Part 4 (part 1 was here)...This thread was not intended to be political at all. But of course someone had to turn it that
Someone, meaning me…
Romney said he'd completely get rid of all capital gains taxes for people earning less than $200,000 a year off of dividends ect... in the debate tonight? Is that really possible? And how does that affect a mustachian's situation of retirement?
Set aside the personal benefit we are all looking forward to, once we can afford to live off passive income.
From a strictly objective viewpoint:
person A spends 40 hours or more (plus commute time) a week going to a job and working hard. On top of the direct value their labor provides to society as a whole, they also contribute a percentage of the income they earn towards the general good in the form of taxes.
meanwhile, person B simply sits around at home (or travels, or has a hobby, or whatever, doesn't matter) and has positive income flow for no other reason than they had money to begin with. Maybe they worked hard in the past and saved up, or maybe they inherited it, or maybe they laundered it after a crime, doesn't matter, point is they are not working hard now, and for that they are rewarded with not having to contribute to society.
Is there really any rationalization that makes this seem fair or reasonable?
Yes, I understand that investing can spur economic growth, I'm not arguing against the concept of capitalism, but actually doing work is much more vital than letting people borrow your money. Simple thought experiment if there is any doubt: imagine what a society would look like with all laborers and no investors. Now imagine a society with all investors and no laborers. We need people to do actual work. We do not need investors.
Furthermore, anyone who has enough capital to have a significant amount of passive income is obviously not hurting for money. There are those who think progressive taxes aren't fair, and argue for a flat rate, but taxing earned income but not unearned is regressive, and I don't think any argument can be made for that.
What I really have trouble understanding is why enough of the middle class thinks this would be a good thing for Romney to be promoting it in public as a tactic to get elected: "I want to lower the taxes the rich pay, so that a few years from now you can make up the difference". This resonates with the people?
Quote from MooreBonds on October 17, 2012, 06:23:27
2) Having said #1, you do have to keep in
mind one important, critical fact: dividends issued by US companies have already
been taxed before they were
distributed to shareholders!!! Does it bother you that a company has a net
income of $1, then pays (perhaps) 35%-40% in federal/state/local income taxes,
leaving $.60, and then distributes $.20 of that $.60 to its owners....and that
$.20 is then turned around and taxed yet again!
The concept of "double
taxation" makes no sense.
Say I go to work, earn a dollar, and pay a dime of it in taxes. Then I go
out and hire someone to do a service for me, pay them with my dollar, and now
he pays income tax. Now he goes out and buys something... etc etc
The "same dollar" has been taxed 3 times!
But each individual has only been taxed once.
The corporation and the individual shareholder are not interchangeable
entities. Me having stock in PepsiCo does not make me PepsiCo, nor make
PepsiCo me. A corporation is considered its own legal entity, with its
own rights and responsibilities, and as such, it pays taxes on its
income. The shareholder is paying taxes on their own income.
Totally independent transaction, for which any previous transactions are totally
What employee? There is no employee is my analogy. You hire a contractor or a masseuse or whatever, that doesn't make them your employee. As I said, owning a share of a company does not make you interchangeable with the company. The corporation is taxed. That is one thing. Whether that corporation pays 100%, 5% or 0% of their profits to you in dividends is entirely up to them. Some corporations pay no dividends at all. This does not change the corporate tax rate. If they decide to give you some of their profit in the form of dividends, that is income for you. So you should pay income tax on it.
Alimony, found property, gambling income, prizes, awards, rewards, scholarships above the cost of tuition, unemployment, welfare, all count as income, even though they are not commerce, and all get taxed.
Most importantly to this example: if my friend deposits that $20 gift, and earns interest on it, that interest IS taxable.
In your example I buy $20 in stock for Pepsi. (Ignoring for the moment capital gains and losses) that's what I own. The $20 worth of shares. If I withdraw those shares, then yes, this is just a transfer, not income. And as such, it isn't taxed. However the $60 in profit does not come out of my original $20 in shares that I bought. Being paid a dividend does not reduce the amount of shares you hold, nor the value of them. This is additional income.
If you have $100,000 and put it in the bank, and get $1,000 in interest, you can't say "its not fair that I have to include that $1000 as taxable income, because I already paid income tax when I earned the 100k". This isn't that money. This is new income.
If you want to invest in an S corporation, go right ahead. If you want to limit your liability to the amount you paid in capital, then the C corporation becomes its own legal individual, and as an individual, it has to pay its taxes on its income.
If at some point you choose to withdraw your own shares, you get what you put in tax free, as that is just a transaction. If you take out more than you put in (which includes dividends), then you pay taxes on your income.
Basically, buying shares does not make you the company. That's why its different. You are not entitled to the company's profit, just like you aren't obligated to pay its debts. If you own your own business you are. As an individual, whatever money you take in is income. Whether that money was taxed before you got it has no bearing on whether or not it is income for you.
It sounds like your implied reasoning is: "if the corporation hadn't been taxed, I would have gotten all $100 in dividends" but that is flawed reasoning. Maybe the rest would have gone to higher employee wages, or lower product prices, or increased internal infrastructure. The employee could say "I shouldn't have to pay any income tax, because my employer was already taxed, and that money would have been mine". Maybe. Probably not. Then the employee's landlord says "I shouldn't have to pay tax on the rent I get, cause the employee would be able to afford higher rent if the company didn't pay taxes and passed that money on to him".
That $100 profit was never yours as a shareholder. The corporation chooses to give shareholders dividends as an incentive to let it borrow their money. Its almost like points on a loan. It is a commerce transaction, a payment for a loan. Although, like I said in the first sentence, commerce is not actually a prerequisite for taxation.