Ned Williams

The Case Against Raising the Capital Gains Tax Rate

Alphameister:

Sorry, I misunderstood.
If you got rid of corporate taxes, I assumed you would have to tax investors and raise tax rates, or owners of small companies would pay themselves and high paid execs in dividends to avoid taxes on salary.
It's an interesting idea and I plan to think about it further.
I would say that the embedded taxes in price are primarily salary and payroll taxes, not profits. If they added a federal sales tax or VAT to make up the difference, the after-tax price of the goods would be the same and there would be no increase in quantity purchased.
Finally, it would be politically impossible to get rid of the income tax on those evil corporations, no matter what the economic justification. (Same problem cap gains currently faces.)

Thanks for keeping my brain stimulated.

Ned


On May 27 06:02 PM Alphameister wrote:

> Who said anything about shifting a tax from corporations to investors?
> I'm saying the corporate income tax is a cost of doing business and
> shareholders earn essentially the same return whether or not there
> is a corporate income tax (as a review of business history will confirm).
> So I don't accept the "double taxation" issue.
>
> As for inflation, it is indeed primarily a monetary phenomenon, but
> the relevant equation is MV=PQ. MV remaining the same, eliminating
> the corporate income tax would lower P (as companies competed away
> the tax benefit) and also increase Q (quantity of goods and services
> produced) as better compensated workers could and would increase
> demand for cheaper goods and services.
>
> Would higher income taxes on increased numbers of better-paid employees
> make up the shortfall in government revenue? Maybe not completely,
> at least without a federal sales tax, but they would tend to produce
> a significant offset.

The Case Against Raising the Capital Gains Tax Rate

Yellowhoard:

Love the Midas look.

Shine on!

Ned


On May 27 10:10 AM yellowhoard wrote:

> The government obviously wants less investment.
>
> You tax behavior that you want less of.

The Case Against Raising the Capital Gains Tax Rate

Alphameister:
I agree with your thinking process, but disagree on specifics.
Complete answer is too long for this venue, but I agree that we must eliminate double taxation. That leaves the problem of taxing either corporations or stockholders. Efficiency leans toward the corporation as the easiest collection point, especially when you consider that withheld taxes on salaries will necessarily be collected by corporations.
Embedded taxes are a big issue for FairTax proponents, so the issue is well covered in the Boortz, Linder book, which agrees with you. However, being a totally disagreeable character, I must disagree with you both. If you remove taxes from corporations and place it on investors, the yield on investments must go up to reflect the additional cost, so it will have no impact on how much the corporation must charge for products.
Re inflation, that is a monetary issue. Increased costs do put upward pressure on prices, but the market must decide what it will pay based on its allocation of available capital. Increased prices across the board reflect increased cash available. With fixed available capital [not today's standard], increased prices in one area indicate decreased supply or reduced consumption of something else.

Ned

The Case Against Raising the Capital Gains Tax Rate

Trane:
Stocks are valued based on known factors, estimations, and emotion. Tax considerations are one of the known factors, which can be forecast with declining certainty into the future. If the tax rate changes, it changes the after-tax yield now and into the future. It is highly unlikely that a change in the known factors will not be reflected in the price of stock.

If the capital gains rate is increased, I will be happy to sell any stock I own to you at pre-announcement prices.

Ned


On May 27 11:06 AM Trane250 wrote:

> Stocks are usually valued on such things as growth potential, dividend
> yield, proprietary models of investment houses, personal predilection
> of the investor, etc., not on after tax capital gains. It's no surprise
> that you are an adherent of voodoo (sorry, "supply side") economics.

The Case Against Raising the Capital Gains Tax Rate

Alphameister:

Thanks for your kind words. While I did assume away the 50% of stock ownership that is tax sheltered, most of those accounts are not actively traded. Day traders, on the other hand, pay a significantly higher rate that will not be affected by a increase in the capital gains rate. The important take-away is that the capital gains rate has some impact on the price of stock, but an even larger impact on the accumulated-gain tax base.

I am struggling with whether to publish something now on my politically viable solution on how to get the capital gains tax abolished, because it's an integral part of the total solution for taxes and entitlements described in my book. The impact on stock prices will be magnified by a concurrent lowering of the corporate tax rate. The solution can stand alone, but it involves a "painless" tax, that is even less painless, when it's part of the integrated solution, since there will be no out-of-pocket expense.

Ned


On May 27 10:01 AM Alphameister wrote:

> Excellent article, though I'd imagine the existence of tax-sheltered
> investment accounts would alter your numbers somewhat. Unfortunately,
> nobody in Washington (at least no Democrat) is able to see beyond
> intended consequences.

The 'Right' Way To Value the Stock Market

Interesting article, however, the model does not include taxes on capital gains or dividends. Without that adjustment, it is inappropriate to compare historic P/E ratios, since the after-tax returns differ. Hypothetically, would there be no change in P/E if the capital gains rate were 100% or 0%?