"Tim, I totally agree with your thoughts on tax policy. The founding fathers were quite wise to have a tax system that pretty well met your criteria. The current system badly misallocates capital by having it chase tax-favored deals (shelters, for instance) rather than the best investments."
Yes, the tax system has gotten completely out of hand, a hostage to political and social deals, a confusing welter of incentives and disincentives, and of course the overall rates are confiscatory.
Besides the double taxation of profits, the overall rates are just enormous by world historical standards. Not even serfs worked for more than half of a year to pay their masters. Not even those in communist regimes did so. By "half" I am roughly adding up the 30-35% FIT, the 5-11% SIT, the various property taxes and energy taxes, the 5-10% sales taxes (corrected for fraction of income spent buying taxable items), and a bunch of other "special assessments" and "mandated user fees" that are really taxes. I am NOT including the double taxation mentioned above. For some large owners of corporations, they are truly taxed at 70-80% rates on the profits of their companies.
Also, I am not counting the tax on "inflation gains." The dollar is now worth about one third to one fourth of what it was worth in the 1970s. Is the increase in a house's price from $50,000 in 1978 to $200,000 today really a profit of $150,000?
(Because the real estate lobby, and other parties, made the right contributions, we got the "deferred exemption" on some capital gains from real estate. No such exemptions for the stock I bought for $50K and sold for $200K, to use the same numbers as above. Even though that "gain" is illusory. Governments usually like it when inflation is very high, as they tax the inflated gains and pay off past debts with inflated dollars. They say they don't like inflation, but do the math. Perhaps this is why Bush is chalking up record deficits.)
Amy is saying that if tax rates were lower on certain kinds of speculative investments, she might become an "angel."
(I won't say here what I think of "angels.")
She and others need to consider the huge amounts of "unrealized profit" locked up in unsold stocks precisely because the tax rates are so high. With capital gains taxes of 26-29% on stock market gains (*), many simply elected to sit on their gains, realizing that the best way to reduce taxes is not to incur the gains at all...and hoping that Republicans would be truer to their alleged ideology and actually eliminate capital gains taxes completely.
(* A note on the capital gains tax rates. Federal rate is roughly 19-20%, changing slightly with time. California's rate is roughly 9-10%, also changing slightly. As California taxes are deductible, for now, this reduces the effective rate slightly, modulo AMT issues which can crop up.)
I expect someone to chime in with a comment about how paying even 29% taxes on the gains when Intel was at $75 was better than riding it down to $15. Sure, in hindsight. A familiar discussion.
The point is that at any given price, lacking foreknowledge, is it better to sell a chunk and then send almost a third of the gains to Big Brother, or wait and see and have no tax issues at all with these particular gains?
I have generally elected to hold and hope that the stock will go back up and/or that tax rates will drop. A big part of California's deficit woes are, according to Gray Davis, caused by a sharp decline in reported capital gains. Partly due to people deciding to wait to sell, partly due to their companies losing all value.
With the stock I acquired in the 70s and 80s, and a much smaller amount in the 90s, I chose to just do nothing and wait for better times. In hindsight, not a good strategy. But foreknowledge is for gypsies.
(However, this general point is probably why a lot of Intel execs are simply selling as soon as they can: they don't need to "wait" for even more money later. They simply exercise and sell and their acocuntants send a check off to the tax man. Not as much as they could get by holding, perhaps, but enough for some nice horse ranches and lodges and yachts.)
Twiddling with the tax code to provide special rates for some industries will just make things worse.
And, of course, it's deeply unconstitutional, in the opinion of many.
--Tim May |
