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There is a lie being told that investment income is double taxed.

mark14

Council Member
A) You can't have a dividend unless you invested in a profit making (and therefor tax paying) business. You can have a capital gain if you invest in a government bond or a CD but that would be the exception, not the rule. The vast majority of capital gains is generated by owning tax paying assets (rental real estate, businesses, etc,).

B) Because as you admit - you and I are not the same person. In the case of corporations and their shareholders, they are the same person(s).

C) No one is saying do away with this (or any other) double taxation. We only ask the left to be honest and stop saying it isn't double taxation (and that these folks "only" pay 15%).
A) Dividends are not "the rule" any more than government bonds. It is true that the vast majority of capital gains are generated by owning tax paying assets such as real estate but you, with real estate being an exception, aren't generally the one directly paying taxes on them, and with regard to real estate you wouldn't claim that the real estate is the same as the person who owns them.

B) Corporations are not the same person as their shareholders. I have invested in Intel. I own stock in Intel. I am not Intel and Intel is not me. Read about it http://en.wikipedia.org/wiki/Corporation or at least the portion on ownership and control.

C) Intel pays its taxes and I pay mine. There is no double taxation in it other than in the sense that money used for commerce is taxed repeatedly in the transactions it is used for with some transactions having relatively preferential tax rates - high end capital gains compared to high income being one of them - which is why the wealthy preferentially take their earnings as capital gains instead of income in general whenever made possible thanks to our tax code.
 

Lukey

Senator
A) Dividends are not "the rule" any more than government bonds. It is true that the vast majority of capital gains are generated by owning tax paying assets such as real estate but you, with real estate being an exception, aren't generally the one directly paying taxes on them, and with regard to real estate you wouldn't claim that the real estate is the same as the person who owns them.

B) Corporations are not the same person as their shareholders. I have invested in Intel. I own stock in Intel. I am not Intel and Intel is not me. Read about it http://en.wikipedia.org/wiki/Corporation or at least the portion on ownership and control.

C) Intel pays its taxes and I pay mine. There is no double taxation in it other than in the sense that money used for commerce is taxed repeatedly in the transactions it is used for with some transactions having relatively preferential tax rates - high end capital gains compared to high income being one of them - which is why the wealthy preferentially take their earnings as capital gains instead of income in general whenever made possible thanks to our tax code.
Not exactly. I do own rental property and it does contribute (taxable) income for me so I am, in fact, the rental property (from a tax perspective). So if I form a company with my son and put the rental property into it and the rental company pays taxes on the income and then pays out the rest of the profits to me and I have to pay another tax on that, it's NOT double taxation? It most certainly is. That's why most of these types of enterprises (the smaller ones) are formed as s corps and partnerships (which, by the way, also have limited liability aspects to them) that pass 100% of the profits through to the owner(s) so they can avoid this very same double taxation you deny exists. Just because the ownership numbers increase into the thousands and the corporation is forced to forgo the direct pass through model of operation doesn't make these dynamics of profitability and ownership different from the family car wash.
 

mark14

Council Member
All your rental property expenses are a deductible expense so what you derive beyond that in rental income is taxed as income (having been I landlord too I know that you certainly work for anything you make on it). S incorporation or types of incorporation, apart from limiting liability, aren't generally created to increase your overall taxation but, as you describe to avoid it, and are generally done exactly in order to legally separate you individually or the group you belong to from the corporation in order to gain exactly those advantages so double trouble boil and bubble is a spurious defense for paying lower rates than income tax payers do.
 

Lukey

Senator
All your rental property expenses are a deductible expense so what you derive beyond that in rental income is taxed as income (having been I landlord too I know that you certainly work for anything you make on it). S incorporation or types of incorporation, apart from limiting liability, aren't generally created to increase your overall taxation but, as you describe to avoid it, and are generally done exactly in order to legally separate you individually or the group you belong to from the corporation in order to gain exactly those advantages so double trouble boil and bubble is a spurious defense for paying lower rates than income tax payers do.
No one using a corporate (or partnership) structure to make money pays "lower" rates than income tax payers (on average). In the case of s corps and partnerships they pay the same. In the case of a c corp, they (again, on average) pay more (due to the double taxation where corporations pay, again, on average, 27% and then the owners pay an additional 15% on the exact same earnings). Yes, some corporations pay less in taxes and in fact some pay none so I can't rule out a situation where someone might pay less. But I'd be more than happy to trade a lower, flat corporate income tax of 15% for the treatment of dividends and capital gains as ordinary income. That is still double taxation and it is still more (by 15%) than non-c corp owners pay, but I have no problem with providing this incentive to keep businesses small enough that they can eschew the c corp structure. Of course we will also have to lighten up the regulatory load so the economics of breaking up the mega corps works (win win)!
 

mark14

Council Member
I'm not a tax lawyer so I'll have to take some of what you have written at your word. I do remember a very clever at tax avoidance fellow recommending some ways I could do the same including forming an s corp and if I recall leaving some of what I earn i the corporation in order to pay myself a lower "salary" in order to lower my rate. So I looked at it and although legal it wasn't worth the hassel and it would have bothered my conscience. A lot of tax avoidance is simply tax delay unless you have significant means to shelter. I don't know if less hassel and bigger savings would have persuaded my conscience otherwise or not but I feel as though I'm doing well enough though like you I want a more efficient if, perhaps with regard to those who need and will benefit from it, more generous, government which I would pay more for and which I think would be a sound investment on which the returns should and will be eventually taxed, double or not, to pay for the investment .
 

mark14

Council Member
I guess one has to be smarter than a slug to understand this concept.
Example:

A CEO earns a million dollars from payroll.
He pays 35% in taxes; so for simplicity lst's say he pays $350,000.
That leaves him $650,000
He invests his 650,000 and turns it into another million dollars.
He clears $350,000 and pays 15% in cap gains taxes, or $52,500.
He has already paid taxes on the $350,000 (15%)
If he invests the $52,500 and doubles it to $105,000
He pays another 15% on the $52,500 profit he has already paid 15% on the original investment money.

He is technically double taxed, but only at the 15% rate and only one time on payrol earnings at 35%.
I don't get what you are implying. I have to be smarter than you to understand what you are writing? Of course I'm not as smart as a slug but wouldn't a slug wonder how you "earn a million dollars from payroll" when payroll is an expense and it isn't the CEO that earns money but the corporation? Oh you must mean you are talking about an individual who who gets paid $1,000,000 and pays around 35%. He still isn't a corporation you know? But then he reinvests and makes $350,000 more which he pays 15% on, not 35% any more, but he doesn't pay any more taxes on the $650,000 dollars he invested so that is double taxation? He reinvests and again pays only on his gain, not what he invested and can even deduct his loses. But it's still double, no, now triple taxation dag nabit!

Hey explain this one. A tax paying corporation pays a worker but the worker has to pay taxes on his income so that should sound like a double taxation to someone with a brain tinier than a slugs if you ask me.
 

JackDallas

Senator
Supporting Member
I don't get what you are implying. I have to be smarter than you to understand what you are writing? Of course I'm not as smart as a slug but wouldn't a slug wonder how you "earn a million dollars from payroll" when payroll is an expense and it isn't the CEO that earns money but the corporation? Oh you must mean you are talking about an individual who who gets paid $1,000,000 and pays around 35%. He still isn't a corporation you know? But then he reinvests and makes $350,000 more which he pays 15% on, not 35% any more, but he doesn't pay any more taxes on the $650,000 dollars he invested so that is double taxation? He reinvests and again pays only on his gain, not what he invested and can even deduct his loses. But it's still double, no, now triple taxation dag nabit!

Hey explain this one. A tax paying corporation pays a worker but the worker has to pay taxes on his income so that should sound like a double taxation to someone with a brain tinier than a slugs if you ask me.
Then you must have one (brain smaller than a slug's). A corporation does not pay taxes on the money it pays employees, or on the matching funds for FICA, or unemployment.
 

mark14

Council Member
OK,

I''ll play. So, I agree a corporation doesn't pay taxes on payroll but it sure doesn't make money on it . It's an expense that comes our of corporate profits. But your post said the CEO made money on payroll. What was that about genius?
 

JackDallas

Senator
Supporting Member
Well of course it's an expense. I didn't say the company makes money on it. And labor does not reduce profits; it produces profits.

When I said the CEO made money on payroll. I meant HE DREW A PAYCHECK. Damn man, are you really that ........yeah, I guess you really are.
 

mark14

Council Member
So if you were telling me that corporate dividends are doubly taxed then what did your example have to do with that? Don't tell me I don't know Jack.
 

JackDallas

Senator
Supporting Member
You may need to get a third grader to help you read my posts before you shoot off your mouth and make yourself look like....how shoul I put this...oh, yeah...of diminished capacity.

I said nothing about dividends. I was talking about a man investing money which he had earned from drawing a paycheck, and how he is taxed if he makes money from that investment.
If I remember correctly from back when I was buying mutual funds. I think dividends are taxed at your regular tax rate. I'm not 100% sure about that but I think that is how it works.

Read my post again, or stop asking stupid questions.
 

mark14

Council Member
You may need to get a third grader to help you read my posts before you shoot off your mouth and make yourself look like....how shoul I put this...oh, yeah...of diminished capacity.

I said nothing about dividends. I was talking about a man investing money which he had earned from drawing a paycheck, and how he is taxed if he makes money from that investment.
If I remember correctly from back when I was buying mutual funds. I think dividends are taxed at your regular tax rate. I'm not 100% sure about that but I think that is how it works.

Read my post again, or stop asking stupid questions.
It's still not double taxed Jack. Only the the profits of investment are taxed. Not the part that was already taxed and reinvested.

Jack Dallas, always right.......


wing.
 

connieb

Senator
It is not a lie. What has happened though is the majority of investors/stockholders are so far removed from the corporations they are invested in that it has lost its meaning. And, to understand it you have to have a basic understanding of business and taxation.

A small business which is a corporation is taxed and treated the same as a big corporation ( assuming they don't make an S election - whole other topic) So, Tom the Bricklayer has a business. He incorporates for liability protection. It is Tom, and two helpers. After Tom takes a salary, and the three helpers get paid, all the other bills are paid the company has $50 in net income. The company pays income tax on that money. But, Tom wants to take some of that money out - so then he does as a dividend which is then taxed again as his personal income.

The reason it is referred to as double taxation is if Tom was not incorporated and was a sole proprietor, he would pay income tax personally on all $50 of that money. If he left it in his business - or took it out for personal use, he would only pay the income tax on the $50. He wouldn't pay income tax on the $50 PLUS paying income tax on the dividends.

So, then what happened.... Congress and the IRS realized that there were a LOT of sole proprietors running around. They didn't want to pay tax on money they earned with their own hands, twice - so they weren't incorporating. That was a problem for the IRS because it is much easier as a sole proprietor to hide money and under report income. At the same time, people were not starting new businesses - which small business is the base for our economy, because they didn't want to deal with double taxation. So, to spur economic growth and to encourage people to incorporate and essentially put some structure in their business - which is easier for auditing, they created what is refered to as an S corporation. In an S corporation, the owners of a business file a tax return for the business - but their share of their earnings are reported on their personal income tax returns. So, the corporation does not pay a tax on the money, the shareholders pay the taxes directly so the net income is only taxed once.

But, now we have people who are receiving dividends from businesses they did not grow or work in with on their own. Essentially, it is not that they are being taxed on their own hard work - as was the motivation to create the S. They are just getting the benefit of what the corporation makes. And, so now, when we look a the double taxation affect, it doesn't mean anything - outside of the small business arena - because, I agree, Mitt's money is not double taxed in the same sense it would be if it was essentially his hard work and earnings that created the net income which was taxed, then when he takes his earnings - they are taxed again.

The problem is the tax code is not just for the Duponts of the world. The same tax code, the same rules apply to the mom and pop store on the corner. So, when we have these discussions we have got to look at the WHOLE picture. How do we make sure the Mitts of the world aren't benefiting from a benefit in the tax code, which may have been designed more to benefit and encourage the hands on business owner, than the investor of today - without hurting those people who aren't rich, who are using businesses they run directly to make a living. So, its never as simple as - well this double taxation thing is just a bunch of hoooey. It really isn't to many people that I work with every day.

( And before someone pipes up with something brilliant about how they should just take all their money in the corporation down to 0 and have no net income and how if you don't know how to do that - you must not be a very good accountant - please consider that you have to leave money in your business to grow. So you have to have some earnings that are left, and subsequently taxed so that you can build equity in your business which affect the types of jobs you can get, your borrowing capacity, etc)
 
It goes that the money invested has already been taxed but it is only the profit from the investment, not the money invested, that is taxed.
You must be a liberal as you have just proven your economic ignorance.

Dividends are payed on Corporate profits that already have been taxed at the 36% corporate tax rate. In other words, if there were no corporate tax, the dividend would be 36% HIGHER.

When you receive a dividend it is net profit, not gross; the government has already taken 36% of it. So when you pay your 15% cap gains tax, you are paying an ADDITIONAL tax, with the government receiving a total of 51%.

ALSO; you can only deduct a maximum of 3% on losses.

So if I have one investment that I make a $100,000 gain on and another where I have a $200,000 loss, even though I actually lost $100,000 I still have to pay15% of $97,000

Raising the investment tax to 30% will cause massive amounts of capital to leave this country, throw us into a immediate, severe recession, possibly a depression, which we may NEVER recover from.
 

mark14

Council Member
Connie,

your explanation is very informative. We do have a complex tax system that I'm sure could use some changes though not necessarily to benefit Mitt Romney and Bain Capital..
 

mark14

Council Member
Sarge, there is no tax on your investment. Just the profit. Unless you are both the corporation and the investor, that the corporation which pays the dividend may already been taxed is irrelevant. If you are both then you can structure your profits in the way that provides the best tax benefits, like to compensate CEOs, then that is done.

As an investor you pay taxes on your net annual capital gains and losses can be used to balance gains. Additionally

"If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss as shown on line 16 of the Form 1040 Schedule D, Capital Gains and Losses. If your net capital loss is more than this limit, you can carry the loss forward to later years. Use the Capital Loss Carryover Worksheet in Publication 550, to figure the amount carried forward.

http://www.irs.gov/taxtopics/tc409.html

I think we should raise capital gains back up to 20% to make them more or less equivalent to actual income tax rates. Corporate taxes could also be 20% if loopholes were eliminated. .

PS 36% is the top corporate tax rate. Exxon and GE pay dividends but no federal taxes at all.
 

connieb

Senator
I agree with you. But, what i honestly see happen is that legislators and politicians call for things to have some major change - and they do not think through the consequences of that legislation on everyone or every aspect of the market that that legislation will touch.

I would actually love to see the tax code that exists be enforced more uniformly. That would be a BIG start to making sure the rich actually pay what they owe.

connie
 

mark14

Council Member
It's worse than ignorance. Lobbyist do think through the consequences and work to influence the legislation accordingly.
 

connieb

Senator
I agree with the lobbyist issue. But, I don' think that the Reps who listen to the lobbyist bother to think things through. Or they lack the ability to actually think it through. Either way, those who actually vote - don't care or understand the consequences.
 

mark14

Council Member
Agreed which is why I think we need intelligent well motivated people in Congress who want to represent their constituents instead of ideologues enamored by power and willing to do whatever will most easily net them the biggest campaign contributions from a small select number of contributors. The right loves to attack Soros but he doesn't lobby for his own interest but rather in support of civil society general.
 
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