that for $30,000. She should be worth a $20,000 profit, but because of income taxes, Buffet will actually have to pay her $40,000. He thus only profits $10,000 from having a secretary.

Alternatively, he could think that buying $200,000 in shares of XOM could be worth a $20,000 profit over the course of the year. Capital gains taxes will only cut that by $5,000, so he will make $15,000 from buying the stock.

So if the secretary wants to compete with Buffet's investment opportunities, she will actually have to accept a lower wage. Even though they are both worth an extra $20,000 over the course of the year, because of taxation, Buffet will choose the stock.

An interesting perspective.

The goal is not to discourage investment. The argument I am making is that we are currently distorting incentives by encouraging investment. Shouldn't we let the market decide whether labor or capital is more valuable?

You're presupposing your previous argument, but bonus points to you for using the language of economic conservatives/libertarians against us.

Of course, the easy answer is to agree and say we should indeed lower the top income tax bracket to 15% so it matches.

[Special K]

Yep, saw this on the news last night and it actually pissed me off. I've tuned out of a lot of this election now because it's gotten so stupid, but this statement reminded me exactly why I am completely against Obama. Besides his totally unrealistic health care policy, I can't stand his push for "wealth redistribution." Unbelievable that so many in America find this line of thinking acceptable.

[Larry]

Because Capital Gains come directly from stocks and bonds, which is how the companies of the U.S. fund their operations and raise capital.

Actually, I have trouble figuring out how that could be.

I've bought stocks. But I never gave a dime of my money to Comnpany X. I bought them from somebody who was selling them. And he bought them from a previous investor. And so forth.

Near as I can tell, the only time the company got any money from the stock, was the first time it was sold. After that, all the money is simply going from one speculator to another.

But, That's really not the focus I'm trying to discuss, here, so I'll just pretend like it's true without actually believing.

A discount encourages investment.

Now that part I have trouble with.

We keep using Warren Buffet as an example, so I'll stick with him.

Do you honestly intend to claim that if his income from the stock market was taxed the same as the rest of his income that he'd stop investing? That the only reason he invests is because it's taxed less?

Warren Buffet invests, because he has 3 choices in life:

1) Invest his money, and live off of the earnings.

2) Put his money in a mattress, and live off of his principal.

3) Go get a job, and work for somebody else.

(And, really, that's only two choices, since he's smart enough to know that Choice 2 leads to Choice 3 down the road.)

In short, if income from investments were taxed at 90%, he'd still invest, because it's better than the other two choices.

[HOF44]

I can't stand his push for "wealth redistribution." Unbelievable that so many in America find this line of thinking acceptable.

Me too, whats your opinion on the "wealth redistribution" going to corporate America right now?

[helptheSKINS]

You are apparently reading my post with the understanding that I am presenting something other than a socialistic economy, not entirely socialistic, but certainly moreso than we have today.

Right now the bottom 50% don't pay taxes. How much higher would you like that number?

With Obama's tax credit (AKA taking money from someone who earned it and giving it to someone who didn't, even if that person sits on his or her ass all day), is there a certain dollar amount you think each one of these people who didn't earn this money should get because they happen to live in the US?

If someone doesn't work due to laziness, do you still think the rich/people who worked hard to get to where they are should provide them welfare and insurance?

I believe that govt handouts which is what a "tax credit" is deter some/many people from taking the extra step to better themselves. Why go to college so they can earn $5,000 more a year when the govt will give it to them? Do you disagree?

I could ask a 100 of these, I just want to see how socialist you are. Not trying to be a jerk, just curious. I am simply amazed that people actually think people are entitled to take money from people who earned it and give it to those who didn't. Obviously some people are unable to better themselves, but most are not.

Why should someone making $250,000 have less money to give to a child or grandchilds college fund so someone not working can have more incentive to sit on his or her ass? I'm fully aware that many people work very hard and just happen to not make a lot of money. That's a shame but it's nobody's fault but their own.

[Special K]

Me too, whats your opinion on the "wealth redistribution" going to corporate America right now?

My opinion has less to do with "evil corporations" (as many call them) and more to do with the small businesses that will be getting creamed with Obama's policy.

[Larry]

Why should Capital Gains income be treated any different from any other income?

Larry, you might want to edit this comment. The politician that made that decision would go down as the worst politician in history. Yes Larry, worse then Bush.

Or you might want to respond to it.

[alexey]

Are you seriously suggesting that the way to prevent bubbles is to discourage investment? That sure seems like another cure worse than the disease scenario to me, even granting the questionable proposition that tax breaks let to the tech bubble.

No. I am not sure where you got all that. All I said was that encouraging of investment may not always be a good idea... I think DjTj is more qualified to make this argument, so I will not interfere with your discussion.

[NavyDave]

Funny isn't it?! The "socialist" tag used to sting more until about a month ago when Bush unveiled the 700 Billion dollar socialist bail out plan, that's when I realized that the Conservative version of Capitalism failed and it required a socialist answer to resolve, after that the badge has not chaffed nearly as much.

Who said that this was a conservative plan? Or that all of President Bush's plans/policies are conservative?

Conservatives myself included were calling this Socialist and the best method would have been no Capital Gains for 3 years and let Wall street fix itself, actually institute regulation, after removing from the corrupt libs, Democrats and GOP types such as Barney Frank and Dodd.

[Larry]

My opinion has less to do with "evil corporations" (as many call them)

Only people trying to put words into other people's mouths.

and more to do with the small businesses that will be getting creamed with Obama's policy.

Only the "small businesses" where the owner pays himself more than $250K/year.

[Special K]

Only people trying to put words into other people's mouths.

Are you saying I'm putting words in others' mouths? If you are, I suggest you go back and read through this thread to comprehend the sentiment expressed by many folks in here. I am not attributing these words to any particular individual, but noting a general sentiment.

Only the "small businesses" where the owner pays himself more than $250K/year.

You act like this is a bad thing.

Here's an interesting article from Politico...

http://www.politico.com/news/stories/0708/11670.html

[Bucaro]

Are you saying I'm putting words in others' mouths? If you are, I suggest you go back and read through this thread to comprehend the sentiment expressed by many folks in here. I am not attributing these words to any particular individual, but noting a general sentiment.

You act like this is a bad thing.

Here's an interesting article from Politico...

http://www.politico.com/news/stories/0708/11670.html

Look who wrote the article and then we can go in to the many, many ways this article incorrectly describes the tax plan and distorts the real tax rate paid by those businesses. :doh:

[Larry]

Are you saying I'm putting words in others' mouths? If you are, I suggest you go back and read through this thread to comprehend the sentiment expressed by many folks in here. I am not attributing these words to any particular individual, but noting a general sentiment.

My opinion has less to do with "evil corporations" (as many call them)

Usually quotation marks are used to indicate that someone is being quoted. They aren't called "general sentiment marks".

And the term "many" usually implies "more than one". Not "none".

(And I think you'll have to reach really hard to find anything you can claim is even a "general sentiment". Personally, when I observe how many people think that corporations are evil, compared to how many get labeled that way, the score is "zero" to "everybody who thinks that all corporations shouldn't be exempt from all taxation and all laws".)

You act like this is a bad thing.

I said nothing of the kind. Speaking of trying to put words in people's mouth.

What I did was point out the teensy fact that your blanket label of "small businesses" leaves out. The fact that virtually no small businesses will be affected in any way.

[Mooka]

The problem here is that you are arguing that the Government should be taking more from the most productive members of society and less from the less productive members of society... In reality, 40% of the work-force doesn't pay taxes (or pays an insignificant amount of tax). Talking about taxing the top 5% MORE and giving it to people (in the form of tax credits) who don't pay taxes is income redistribution.

The "producers" should be allowed to use more of their money to produce... The non-producers will benefit more if the producers are allowed to produce.

When did people become dollar signs?

[techboy]

Now that part I have trouble with.

We keep using Warren Buffet as an example, so I'll stick with him.

Do you honestly intend to claim that if his income from the stock market was taxed the same as the rest of his income that he'd stop investing?

No.

That the only reason he invests is because it's taxed less?

No, again.

Warren Buffet invests, because he has 3 choices in life:

1) Invest his money, and live off of the earnings.

2) Put his money in a mattress, and live off of his principal.

3) Go get a job, and work for somebody else.

(And, really, that's only two choices, since he's smart enough to know that Choice 2 leads to Choice 3 down the road.)

Actually, Buffett has enough money at this point that he could choose 2 and never come close to running out. (Which is why, actually, his opinion on the impact of taxation is less impressive than it might be, as he has so much money he'll never personally be impacted, even at the ridiculous levels you suggest below). Especially since he is famously frugal, drinking coke and driving his own used car around Omaha.

In short, if income from investments were taxed at 90%, he'd still invest, because it's better than the other two choices.

Although I have bowed out of this discussion as too political, I will respond to your post here, because you are horribly wrong.

Buffett would indeed invest in something given 90% cap gains rates, but it would almost certainly not be stocks and bonds (at least corporate).

The reason for this is that stocks and bonds are risky. Investors invest in risky assets because in compensation, they receive a much higher rate of return. If the spread between risky and riskless (theoretical) is high enough, they choose the risky investment. If not, they do not.

As a practical example, would you invest your money in a company probably about to go bankrupt instead of U.S. Treasury bonds if the bankrupt company's assets only paid .25% more?

I'd hope the answer would be no.

Investors make this risk/reward judgement all the time, and if the spread is not large enough, they do not invest in the risky asset. Why would they?

To use your number, a 90% Cap. Gains rate would murder that spread. Even a 20% return might not be enough to entice an investor, if he only got to keep 2% of it.

Buffett would likely still invest in something, but it'd be something safe like T-Bills. Or, more likely, congressmen that would lower that stupidly high rate.

Now, obviously, the difference between current levels (15%) and what they would be for a guy like Buffett (perhaps 35%) is not as much as your 90% scenario, but I can assure you that it still alters the risk/reward equation, probably to where a guy like Buffett either goes a littler safer (and thus does not fund riskier ventures like small caps like Microsoft once was), or those riskier companies are forced to offer a little higher compensation, which can be a problem in its own way.

So, my point is a little more subtle than what you are suggetsing.

[Larry]

OK, so now we've gone from "Low CG rates encourage investment" to "Low CG rates encourage risky investment."

(We've also made things a lot more complicated, because many of the numbers involved, like, say, t-bill rates, are market driven. If the CG rate goes up, and people pull their money out of the stock market and put it into t-bills, then the t-bill rate will go down, until enough people are willing to put their money in the stock market again.)

(I'll also observe that, in that scenario, people would be encouraged to put their money into CDs, causing CD rates to go down, and also causing bank loan rates to go down. Which might, in turn, stimulate home buying, and might encourage businesses to borrow their money from banks instead of the stock market.)

So, the reason why the government should be encouraging people into particular investments (the riskier ones) is?

[techboy]

All stocks and corporate bonds are risky (actually, Treasuries are too, but they are effectively riskless since if the risk actually shows up, we're all screwed anyway).

And anyway, I never suggested that the government should be encouraging anything. I simply stated that the government should not be discouraging investment.

If you had brought this up in 1980, you might have had a point.

Now, though, cap gains rates are lower. You're talking about raising them. This is a disincentive.

[Koolblue13]

Is anything other than an equal percentage across the board "fair"? I don't think so.

No deductions, no bull****. It costs money to do what we do, so spread it out equal.

It's the only "fair" thing to do, anything else is wealth redistribution, for better or worse.

Also, for those mentioning Buffet. Didn't he just invest a heck of a lot of money into the second largest recipient of War contracts, while backing the "peace" candidate?

[Larry]

And anyway, I never suggested that the government should be encouraging anything. I simply stated that the government should not be discouraging investment.

Now we're back to the old, false, Gay Marriage argument. "I don't think we should be endorsing gay marriage by treating it the same as everything else."

Your point is "I don't think we should be discouraging something by treating it the same as everything else."

No, ending a subsidy is not discouraging something. Equality is equality. (And it should be the default policy of the government, followed in all cases unless there's a clear, direct, societal reason otherwise.)

[Larry]

Also, for those mentioning Buffet. Didn't he just invest a heck of a lot of money into the second largest recipient of War contracts, while backing the "peace" candidate?

Dax: And, as the 34th Rule of Acquisition states: "Peace is good for business."

Quark: That's the 35th Rule.

Dax: Oh, that's right. What's the 34th?

Quark: "War is good for business." It's easy to get them confused.