Signs of the Times - and a question

[finnbow]

Originally Posted by whell

This also hopefully illustrates how capital gains tax is also a tax on capital. Unless capital is "risked" (invested, converted or utilized) it will be reduced in value. If it is a commodity like gold, it will rise and fall with market value. But even gold gains value with it is utilized as capital and converted to a product. Without creating an environment that incents the conversion of capital, we suppress economic activity and economic growth.

Must a 2% (plus or minus) annual growth rate in GDP be accepted as "the new normal", or can we do better? Can we jump start growth by reducing the cost of taking a financial risk?

I think the answer to both is yes.

Your simplistic and one-sided analysis failed to note that the risk is mitigated somewhat by the ability to write off capital losses against the gains. Also, as any student of investing understands, over the long term, stocks nearly always outperform bonds (and bank interest, of course). Why do we need to sweeten these gains even further?

I'm just not a believer in structuring the tax code to induce people to do certain things in lieu of other things. That's how we ended up with the most cumbersome inefficient tax code in the First World. We have short term CG's, long term CG's, qualifying dividends, non-qualifying dividends ..... and each has a constituency saying that they must have these breaks to keep on investing. BS.

[whell]

Originally Posted by finnbow

Your simplistic and one-sided analysis failed to note that the risk is mitigated somewhat by the ability to write off capital losses against the gains. Also, as any student of investing understands, over the long term, stocks nearly always outperform bonds (and bank interest, of course). Why do we need to sweeten these gains even further?

I'm just not a believer in structuring the tax code to induce people to do certain things in lieu of other things. That's how we ended up with the most cumbersome inefficient tax code in the First World. We have short term CG's, long term CG's, qualifying dividends, non-qualifying dividends ..... and each has a constituency saying that they must have these breaks to keep on investing. BS.

Sure it's simplistic. It was meant to me. For example, you don't mention that gains can only be written off against profits. If the risk is taken and results in a capital gain, but there is no profit (which is more common in production examples) then there's no write off. Or at the very least, the write offs are limited to the extent that there are (any) profits.

Why do we need to sweeten the pot further? Because right now the incentive to take risk is being depressed, which gives us the sub 3% growth rate in GDP. We need more growth to create jobs.

Also, your earlier post you talked about bonds. Of course, bonds are really loans. Therefore, the profit goes to the individual making the loan and would be taxed accordingly. However, the objective of the loan in an economic sense it to generate operating capital (or cash flow). This makes the cost (risk) of converting capital more expensive for the recipient of the loan, since the interest rate (for example) of a business loan is running around 6 - 7% right now (assuming a business could even qualify).

Your 2nd paragraph takes me back to an earlier point where we may find some agreement. Make the tax code simple and predictable. Sit it at one rate for all, and tax all profit at the same rate. You can make it progressive if you must, but tax profit not capital.

[whell]

Originally Posted by piece-itpete

Thanks whell, post 148 was great.

Pete

Gracias amigo.

[d-ray657]

Originally Posted by whell

Sure it's simplistic. It was meant to me. For example, you don't mention that gains can only be written off against profits. If the risk is taken and results in a capital gain, but there is no profit (which is more common in production examples) then there's no write off. Or at the very least, the write offs are limited to the extent that there are (any) profits.

Why do we need to sweeten the pot further? Because right now the incentive to take risk is being depressed, which gives us the sub 3% growth rate in GDP. We need more growth to create jobs.

Also, your earlier post you talked about bonds. Of course, bonds are really loans. Therefore, the profit goes to the individual making the loan and would be taxed accordingly. However, the objective of the loan in an economic sense it to generate operating capital (or cash flow). This makes the cost (risk) of converting capital more expensive for the recipient of the loan, since the interest rate (for example) of a business loan is running around 6 - 7% right now (assuming a business could even qualify).

Your 2nd paragraph takes me back to an earlier point where we may find some agreement. Make the tax code simple and predictable. Sit it at one rate for all, and tax all profit at the same rate. You can make it progressive if you must, but tax profit not capital.

If you sell something for more than you paid for it, is it not a profit? I.e., is not a capital gain a profit?

Regards,

D-Ray

[finnbow]

Originally Posted by whell

Sure it's simplistic. It was meant to me. For example, you don't mention that gains can only be written off against profits. If the risk is taken and results in a capital gain, but there is no profit (which is more common in production examples) then there's no write off. Or at the very least, the write offs are limited to the extent that there are (any) profits.

Why do we need to sweeten the pot further? Because right now the incentive to take risk is being depressed, which gives us the sub 3% growth rate in GDP. We need more growth to create jobs.

You can write off $3k per year in capitol losses without having had any gains and carry forward anything exceeding that amount to be written off in the future.

I think that taking risks isn't depressed currently. What is depressed is demand. With prospective demand for their products, entrepreneurs take risks. Without it, they don't.

[whell]

Originally Posted by d-ray657

If you sell something for more than you paid for it, is it not a profit? I.e., is not a capital gain a profit?

Regards,

D-Ray

In an investment sense, yes. Profits from investments are always "realized capital gains."

In a production environment, not always. Manufacturers must capitalize all direct and indirect costs of production. This includes all material costs, amounts paid to employees directly involved in manufacturing, as well as a portion of salaries for employees not directly involved. Also included are expenses incurred for indirect supplies, repairs and maintenance, rent and utilities, even if incurred before and after the actual production of the property. All capitalized costs will reduce the amount of profit that is recognized when the property is sold.

[d-ray657]

Originally Posted by whell

In an investment sense, yes. Profits from investments are always "realized capital gains."

In a production environment, not always. Manufacturers must capitalize all direct and indirect costs of production. This includes all material costs, amounts paid to employees directly involved in manufacturing, as well as a portion of salaries for employees not directly involved. Also included are expenses incurred for indirect supplies, repairs and maintenance, rent and utilities, even if incurred before and after the actual production of the property. All capitalized costs will reduce the amount of profit that is recognized when the property is sold.

Accordingly, such capitalized costs reduce the exposure to capital gains tax. But as you mentioned in an earlier post, let's just tax all income - or whatever kind - and be done with it. If you buy a $1000 property, put $100 into it and sell it for $1200, you've made $100 income from it.

Regards,

D-Ray

[BlueStreak]

Oh, Christ. Whatever happened to---"Whatever is left after the bills are paid is called profit."?

[finnbow]

Originally Posted by BlueStreak

Oh, Christ. Whatever happened to---"Whatever is left after the bills are paid is called profit."?

That's old thinking, Dave. It ain't that simple any more. You forgot important elements of tax-dodging, credits, hiring lobbyists to bribe politicians, creative accounting ... It's a major element of big business these days. Nobody is even capable of making sense of corporate balance sheets anymore.

[whell]

Originally Posted by d-ray657

If you buy a $1000 property, put $100 into it and sell it for $1200, you've made $100 income from it.

No you haven't. If you buy $1000 in property, you must also pay tax on it. You then pay tax on it every year that you hold it. You then pay tax again at sale time on any gain. You're lucky if you break even.