Posts Tagged ‘capital gains’

What’s the difference between the “Buffett Rule” and the AMT?

April 17, 2012

Finished up my taxes this weekend …. OUCH.

Along with more than 30 million other taxpayers, I got caught by the Alternative Minimum Tax (AMT).

There are about 130 million Fed tax filings each year … about half of them pay no Fed income taxes (or get a refundable credit) … that means that about half of all tax payers get hit with the AMT.  it only takes about $75,000 in income to make somebody a candidate for the AMT.

This year — in part because of the hoopla re: the Buffett Rule — I dug dig into the AMT calculations rather than just take Turbo Tax’s answer and run.

The bottom line — based on my dissection — is that the AMT requires that high earners pay about 28% on their ordinary taxable income — wages, interest, pensions, etc.

So, on ordinary taxable income the Obama-Buffett Rule (OBR) boosts the rate from 28% to 30%.

Big deal, right?

The real impact is what happens to capital gains and “qualified” dividends — which are currently capped at a 15% rate — even under the AMT.

Under the Obama-Buffett Rule, capital gains and qualified dividends would be taxed at 30% — a doubling of the current AMT rate.

Now, that is a big deal.

When you cut to to the chase, the Obama-Buffett Rule is simply a doubling of the capital gains tax rate — selectively applied to those people who earn most of the capital gains.

The OBR simply takes capital out of play from the private sector and transfers it to the government sector.

If you think that the government does a better job allocating capital than the free market, then you gotta love the Obama-Buffett Rule.

If you think the government uses capital less efficiently than the private sector, you gotta hate it.

Put me in the latter camp …

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Why the top 1%’s “individual” income has increased so sharply …

April 10, 2012

Interesting op-ed in the WSJ last Friday: “The Real Causes of Income Inequality”

Article’s conclusion: Yeah, the Top 1% have accrued a greater portion of income in the U.S., but not to worry, they still pay proportionately more taxes that in places like, say, France or Sweden.

And, from a strictly taxes-economics perspective, the disproportionate gain is traceable to 3 tax changes which boost economic efficiency:

1) Marginal tax rates for individuals were lowered below corporate tax rates, so new businesses formed as limited partnerships and S-Corps instead of C-Corps.

In 1986, before the top marginal tax rate was reduced to 28% from 50%, half of all businesses in America were organized as C-Corps and taxed as corporations.

By 2007, only 21% of businesses in America were taxed as corporations and 79% were organized as pass-through entities, with four million S-Corps and three million partnerships filing taxes as individuals.

Now,  a significant amount of what is now declared as personal income is actually income from businesses that are now taxed as individuals.

In 1986, just 5.6% of the income of top 1% filers came from business organizations filing as Sub-chapter S-Corps and partnerships.

By 2007, almost 19% of income declared on tax returns filed by the top 1% came from business income.

A significant amount of income that critics claim is going to John Q. Astor actually is being earned by Joe E. Brown & Sons hardware store.

2) Capital gains taxes were lowered, first under President Bill Clinton and then under President George W. Bush.

At a top tax rate of 28%, realized capital gains were 2.5% of GDP and made up 17.7% of the income of top 1% filers.

The percentage of the income of top 1% filers coming from capital gains grew to 26% in the 1997-2002 period and 28.1% during 2003-07.

By reducing the penalty for transferring capital from one investment to another, these lower tax rates increased the mobility of capital.

High-income taxpayers sold more assets, declared more income, and paid more taxes.

3) The tax rate on dividends was lowered,

Similarly, when the tax rate on dividends fell to 15% in 2003, dividend income for the top 1% grew 178% by 2007 to make up 5.6% of the income of these filers.

In 2007, immediately prior to the recession, capital gains and dividend income combined was equal to the amount of salary, bonus and exercised stock options earned by the average top 1% filer.

Lower tax rates made dividend-paying stocks more attractive to high-income investors and made dividend payouts more attractive for companies that would have previously retained those earnings or bought back their stock.

Capital trapped in companies with below-market rates of return was redeployed and the entire economy benefited.

* * * * *

So, if corporate tax rates are pushed own – as they should be to make the U.S. competitive in the global economy – then more businesses will incorporate as C-Corps and income will shift from the top 1% to corporations.

Hmmm.

And, if capital gains and dividend taxes are raised, then capital will become less mobile, and often locked in low return businesses.

Double hmmm.

Hope Team O read the op-ed.

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