One of the main reasons for the growth in Investment activity over wage

[WCGreen]

growth is the special tax treatment given to Investment income in the way of Capital Gains and Dividends.

It turns out in this country, income earned through work for wages and salary is at a tax disadvantage as compared to the special tax treatment enjoy by those investing.

Your wages are considered less important to the economy by those in Washington.

And guess what, a lot of those massive bonus payments shoveled toward Wall Street denizens is treated as investment income. Not only are the bonuses huge but the tax bill for those bonuses have a rate lower than most mid level employees pay.

[Carl Skan]

1. To clarify...

That is true for income over 33,950 for an individual and 67,900 for a married filing jointly which is approximately the top half of the wage earners. Up to that point, your income is taxed at the same rate or lower than the 15% capital gains rate.

[Selatius]

3. Is that including both local and state tax burdens? Or are you strictly speaking only federal taxes?

Because if you add in local and state taxes, the picture can change radically in many states.

[WCGreen]

5. I just ran a test comparing a married couple with 100k Long Term Capital Gain

vs another couple, both making 50k.

The capital gains tax was 2,587 or 2.5%.

For the couple working paid 13,283 or 13.3%.

Now remember that the couple each earning the 50k, would also pay $7,650 in payroll or social security and medicare.

Now this was a special year, 2008, because those low rates on capital gains were set to help with the stimulus.

Dialing back to 2007, and we have this breakdown.

The Capital Gains couple would pay 6,005 or a rate of 6.0%

While the working couple would be paying 14,092 or 14.1%. Again, the couple would be paying an exra $7,650 in payroll taxes.

In theory, you are correct. In practical do the tax return, here you go.

[Carl Skan]

7. And THAT ladies and gentlemen...

...is a great example of how damn complicated the tax system is. Even in your highly detailed and thorough example, you didn't include the additional payroll taxes their employer would pay as well.

All in all, I'm most certainly in favor in a revamp of the capital gains tax. People like to focus on increasing the marginal rates when the people that truly have the wealth that they can spare aren't paying marginal rates at all.

[WCGreen]

8. I was just talking about what the taxpayer would pay...

Of course the employer would love to compensate "workers" with stock so that they wouldn't have to pay the payroll tax.

[Carl Skan]

9. I consider my portion (as employer) of the payroll tax

to be a hidden tax on the employee. It's most certainly something that comes into play when determining how much I pay them.

[WCGreen]

10. You as a business owner and myself as a tax preparer, know that

this is a hidden tax on employers.

I was making a point with those who earn a paycheck vs. those who depend on investments for their income.

I was basically trying to keep it as simple as possible.

Good points, though. Don't forget unemployment and workers compensation.

I believe that if the Obama plan included payment for injuries on the job, that the small businesses that pay into the WC system would embrass the Obama plan full force.

[CaliforniaPeggy]

2. That is just wrong...

Especially the bonus payments.

Wall Street is profiting at the expense of the rest of the country.


K&R

[Selatius]

4. This, ostensibly in a country that elected this man who held this view:

"Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits."

-- Abraham Lincoln, First State of the Union Address (3 December 1861)

[WCGreen]

6. Commie...

[unblock]

11. massive wall street "bonus" income is treated as ordinary income

there are other forms of incentive pay in many industries (including wall street) most notably incentive stock options, which are treated as capital gains if converted to stock and held for more than one year before selling. but the ginormous payouts that are called "bonuses" on wall street are taxed as ordinary income.

[WCGreen]

12. What I said was this...

And guess what, a lot of those massive bonus payments shoveled toward Wall Street denizens is treated as investment income. Not only are the bonuses huge but the tax bill for those bonuses have a rate lower than most mid level employees pay.

[unblock]

13. bonuses are not treated as investment income. they are treated as ordinary income.

c-level executives of most public companies in america get incentive stock options and THEIR massive compensation is mostly treated as investment income.

the massive payouts you hear about from wall street traders is a single cash payment, typically paid in january, and is treated as ordinary income. that trader probably had a few incentive stock options as well, but that's dwarfed by the cash bonus.

[Honeycombe8]

14. Except that dividends are taxed as regular income. nt

[WCGreen]

16. Not until 2010 when the Bush Tax cuts expire...

Most dividends are paid out of the earnings and profits of a corporation and count as regular income; they are known as 'ordinary' (ie taxable) dividends. Ordinary dividends are shown in box 1a of Form 1099-DIV.

Under tax-cutting legislation passed in 2003, and extended by The Tax Increase Prevention and Reconciliation Act of 2005 until 2009, most 'ordinary' dividends are known as 'qualifying' dividends and are taxed special low rates of 5% or 15%*. Qualified dividends are shown in box 1b of Form 1099-DIV.

(*In tax years beginning after 2007, the 5% maximum tax rate on qualified dividends and net capital gain was reduced to 0)%. Thus, qualified dividends and net capital gain are not taxed if the regular tax rate that would apply to them is lower than 25%.)

http://www.usa-investment-tax.com/taxation_dividends.asp

Just so you know...

[Honeycombe8]

17. Wow. That's clear as mud. I think my dividends were taxed at regular rates.

Of course, I haven't had enough dividend income to make much difference, one way or the other, anyway. :eyes:

[WCGreen]

18. Personally, I don't think dividends should be taxed.

The profits of the company are already taxed. This would go a long way to keeping hold of stock instead of churning the shares over and over again to the benifit of Wall Street Brokers.

[unblock]

19. i don't see what taxing the corporations profits has to do with taxing dividends.

generally speaking, as money moves from one legal entity to another, each point is a separate, potentially taxable event.
i pay taxes on my income, and with my already taxed money i pay sales tax to a merchant when i buy his goods.
with my income taxed and sales taxed sales proceeds, the merchant pays off his supplier. both the merchant and the supplier pay income tax on any profit. and so on.


as a shareholder, you can realize the benefit of corporate profits by having the corporation dividend the money to you or by letting the company appreciate in value and sell your shares, realizing a capital gain.

it is ABSOLUTE INSANITY for the government to provide a tax incentive for corporations to dividend out money instead of holding on to it. WHY ONE EARTH would the government want to promote liquidating out corporations and provide a tax incentive to do so?

especially once you take into account the now widely identified problem of executives making bets that might realize big cash this year while exposing the for to disaster down the road. so the basic structure would be to bet big, win big, dividend out tax-free, and laugh at the creditors when the corporation files bankruptcy when disaster hits the company. oh sure, there are laws against this if it's done overtly and the dividend is within 90 days of the filing and all that, but if there's a big tax incentive, companies will find a way to make it happen.

[WCGreen]

20. But the your wages are deducted from the company and then taxed

when you, the end user, receive the money. So your wages aren't taxed twice.

I can see your point about the accumulation of profit and the distribution of dividends being seen as different transactions. Perhaps if dividends were paid with present income and not accumulated wealth, the distribution could be seen as a tax free distribution. But if it comes out of accumulated monies, money reinvested into the company, than that would result in a return on capital and thus a taxable event.

Your tax scenario is interesting. I am more un tune with the way individuals treat income since my focus, as an accountant, is toward individuals and micro companies. The accumulated cash in an S-corp are not taxed when distributed because it has already been taxed.

[Nipper1959]

15. There is a simple fix for this.

Any money received is, and should be taxed as, income. Period.

[quaker bill]

21. Actually

I think it would be better to tax passive gains at a higher rate than wages earned through labor. Not massively higher, but higher.