Posted on 12/12/2017 3:43:12 AM PST by Oshkalaboomboom
Republicans are supposed to be the party that cuts the job-killing capital gains tax, not raises it. But because of a quirk in the Senate-passed tax bill, the tax on capital gains may go up -- and for some types of long-held assets, fairly substantially.
Most members of Congress don't even know of this stealth capital gains hike. Here's the story: At the start of the year, Republicans promised to reverse the near-60 percent rise in the capital gains tax under former President Barack Obama -- a hike that helped bring investment rates to historic lows. The GOP plan was to eliminate the Obamacare 3.8 percent investment-tax surcharge on capital gains and dividends?. That repeal never happened. But now, the Senate tax-reform bill proposes to raise several billion over the next decade by changing the rules on how stocks are taxed.
It would require shareholders to sell their oldest shares in a company before their newest purchased ones. The older the share, the larger the taxable capital gain. This is called the first-in, first-out accounting system.
Consider this example: Let's say you bought 100 shares of Apple stock in 1998 at $100 a share?, and then you bought another 100 shares in 2008 at $300 each. If you were to sell 100 shares at $500 a share, you would have to "sell" the oldest stock and pay a $400 per share capital gains tax, versus $200 a share under the current law.
Now, this accounting change may actually make sense, except that the gains on long-term stocks are not adjusted for inflation. So on many sales of long-held stock, as much as half of the reported and taxable "gain" is due to the compounding effect of inflation. The actual capital gains tax paid could more than double for many stock and asset sales.
Therefore, the Senate rules would require millions of Americans to pay taxes on phantom or illusory gains. That is patently unfair and would discourage the very long-term investment that economists and politicians agree that we need.
If you were to give us $1,000 today, we would be glad to give you $1,500 25 years from now, because inflation is likely to run ahead of that pace. Believe us -- you haven't made a $500 profit on this transaction. But the government thinks you have.
There are other huge inequities in this new policy. Under the Senate bill, there's an exception for mutual funds, exchange-traded funds and other institutional funds. They would continue to apply the tax treatment under current law.
So get this: The little guy who wants to buy and sell stock on his own has to pay the higher capital gains tax, but the big investment funds have a more generous set of rules with lower taxes. Huh?
The mutual-fund industry convinced the Senate that conforming to the new rule would be too complicated. That's good news for Fidelity Investments and Vanguard. But what about Joe Lunchbucket? This new rule is complicated for him, too. This law is going to nearly force small investors to purchase stock through the big fund managers -- and, of course, pay their fees.
Most important, this is bad for the economy. The higher tax penalty on investment would discourage people from buying stock or investing in small startup companies in the first place.
This would also exacerbate the lock-in effect of the capital gains tax. History shows that when the tax on gains is higher, Americans are much more reluctant to sell their shares and pay the higher tax. This benefits old, established companies like Boeing and Microsoft but dries up capital for smaller, fast-growing firms that could be the next-generation Apple, Google or Uber.
In other words, this stealth capital gains tax contradicts the entire purpose of an otherwise prosperity-generating tax bill. We want lower business tax rates and investment tax rates to get more growth, more jobs and higher wages. A backdoor capital gains tax would accomplish the opposite.
Well of course it was, just like the increases to middle class taxpayers with grown kids. I got a tax increase for Christmas. I paid every dime of my college to make a better life for everyone around me. It pays more to be a poor family, than a middle class worker. And I guess it doesn’t make your feet or hips hurt either. We got soaked again.
Quirk......right.
Yep—trying to force individual investors into the big-bank solutions.
But so bogus anyway: there is no reason in a free country that people shouldn’t be allowed to choose which assets they are selling.
The GOP tax policies soaking the relatively poor ... again.
Yea! More winning!
>>Now, this accounting change may actually make sense, except that the gains on long-term stocks are not adjusted for inflation. So on many sales of long-held stock, as much as half of the reported and taxable “gain” is due to the compounding effect of inflation. The actual capital gains tax paid could more than double for many stock and asset sales.
When you sell your house do you get to “adjust for inflation” when you sell it decades later?
In the case of the proposed capital gains tax change, I don't know how big a deal this would be. How many small-time investors would be in a position where the scenario Kudlow describes -- selling two different blocks of Apple stock that were purchased ten years apart -- would even matter? Both the 2008 and 1998 blocks will ultimately have a capital gains tax paid on them, right?
Now, this accounting change may actually make sense, except that the gains on long-term stocks are not adjusted for inflation. So on many sales of long-held stock, as much as half of the reported and taxable "gain" is due to the compounding effect of inflation. The actual capital gains tax paid could more than double for many stock and asset sales.
I'm a little confused about this point.
1. The gains on assets held for ANY period of time aren't adjusted for inflation, either.
2. Yes -- the growth in an asset's value is driven partially by inflation. But so are all the financial transactions (dividends, for example) in the intervening years that actually drive the asset's value.
Instead of complaining about it, why don’t you just sit down and figure out how to minimize your tax exposure. The Federal tax code might be complicated, but in all my years there has never been a time when there weren’t plenty of tax shelters available, or other ways a reasonably intelligent taxpayer could reduce his or her tax liabilities through perfectly legitimate means.
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You do...in the form of a $250K/$500K cap gains exemption.
I think the point is that everyone likes to complain about paying taxes on capital gains that aren’t adjusted for inflation, but nobody complains when they get enormous inflation-driven growth in assets that are sold with no capital gains taxes at all.
?? It’s late for me....those “cap-gains free” assets would be?
Homes are not free of cap-gains...just subject to a $250K/$500K exemption (easily exceeded in high cost real estate areas).
Understood. In any case, the point is that you never hear anyone complain about inflation when they sell a home for $600,000 in 2017 after they paid $75,000 for it 35 years ago.
That’s true...but they still need a place to live, and that will be at 2017/18 prices! ;-)
It’s very common. Since many small investors will be paying taxes on a pass-through basis, they can defer gains or not depending on their current tax liabilities. Of course, with Goldman Sachs running economic policy for “both” parties, it’s probably best just to take the pain today.
“Now, this accounting change may actually make sense, except that the gains on long-term stocks are not adjusted for inflation. So on many sales of long-held stock, as much as half of the reported and taxable “gain” is due to the compounding effect of inflation.”
This only makes sense (it doesn’t) if your position is that the rise in the market-stated new value of the stock is actually NOT due to what it has risen to in trading alone, but in part due to “inflation”.
Yes, a dollar 25 years ago was worth more than a dollar today in a statistical buyer-power comparison. But that - statistic - as an economy wide number, and some items that went into it rose (in price) more than the statistical average, and some rose less or not at all. How much are today’s stock prices “inflated”. The national average inflation rate can’t tell you, no one can.
FIFO is O.K. Many companies already use it.
The tax tables, exemptions and standard deduction have been adjusted for inflation for many, many years. So even if you have a situation where a good part of your capital gains are based on inflation, and the government is taxing an illusory profit, the overall tax that you pay will also be lower than if the tables had not been adjusted. It kind of balance is off, with each situation being unique.
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Instead of complaining about it, why don’t you just sit down and figure out how to minimize your tax exposure. The Federal tax code might be complicated, but in all my years there has never been a time when there weren’t plenty of tax shelters available, or other ways a reasonably intelligent taxpayer could reduce his or her tax liabilities through perfectly legitimate means
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Maybe, just MAYBE, as we are a ‘supposedly’ FREE country, people shouldn’t be needing to jump through govt hoops to 1) keep what is theirs 2) nor economically enslaved (illegally, I might add - 5th/13th) to anther; even if that ‘another’ is govt.
Let’s SOLVE the problem(s), not rearrange deck chairs.
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