patrick.net

Like PGE?

I thought it failed in 2000 because it was not allowed to pass costs directly onto consumers.

"Clients are pulling listings and selling privately"

Well I can't lose too much sleep over that one. With a 6% comm. and a declining market evidently a lot of sellers simply can not afford to be generous. (Especially in Sacramento).

Then again we've said for some time that if realtors (TM) brought their comm. in line with virtually every other tangent of financial services there would be enough volume to off set the reduction.

I'm very happy to get 1% (and that's on avg.)

And here I thought it was public pension funds and institutionals. Learn something new every day.

If you "look through" the pension funds and institutions the beneficial owners of those securities tend to be teachers, stewardesses, etc., with pension plans. Pension benefits are already taxed at high ordinary income tax rates.

Who would be adversely affected if cap gains was taxed the same as income? Bill Gates, Buffett, Michael Dell, the Walton family, etc...

As for "disincentivizing savings," I don't think this is a problem. Couldn't you argue that the current system "disincentivizes work"?

I agree that a pure consumption tax might be preferable, as it would not dinsincentivize work *or* savings. But it would require such a massive overhaul of the existing tax code that I just can't see it happening.

Glen,

I can (and will) go along with everything except #4.

If anything (and I know Peter doesn't believe in them) we should be shoring up 401K's etc. We've all seen the disparity between the growth in a taxable acct. and tax deferred acct. until our eyes are bleeding. We've also seen that our employers can not really be relied on. SS is already at the breaking point. Properly done there's absolutely NO reason a JBR can't find him/herself every bit as comfortable in retirement as the "landed gentry". Take away this pillar and we really will revert back to a land owner run society.

Tax advantages aside, it motivates people! We didn't go through the industrial revolution just so we could "pass the hat" for your widow when the mine collapsed.

I CERTAINLY think we can make them more simple! Right now we have ERISA, EBSA, DOL and the IRS regulating this thing into the ground. Now that I'll definitely agree on!

I can (and will) go along with everything except #4.

If anything (and I know Peter doesn’t believe in them) we should be shoring up 401K’s etc.

But if cap-gain tax is abolished we would not need #4.

As for “disincentivizing savings,” I don’t think this is a problem. Couldn’t you argue that the current system “disincentivizes work”?

The biggest disincentivizing of savings is inflation. If I throw $100K in the bank and it returns $5K, barely matching official inflation, I'm then expected to pay taxes on that? Now I'm behind the inflation curve.

Allow everyone to write off their first $20K of cap gains / interest from their 1040 and you might see an increase in the savings rate.

Flat taxation is the biggest sucker punch the rich ever came up with (excluding the push to eliminate the "death tax"). "But it's simpler" Wazza matter? You can't use a lookup table?

DinOR,

Ok, fine. But the system is so ridiculously cumbersome as it is. How about two kinds of accounts:
1. IRA (pay taxes later, not now)
2. Roth (pay taxes now, not later)

(I would say just Roth accounts, but I'm not sure I trust future governments not to default on the implied promise of no taxes on withdrawal.) Employees could split their annual contribution limit into both kinds of accounts in order to diversify their exposure to future changes in tax policy.

If employers want to help you set it up and make direct deposits, great. But they should have no fiduciary responsibility or discretion in selecting investments. They can have a "default option" if they want, but they will have no liability if they mismanage it. There should be some regulation of "default funds" to avoid kickbacks, etc., from financial institutions. And they should not be able to restrict anyone from buying anything--peso bonds, sugar futures, options, midcap utility funds....whatever. They also clearly should not be able to force or direct employees into buying employee stock. Totally up to the employee. I could live with a system like this.

I'm not going along with anything that eliminates my cushy SEP with it's special small biz perks.

Peter P,

The idea here is that not only does it grow tax deferred it reduces your pre-tax income as well.

We really have two seperate tax codes in this country. One for W-2 wage earners (which get payroll taxed to death) and the 1099 crowd that pick up reciepts blowing across the parking lot.

If it can be legally written off, I'm all over it! Without AT LEAST an avenue for tax deferred saving (hopefully w/employer match) we don't have anything resembling a level playing field.

I'm all for simplifying this, but doing away with ret. accounts altogether? Peter do they have a restroom where you work?

But if cap-gain tax is abolished we would not need #4.

Well, depends what you mean by "abolished." If we just tax cap gains at the same rates as other forms of income (abolishing the distinction in rates, but not the tax itself), then there is still a reason for these accounts.

Example:

Employee #1 earns $10K and puts it into a 401K which doubles to $20K, then withdraws the money, which is taxed entirely at 20%. Net result = $16K of retirement consumption and $4K of tax to the gov't when employee retires.

Employee #2 earns $10K and pays immediate $2K of immediate income tax, leaving $8K for retirement savings. Again, the money doubles, giving them $16K, but they still need to pay the flat 20% tax on their gains. 20% tax x $8K gain = $1,600 tax, leaving them with $14,400 of retirement money after paying a total of $3,600 in taxes. The other $2K disappeared because it is the lost hypothetical gain that the employee *would have* gotten if they had deferred their taxes. Instead, the government got the money sooner to do whatever it is they do with tax money. (Suffice it to say, it is unlikely that they invested it and doubled their money.)

I will be in SF next thursday. Would anyone be up for an early dinner of sushi?

Allow everyone to write off their first $20K of cap gains / interest from their 1040 and you might see an increase in the savings rate.

Good idea. Works sort of like an IRA with a high contribution limit--except that you should be able to get the money back out (if you so choose) before you are 59 1/2! And instead of tax deferral you actually avoid the tax altogether. This way, you could save for a downpayment on a house while waiting out the bubble... 401ks are fine, but no good for housing-crash savings accounts.

The idea here is that not only does it grow tax deferred it reduces your pre-tax income as well.

But if income tax is replaced by consumption tax we would not have to worry about that as well. :)

I will be in SF next thursday. Would anyone be up for an early dinner of sushi?

Will you be in the blog party on the 3rd? :)

Well, depends what you mean by “abolished.” If we just tax cap gains at the same rates as other forms of income (abolishing the distinction in rates, but not the tax itself), then there is still a reason for these accounts.

I still think it is best not to tax cap-gains at all. This should lead to more efficient capital allocation.

most securities are owned by a relatively small % of rich families.

And here I thought it was public pension funds and institutionals. Learn something new every day.

Perhaps I'm missing something, but I thought it was generally understood that the top quintile of HHs in the U.S. own the majority of securities & income producing assets:

http://www.pcf.org/venture_philanthropy/pdfs/ida_research.pdf#search=%22asset%20distribution%20U.S.%22

--The top 20% of all American households earn over 43% of all income but hold over 68% of net worth (all assets less all liabilities) and almost 87% of net financial assets.
--Ten percent of America‘s families control two-thirds of the wealth.
--The top 1% collected over four times their proportionate share of income, but hold over 11 times their share of net worth.
--The richest 1% possesses at least $763,000 in net worth, an amount 22 times greater than the median of the remaining 99%

I’m not going along with anything that eliminates my cushy SEP with it’s special small biz perks.

This is why tax reform is so hard to accomplish. Everybody has some piece of turf to protect.

Nevertheless, I would not be surprised to see some sweeping tax reforms in '07 (or at least an attempt to pass something). There have some rumblings about this, starting with the president's tax reform panel. But I think Bush probably blew it. The time to pass rational tax reform would have been when they passed the '01 and/or '03 tax cuts. It is much easier to swallow changes in the tax code when the taxes, overall, are being reduced.

It will be very hard, if not impossible, to sell changes to the tax code which negatively impact some taxpayers and do not benefit others during a recession with a lame duck President, a recession and an imploding housing market. Typical Bush, though, he left the hard work and heavy lifting for his successors.

I’m not going along with anything that eliminates my cushy SEP with it’s special small biz perks.

...and don't think about touching my kiddie tax credit. :-) Special interests forever.

Found Roubini's Blog (Krugman's reference):

http://www.rgemonitor.com/blog/roubini

Philosophical question:

Should we aim to improve social equity or should we improve overall standard of living?

On the other hand, eliminating cap-gain tax may incentivize everyone to save and invest.

Peter P-

I am not sure about the blog party on the 3rd, it depends on what my in-laws are up to. Right now it looks as if we will not be there.

However, I, am certain to be in SF on the 31st. If anyone is interested in sushi, I would be interested too.

Glen,

I see you're logic with the "double-taxation" on retirement savings cap. gains, though of couse NOT eliminating the tax write-off for IRA/401k/401b/SEPs would eliminate that problem.

Completely abolishing capital gains --while nice for those who get more income from investments than wages-- would perversely make the wealth disparity in the U.S. even worse than it already is. I don't see why Mr. Trustafarian should get a tax "pass" on his unearned passive gains, while I get hit for 30% a year on my meager earnings from actual work.

Just seems regressive, a poor incentive structure, unfair and bad tax policy IMHO.

Should we aim to improve social equity or should we improve overall standard of living?

If you mean through the tax code, then neither should be the goal. Taxes should be raised in order to fund government spending. The simpler and more transparent the system for doing so, the better.

If the government wants to support a particular activity, then they should subsidize it. If they want to disincentivize some activity, they should impose fines or criminal penalties. Other than that, let people decide how to spend their own money. Monkeying with the tax code just gives politicians cover for discretely funding favored special interests, which requires everyone else to pay higher taxes to fund these interests.

Mr. Schmoe, a word of advice, don't pick Peter P's sushi bill :)

It is typically larger than the GDP of Angola. He is rumored to have eaten an entire blue fin tuna himself.

"pick up"

Completely abolishing capital gains –while nice for those who get more income from investments than wages– would perversely make the wealth disparity in the U.S. even worse than it already is.

But the investments were already taxed at the corporate level.

He is rumored to have eaten an entire blue fin tuna himself.

The rumor is greatly exaggerated. :)

It is typically larger than the GDP of Angola.

Not really. But the bill is usually much higher than the net worth of many FBs. :)

But a Big Mac costs more than the net worth of many FBs.

Taxes should be raised in order to fund government spending.

It can also be argued that government speding to be reduced in order to lower taxes. Spending is a means, not an end.

On another note, here's a case where life imitates art:
http://tinyurl.com/f4n45
I wonder if they'll ever make a movie out of our housing bubble bust, and if so, I wonder who will play the FED?

I don’t see why Mr. Trustafarian should get a tax “pass” on his unearned passive gains, while I get hit for 30% a year on my meager earnings from actual work.

HARM,

I totally agree. If you earn $100K in salary and Trustafarian earns $100K on the sale of stock, you are both better off by exactly $100K. If the gov't needs to collect $60K, they could tax each of you $30K, or they could collect $20K from Trustafarian and $40K from you. Which is more fair?

Sure, the lower cap gains rate may persuade Trustafarian to reinvest his money in more capital assets instead of blowing it on coke and strippers. But what about you? Aren't you likely to take a break from the rat race and stop working so hard next year?

It is also weird that if you buy stock which appreciates, you pay cap gains. If you earn dividends, then you pay "dividend rates" (depending on the kind of dividend). If you earn interest income, you pay ordinary income tax. Too many rate structures, too much complexity, in my opinion.

At this point, the incentives are so complicated and nuanced that most taxpayers couldn't make maximum use of them, even if they tried. An example of the confusing questions consumers face:

1. Roth or regular IRA (depends on highly unknowable future income tax rates)?
2. Pay down debt or contribute to retirement plan (depends on after tax cost of debt vs. savings from tax deferral)?
3. Stocks that pay dividends or interest-bearing bonds?
4. Sell now and take short term capital gains since I am bearish on future prospects of my stock or wait and pay LT cap gains later when stock may have fallen?
5. Sell house now and take easy bubble money? Or wait until two years have passed to get cap gains exclusion?

Etc., etc... Not even a highly competent professional financial planner can give a definitive answer to most of these questions. Some incentives.

I wonder if they’ll ever make a movie out of our housing bubble bust, and if so, I wonder who will play the FED?

Huh?

It can also be argued that government spending to be reduced in order to lower taxes. Spending is a means, not an end.

Absolutely --and good luck getting that to happen. We've had a "conservative" Republican-dominated government for nearly 6 years now. So how have those "starve the beast" spending cuts been going so far? Any Congressmen or Senators out there ready to sacrifice YOUR state/district's pork-funded jobs or farm subsidies?

Anyone, anyone.... Bueller?

Hmmm... perhaps a new theory may be in order.

Glen,

I'm with you! I've been pulling for this for years. The way I set up SEP's you can daytrade for all I care. I have ONE rule though, if I get fired b/c you're too distracted I'm gonna make sure YOU get fired first!

You should see some of the stuff on my books! Alternative energy, Canadian mining stocks, pennys you name it. I just remind these guys, "you're the CFO here right?" You're a big boy, right? So there's no crying in baseball and there's no crying on Wall Street, right?

Have at it my friend!

Default kick-backs can be remedied by making the default random. Don't like what you're in? Here's our 1-800 number.

I said:

Taxes should be raised in order to fund government spending.

Then Peter said:

It can also be argued that government speding to be reduced in order to lower taxes. Spending is a means, not an end.

My post may have been ambiguous. When I said "raised" I did not mean "increased." I meant taxes should be collected to fund whatever level of spending is deemed appropriate by the powers that be. I was just trying to make the point that the sole function of the tax system should be to collect money, not to engage in social engineering. A good system of taxation is fair, economically rational and administratively feasible. Our current system fails on all three counts.

It is also weird that if you buy stock which appreciates, you pay cap gains. If you earn dividends, then you pay “dividend rates” (depending on the kind of dividend). If you earn interest income, you pay ordinary income tax. Too many rate structures, too much complexity, in my opinion.

At this point, the incentives are so complicated and nuanced that most taxpayers couldn’t make maximum use of them, even if they tried.

Glen,

We are in 100% total agreement on this. Current tax code is insanely complex and so byzantine precisely beause it attempts to "incentivize" everything to death, and because every business/interest group out there lobbies for its own loopholes/"special status", ultimately defeating the original purpose of special exceptions. This is why I'd much rather see a greatly simplified income & asset-class neutral structure.

I meant taxes should be collected to fund whatever level of spending is deemed appropriate by the powers that be.

I see. :) But that would still mean that tax should be collected to support an arbitrary level of spending. This is dangerous.

I wonder if they’ll ever make a movie out of our housing bubble bust, and if so, I wonder who will play the FED?

There will be such a movie.

I see. But that would still mean that tax should be collected to support an arbitrary level of spending. This is dangerous.

Well, I have my own views on the appropriate level of government spending. But these views are independent of my views on the purpose of the tax code.

My guess is that we could reduce rates meaningfully if we broadened the tax base by eliminating special loopholes, carve-outs, exemptions, credits, deductions, "incentives," etc., etc...

Rates could be reduced further if we actually managed to cut spending. But I think it would be easier to cut spending if all the special tax favors were itemized as line items in a spending bill, instead of being tucked into an obscure tax code provision. It is easier for Joe Public to understand that his money is being collected and distributed to an oil company than it is for him to understand that a special tax break for the oil company invisibly raises taxes on everyone else. Just look at the difference between the press coverage on spending for Halliburton and other war contractors vs. invisible spending in the form of tax "incentives" for, eg, accelerated depreciation, oil well depletion allowances, etc....

HARM,

In 1986 the government radically transformed the tax code by wiping out tons of special rules, loopholes, etc. from the tax code in one fell swoop. It was a victory for bipartisan rationality. Bill Bradley (D, NJ) authored the bill and helped shepherd it through the Senate. Reagan and other Republicans supported it and helped get it through. The '86 tax bill eliminated all kinds of loopholes (eg: unlimited "passive loss" deductions, etc.) which had distorted the code. Naturally, the beneficiaries of these loopholes were pissed.

Then Congress got back to the business of handing out favors. Twenty years later, the code is far worse than it was in '85. But it will take some kind of miracle for bipartisanship and the public interest to prevail over partisanship and special interests in the coming years, I'm afraid.

My guess is that we could reduce rates meaningfully if we broadened the tax base by eliminating special loopholes, carve-outs, exemptions, credits, deductions, “incentives,” etc., etc…

How about merging the "regular" tax with the AMT, so everybody pays the AMT at a slightly higher rate? This would become a slightly progressive "flat" tax.