Mike Kueber's Blog

January 28, 2015

President Obama as Redistributor in Chief

Filed under: Economics,Law/justice — Mike Kueber @ 12:37 am
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Amity Shlaes authored a column in Time magazine this week titled, “Redistributor in Chief.” You might guess she is referring to President Obama, and you would be correct.

Redistribution,” of course, is an ugly term that most conservatives use to tar any proposal that shifts government taxes from poor to rich or any government benefits from rich to poor. Although I style myself a conservative, I believe that each proposal needs to be examined on its merits.

In her column, Shlaes provides a litany of evil Obama proposals, and I agree with her on many of them. But one of her criticisms stuck in my craw:

  • Even more damaging is the President’s plan to kill the “step-up in basis” for inherited wealth. Some non-rich families have a second home somewhere in the woods. Obama’s plan would force many children to sell such a house to pay the taxes due upon a parent’s death.

I blogged about my support for killing the “step-up in basis” when Obama first proposed it. It makes no sense to evade capital-gains taxes merely by passing the property upon death.

But instead of trying to defend the indefensible, Shlaes resorts to a red herring fallacy. How many “non-rich families have a second home in the woods”? Not very many when compared to all of the rich families that evade paying capital gains on appreciated stock by transferring the stock through an estate.

Shlaes’s silly example reminds me of liberals and progressives who argue against Voter-ID laws because there is a widow in west Texas without an ID and she would have to travel over 60 miles to find an agency that could provide her with one.

January 19, 2015

My third pet peeve in government

Filed under: Economics,Issues,Law/justice,Politics,Retirement — Mike Kueber @ 11:01 pm
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I recently posted about a progressive Facebook friend who is displeased with SA’s mayor, Ivy Taylor. She also is displeased with her redneck in-laws who, despite their antipathy toward welfare, are not above keeping a cow on their acreage to avoid paying any significant property tax.

While I’m not judgmental re: people who energetically try to avoid taxes, I have previously blogged about my disgust with the farm/ag exemption.  The ag exemption, along with the obscene pension plan that state legislators have provided themselves, are strong evidence of the corruption involved in government.

To my list of pet peeves in government, I am adding a third item – long-term capital gains. These gains are currently taxed at 15% for most people, which is a compromise between some people arguing that these gains should be untaxed and others arguing that these gains should be taxed the same as ordinary income.

I agree with the latter position, but even if I understand the compromise, I don’t understand why the tax code would allow an estate to transfer to its heirs capital assets not only without assessing a tax on its capital gains, but also with its cost-basis increased to its current market value. What uncorrupted legislator would think that makes sense?

For some reason, I’ve never heard this grotesque policy discussed, let alone discussed. Imagine my surprise a couple of weeks ago upon hearing that President Obama is proposing to seek a middle-class tax cut that will be paid for by assessing a capital-gains tax on inherited property.

I look forward to hearing how the Republicans argue against this proposal. Mitt Romney is opening his campaign with an emphasis on helping the middle class, and I would love for him to adopt this proposal.

February 10, 2012

The Zuckerberg Tax

Filed under: Economics,Finances,Investing,Issues,Law/justice,Politics — Mike Kueber @ 4:14 am
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A recent op-ed piece in the NY Times recommended that America adopt a “marked to market” tax – something it called the Zuckerberg Tax in honor of Facebook founder Mark Zuckerberg.  Essentially the tax would require the wealthiest Americans to pay taxes on their capital gains every year, regardless of whether they actually sold their assets – i.e., individuals would be taxed on their paper gains. 

That makes sense to me.  Individuals who are getting super-rich should not be able to avoid contributing toward the provision of government services by holding onto their capital assets.  The column reported that Apple’s Steven Jobs never sold any of his Apple stock, and thus never paid capital-gains taxes on his billions of dollars of capital gains.

Even more troubling is the report in the column regarding the tax treatment of capital gains that are never realized before the owner dies and passes them to heirs.  According to the column, neither the estate nor the heir pay capital gains at the time the capital is transferred, and inexplicably instead of requiring the heir to assume the deceased’s cost basis for the assets, the heir’s basis becomes the market value of the assets at the time of the transfer. 

For example, Steve Jobs buys ten million shares of Apple for $10 a share, and then holds them until his death, when they are worth $300 a share.  Thus, he never realized any capital gains and didn’t pay a penny of taxes.  His wife then receives the shares through the Jobs’ will, and she holds them for another year before selling them for either $290 a share or $310 a share.

If she sells them for $290 a share, she will receive $2.9 billion from an initial investment of $100 million, yet she can actually declare a $100 million loss and offset that loss against other capital gains.  If she sells them for $310 a share, she will receive $3.1 billion, but will have to declare capital gains of only $100 million, on which she will pay capital-gains tax of 15% or $15 million.  That’s an incredibly low tax rate (.5%) on the $3 billion in capital gains that she and her husband experienced.

The Zuckerberg Tax seems like a good idea, even though it will have tough sledding.  There is no reason, however, for failing to assess the capital-gains tax when property is transferred by someone’s death.

January 25, 2012

Double taxation

Filed under: Business,Issues,Politics — Mike Kueber @ 4:44 am
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I confess that because I was preoccupied with a Happy Hour, I missed President Obama’s State of the Union address.  But prior to the address, I heard that a major part of the address was the so-called Buffett rule, which focuses on the fact that some secretaries paid taxes at a higher rate than their bosses.  I agree with this criticism of the American tax code.

Mitt Romney recently disclosed that his tax obligation was less than 14% even though he made about $20 million a year.  Based on news reports, President Obama was prepared to highlight that many secretaries not only paid taxes at a higher rate than 14%, but also had to pay social-security taxes of more than 7%, which the multimillionaires were not required to pay on the bulk of their income.

I agree that rich people should not be allowed to pay reduced income-tax rates simply because their income comes from capital gains.  The argument that such a tax amounts to double taxation doesn’t make sense.  Just because someone pays taxes on earned income doesn’t mean that additional income earned on that income shouldn’t be taxed.  America’s tax system is based on levying a tax on each transaction (e.g., sales tax is assessed every time your car is sold), and that is completely consistent with taxing a person on earned income and then taxing them again when those assets are used to generate capital gains.  The tax rate on capital gains should be at least at much, if not more, than the tax rate on earned income.  This concept would also work with estate taxes, where there is a tax on income earned and then another tax on the assets when they are tranferred to a beneficiary.  

To suggest that people will be reluctant to invest their capital because capital gains will be fully taxed is ludicrous.  That’s like saying you will decide to stop earning income above $250k just because the marginal rate on income over $250k is increased to 40%.

December 30, 2011

Wikipedia and tax mediation for a frugal retiree

During college or law school, I was taught that there is a critical difference between tax avoidance and tax evasion – avoidance is legal and OK; evasion is illegal and not OK.  Wikipedia, however, seems to have blurred that distinction in the last sentence of the following definitions:

  • Tax avoidance is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax avoidance. The term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law. The United States Supreme Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.”  Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax avoidance and evasion can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state’s tax system.

If I may digress from my taxing subject for a minute, this morning I heard Doug Gottlieb, a substitute host on Mike & Mike’s sports talk show on ESPN2 rely on Wikipedia for the historical origins of the marathon and then gratuitously slam Wikipedia by saying that, because the info came from Wikipedia, it might be right and it might be wrong.  What an ugly thing to say!  Although Wikipedia may not have all of the overlapping validations of most reference sources, I have found it to be highly reliable and exceptionally well written.  The paragraph above on tax avoidance is typical.  That was a cheap shot, Doug, unless you are prepared to give us examples of you being misled by Wikipedia.

Back to my subject of “tax mitigation,” a lot of retirees with a moderate amount of assets don’t realize that the U.S. tax code allows them to earn a relatively sizable amount of income without paying any taxes.  Here is how:

  • The personal exemption and standard deduction for a single person combine to about $10,000 so that amount of income is tax free.
  • The Bush tax cuts allow people in the 10% or 15% tax bracket to pay $0 on capital gains.  For a single person, the 15% bracket changes to 25% with income of $35,000.

Thus, according to my calculations, an individual can earn income of $10,000 and take out capital gains of $35,000 and still pay no taxes.  If you need more than $45,000 a year to live on, you simply consume some of the assets that resulted in the capital gains.  Sweet!

Although I think the Bush tax cuts should be eliminated for everyone, not just the rich, I endorse Mitt Romney’s suggestion that the capital gains tax should be eliminated for everyone except the rich.  Providing an incentive for wage-earners (the proletariat) to become asset-owners (the bourgeoisie) would be a good thing.

August 23, 2011

Increase the capital-gains rate and balance the budget

Filed under: Issues,Politics — Mike Kueber @ 6:33 pm
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As the federal government struggles with its deficit and debt, an item that has escaped much public attention is the preferred treatment of capital gains.  As Warren Buffett recently pointed out, this preferred treatment enables him to pay taxes at a lower rate than his secretary:

  • “Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’ thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

James Stewart, a business/finance columnist for the NY Times, recently elaborated on Buffett’s argument about carried interest:

  • For most hedge fund and private equity partnership managers, carried interest is compensation in the form of a percentage (usually 20 percent) of any gains they generate for investors. If a hedge fund manager generated $1 billion for investors by betting against mortgage-backed securities before the real estate market collapsed, the hedge fund manager is entitled to keep $200 million as compensation. The tax code treats that as a capital gain, taxed at a lower 15 percent rate. (The top rate on ordinary income is 35 percent.) The argument that this should be ordinary income rests on the notion that hedge fund managers earn these fees from their labor, just like other workers get a salary for theirs and are taxed at ordinary income rates.

Although managers of private equity and hedge funds provide a (un)popular target for tax reform, the far richer target is the complete elimination of a separate, reduced rate for capital gains.  If the capital gains rate were the same as an individual’s income tax rate, Warren Buffett wouldn’t pay taxes at a rate lower than his secretary.  Furthermore, the elimination of the reduced rate is not an extreme idea.  In fact, it was included in the estimable report of the bi-partisan Simpson-Bowles commission.

The aspect of this reform that fascinates me is the prospect of implementation would surely motivate millions of people with locked-in capital gains to claim those gains at 15% before the new 35% rate kicks in.  I have searched high and low to find an estimate of how much capital gains are waiting to be taxed, but I have been unable to find an estimate.  Although the capital-gains tax plays a relatively small part in supporting the federal government (see below), I suspect that the surge of activity to avoid a higher rate would go a long way toward balancing the federal budget that year.

Table 1 Sources of Federal Revenue (billions of 2003 dollars)

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Capital gains tax 45

Corporate income tax 132

Individual income tax 794

Social Security taxes 713

Total revenues 1,782