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Message 1296293 - Posted: 17 Oct 2012, 18:32:26 UTC

Everyone knows that taxes fund governments and for more than a century taxes on income and corporate earnings have been the main source of Funding for the federal government. But there is another aspect to taxes, commonly known as "tax policy".

Legislators in federal, state and local venues put in place tax breaks (deductions or credits) that serve a broader general purpose. An example that many people like (if you own your home) is the home mortgage deduction. You are allowed to deduct from your taxable income the amount that you paid in interest on a home mortgage. The government has a purpose for giving you a break on your taxes: they want to encourage people to buy homes; but your taxes are not reduced by the full amount that you paid on your mortgage interest, just the amount that equates to your tax rate. For instance, if your tax rate is 28% then for every $100 you paid in mortgage interest your tax bill is reduced by $28. In other words you have to pay $100 to reduce your taxes by $28.

Other tax breaks have similar motives: renewable energy credits encourage people to install solar water heating or PV systems; deductions to charitable institutions help fund those institutions thus relieving government of some of the burden of fulfilling those functions. The capital gains tax rate is a special case where capital gains are taxed at a lower rate because the government wants investment in publicly traded companies and because the money used to invest has already been taxed as income by the investor and the capital gains have been taxed as income to the corporation.

When GE pays no taxes, assuming everything they did was legal under the tax code, it was because they utilized deductions and credits that the government allowed them, which fulfilled a greater purpose, like green energy programs or building clean energy facilities. They paid more for these investments than they saved on their taxes. If the corporate tax rate is 35% on earnings, the company only gets a $35 deduction for every hundred dollars they spend for the deduction, but this relieves the government of having to fund those projects deemed to be worthwhile.

With this in mind, it's a lot harder to complain about wealthy companies or individuals that pay no taxes or very little in taxes since these people or companies are actually doing something good for the country. They're not paying that money in taxes but they are spending more for the good of society than they would have paid for taxes. There are also tax breaks and credits for people below the poverty line that allow those people to pay no taxes, for example, childcare credits and deductions for medical expenses. If you look only at the fact that a person or company pays no taxes, you're not recognizing the larger picture.

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Message 1296297 - Posted: 17 Oct 2012, 18:39:38 UTC - in response to Message 1296293.
Last modified: 17 Oct 2012, 18:40:52 UTC

lower capital gains taxes on stocks and investments has had no effect on investments in the last 40 years.

One could argue that higher Capital gains taxes encourage continued investments in a stock. Moving the stock would cause one to incur the tax. Leaving in one place reduces ones exposure to the tax.

A lower tax could also be a cause of market volatility as investors see a small tax as less of a burden than losing a money on a stock in the short term.
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Message 1296309 - Posted: 17 Oct 2012, 19:18:48 UTC

Fair point about tax *policy*.

One could change tax policy on the corporate side to lower basic rates (as these are largely pass through as cost to the buyer), but at the same time not provide corporate tax breaks on exporting work, or foreign profit.

Regarding the very wealthy spending more of what they have -- actually that seems on its face to be not so true. It would seem to me that a larger proportion of earnings at the low to upper middle income levels get spent for goods and services that at the very wealthy side. I don't see encouraging the extremely wealthy to accumulate even more wealth as being all that good for the economy -- rather that simply takes money out of the economy.

That is one of the curious effects of sales tax (or VAT) -- that taxes spending -- which by increasing the cost of goods, might tend to reduce 'circulation' of money in the economy. To some degree, sales tax (VAT) is sort of a match to corporate taxes -- although more direct on the buyer.

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Message 1296310 - Posted: 17 Oct 2012, 19:19:04 UTC - in response to Message 1296297.

lower capital gains taxes on stocks and investments has had no effect on investments in the last 40 years.

One could argue that higher Capital gains taxes encourage continued investments in a stock. Moving the stock would cause one to incur the tax. Leaving in one place reduces ones exposure to the tax.

A lower tax could also be a cause of market volatility as investors see a small tax as less of a burden than losing a money on a stock in the short term.

One can argue anything one wishes, but if lower capital gains taxes have "had no effect on investments in the last 40 years", as you say, then why the explosion of mutual funds and the heavy reliance on equities by pensions? I think that decision makers, individuals and fund managers, put more into equities, in large part, because of the lower tax rate on the investor. This stimulates economic growth. If the capital gains tax is increased, people may go to other investments, which would inhibit expansion by companies (hiring, capital improvements) and negatively impact the economy--how much is open to debate, but in these hard times, do you want to risk such a contraction?

Capital gains taxes is only a part of tax policy. Congress (for the feds) and state and local legislators have put in place tax breaks, as I have outlined, to serve a societal purpose. If any particular tax policy isn't working, it can be changed.

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Message 1296319 - Posted: 17 Oct 2012, 19:49:32 UTC - in response to Message 1296293.



The capital gains tax rate is a special case where capital gains are taxed at a lower rate because the government wants investment in publicly traded companies and because the money used to invest has already been taxed as income by the investor and the capital gains have been taxed as income to the corporation.


A fact to consider is that when one purchases stock in a publicly traded company no new capital is created only the ownership of existing capital. I ask how is that an investment? The strict definition of an investment is the creation of new capital.
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Message 1296322 - Posted: 17 Oct 2012, 20:12:22 UTC - in response to Message 1296319.
Last modified: 17 Oct 2012, 20:13:36 UTC

The capital gains tax rate is a special case where capital gains are taxed at a lower rate because the government wants investment in publicly traded companies and because the money used to invest has already been taxed as income by the investor and the capital gains have been taxed as income to the corporation.

A fact to consider is that when one purchases stock in a publicly traded company no new capital is created only the ownership of existing capital. I ask how is that an investment? The strict definition of an investment is the creation of new capital.

You are right if you mean the purchase of stock from another investor, but all stock is issued by the company which uses the sale of their stock to fund expansion. If the company grows in value due to the infusion of money from the sale of stock, the value of the stock increases and the price increases (and dividends may be paid). The net effect is that the owner of the stock is (allowing the company to create) capital, and make profits, on which the company may pay taxes (or may further invest in things to get off-setting tax deductions). If the investments are are successful, then the economy benefits.

In any case, stock is purchased with after-tax dollars and dividends are paid with after-tax dollars, so paying a lower capital gains rate on something that has already been taxed makes some sense.

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Message 1296324 - Posted: 17 Oct 2012, 20:19:43 UTC - in response to Message 1296322.

The purchase of stock directly from the issuing company does create capital and probably deserves special treatment, The speculative purchase of existing stock does not deserve the same treatment.
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Message 1296326 - Posted: 17 Oct 2012, 20:32:12 UTC - in response to Message 1296309.

Regarding the very wealthy spending more of what they have -- actually that seems on its face to be not so true. It would seem to me that a larger proportion of earnings at the low to upper middle income levels get spent for goods and services that at the very wealthy side. I don't see encouraging the extremely wealthy to accumulate even more wealth as being all that good for the economy -- rather that simply takes money out of the economy.

Romney suggested that deductions be capped; the hypothetical figure he used was $25K, which would not affect most middle class but would affect the very rich. Some very rich, like Bill Gates and Warren Buffet might continue to make charitable donations and other payments beyond the $25K, but I suspect many would stop "giving" about when they reach the limit. Romney himself gave millions to charities, but he may be an exception. If I found out that a $5K gift to my local Public Radio would bring me to $30K deductions under Romney's plan, I might rethink it or put it off to next year, unless next year I'd be over the limit too.

Our taxes are already progressive, so that the wealthy pay a higher rate (percentage), but also pay more actual dollars. Romney may have paid 14% while his secretary paid 28%, but he funded the government with many times more dollars than his secretary paid the government; and add to that his contributions to society through charitable institutions and he did not get off cheap.

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Message 1296327 - Posted: 17 Oct 2012, 20:35:09 UTC - in response to Message 1296324.

The purchase of stock directly from the issuing company does create capital and probably deserves special treatment, The speculative purchase of existing stock does not deserve the same treatment.

Then who gets that "special treatment"? Only the original purchaser? If the stock is sold the benefit should follow ownership of the stock.

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Message 1296329 - Posted: 17 Oct 2012, 20:51:49 UTC - in response to Message 1296327.

Well we disagree. My modest purchases of stocks and mutual funds are really a form of inflation hedging savings, at best with a modicum of income from dividends. I did not create capital and should not be rewarded as such. If I want to speculate I can go to the casino.
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Message 1296331 - Posted: 17 Oct 2012, 20:57:59 UTC

The speculative purchase of existing stock


If there is no trading in a stock, there is No Liquidity, and therefore No Capital Market. How would the "Original" purchase of stock through an IPO, if there is No Trading, what you call Speculative Purchase, occur, without traders/"speculators"?

If there is No Market(trading/speculation) for a stock, there is no Continuing Capitalization for The Company. No expansions, No hirings. No Jobs. Blah Blah Blah.

Even OBlabby knows this stuff.

This is all common knowledge and is Capitalism 101.

JEEZ 'O Flip. Do so few understand?.

The Whole System would collapse without "Speculation".

Duh.

The DEMON...ella
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Message 1296332 - Posted: 17 Oct 2012, 20:58:12 UTC - in response to Message 1296319.



The capital gains tax rate is a special case where capital gains are taxed at a lower rate because the government wants investment in publicly traded companies and because the money used to invest has already been taxed as income by the investor and the capital gains have been taxed as income to the corporation.


A fact to consider is that when one purchases stock in a publicly traded company no new capital is created only the ownership of existing capital. I ask how is that an investment? The strict definition of an investment is the creation of new capital.

I noticed this too, but this ignores the not publicly traded stock, which is what the government really wants. This stock rarely changes hands between investors, SEC rules. Think vulture capitalist.

However for a public company they own a chunk of themselves. Called treasury stock. When the price is down they buy back on the open market, to raise the price and keep the shareholders happy. When the price is high they sell and thus generate more capital for the firm.

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Message 1296333 - Posted: 17 Oct 2012, 21:02:56 UTC - in response to Message 1296329.

Well we disagree. My modest purchases of stocks and mutual funds are really a form of inflation hedging savings, at best with a modicum of income from dividends. I did not create capital and should not be rewarded as such. If I want to speculate I can go to the casino.

So if you buy land and build a home and sell it, you can get the deduction for capital gain on a house. But the person who buys it from you, lives in it ten years and sells it at a profit can't take the deduction. I think I'm beginning to understand your logic.

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Message 1296336 - Posted: 17 Oct 2012, 21:06:37 UTC - in response to Message 1296333.

Gary, we've had this discussion before, a home is not capital.
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Message 1296339 - Posted: 17 Oct 2012, 21:14:54 UTC - in response to Message 1296336.

Gary, we've had this discussion before, a home is not capital.

Despite what you believe the tax code says it is. We are discussing the tax code. We must use its definitions.
The dictionary also says it is: 2) Wealth in the form of money or property owned by a person. A home is property, it has value, ergo it is capital.
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Message 1296341 - Posted: 17 Oct 2012, 21:16:43 UTC - in response to Message 1296336.
Last modified: 17 Oct 2012, 21:21:09 UTC

Gary, we've had this discussion before, a home is not capital.

Actually, it is: privately owned capital.

Definition: Capital is something owned which provides ongoing services. In the national accounts, or to firms, capital is made up of durable investment goods, normally summed in units of money. Broadly: land plus physical structures plus equipment. The idea is used in models and in the national accounts.

http://economics.about.com/cs/economicsglossary/g/capital.htm

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Message 1296343 - Posted: 17 Oct 2012, 21:18:22 UTC - in response to Message 1296331.

Demon, IPO purchases come from savings. IPO purchases can create capital, buying existing capital provides the seller with liquidity to do what ever they want, good, destructive or indifferent. That is the free market, but the country should not be subsidizing a game of musical chairs.
OBW, you sure come off much like the Dull One with a fixation on Darwin's worm.
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Message 1296345 - Posted: 17 Oct 2012, 21:20:41 UTC - in response to Message 1296341.

Capital is defined as a tool used in the production of goods or services. A home office used in business is capital, the same home office used for personal things is not capital.
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Message 1296346 - Posted: 17 Oct 2012, 21:22:58 UTC - in response to Message 1296339.

If this thread is about taxes, then I am pointing out a gross distortion the tax code creates.
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Message 1296347 - Posted: 17 Oct 2012, 21:23:49 UTC - in response to Message 1296297.

A lower tax could also be a cause of market volatility as investors see a small tax as less of a burden than losing a money on a stock in the short term.

Except that short term capital gains are taxed at regular income rates today.

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