by | ARTICLES, BLOG, CONSTITUTION, ECONOMY, GOVERNMENT, TAXES
Capital gains are the profits realized from the sale of an asset and are included as part of taxable income. A handful of states have favorable rates toward capital gains (or don’t tax them at all because they do not have an income tax).
Other states tax capital gains as ordinary income. Among the most offensive states are NY, NJ, and CA. These states have concentrations of high income individuals and businesses who pay tax at high state tax rates. And they give no rate reduction for capital gains.Such tax policy discourages the sale of less productive assets and thereby reduces investment opportunities and economic growth.
Furthermore, taxes on capital gains (just like dividends) are subject to double taxation. This means every dollar of capital gains taxed to an individual has already been taxed at the entity level. No other major country double taxes this income. And for states to not even give a rate break for this double-taxed income is as mean-spirited as it is egregious.
High capital gains taxes are inequitable, destructive, and detrimental to the economy. They should be lower, not higher.
by | BIDEN, BLOG, ECONOMY, POTUS, TAXES
The concept of an American President (Biden) going after people making a lot of money displays an absolute lack of familiarity with how people get wealthy. As a CPA, I can attest to the fact that the most common way people accumulate massive wealth is either by a huge amount of hard work (creating a successful business) or selling an asset (an invention, real estate, etc).
Many people who file tax returns with large amounts of income, such as selling a business for $10 million, will have a multi-million capital gains amount. It’s not that the higher income earners have some sort of capital gains loophole, but it’s really that the wealthy have done something well to attain the American Dream. And when they do strike it rich through their effort, part of their wealth is treated as a capital gain and it gives those earners a chance to keep a large part of it. Knowing that there is a low capital gains rate is an extra incentive to work hard and be successful.
Many of my clients are wealthy, and I have experienced time and again that they will come to me and ask the question: if they are successful, can they keep the majority of their money?” This is because they know that the government wants to take more from the highest income earners who have proven their success, while at the same time, the government is quite happy to let them lose on their own on their particular endeavor.
Most in the top echelon get there from a one-time income-producing significant event. To punish such success by imposing a massively high capital gains tax only serves to drive a deeper wedge between the have- and have-nots in an attempt to level the economic playing field. Biden would do well to maintain the lower the capital gains rate and restore a sense of trust with those who work hard, contribute to the economy, and attain the American Dream.
by | ARTICLES, BIDEN, BLOG, ECONOMY, POTUS, TAXES
When Biden was a candidate, one of his proposals was to raise the capital gains tax (which also applies to dividends) to 39.6%. When I wrote about it at the time, it sounded completely outrageous that any serious candidate for President of the United States would willfully consider implementing such a devastating levy. We had already experienced the negative effects of Obama’s 23.8% tax on capital gains which contributed to the sluggish economic recovery during the Obama administration, and his Vice President now wanted to raise the capital gains rate even higher?
Unfortunately, Biden’s plan has been introduced and may be coming to fruition. This week he indeed announced a new 39.6% capital gains rate (43.4% including the Obamacare add-on), which nearly doubles the current effective rate of 20% (23.8% including the Obamacare add-on).
Yet that’s not the worst of it. Some states with a large concentration of wealthy people and high performing businesses, such as California and New York have recently raised taxes, so taxpayers in those localities will pay much more. The absolute worst area would be NYC; after factoring in local taxes as well as the recent state tax increase, high income earners would face a rate of 57%!
Remember, Economics 1a teaches that when you tax something you get less of it. Taxing investments this way guarantees that investment – economic growth and GDP – will decrease.
Furthermore, this increase is outrageous as a matter of equity and fairness. Taxation of dividends and capital gains is a second tax on the same income – having already been taxed at the corporate level. No other major country double taxes this income. That is the reason dividends and capital gains are taxed at a lower level now – and they should be reduced, not doubled.
Furthermore, raising taxes on capital gains does nothing to raise revenue. Because people have discretion as to whether or when to sell assets, higher capital gains rates invariably lead to lower tax collections! Furthermore, it discourages the sale of less productive assets thereby reducing investment opportunities and economic growth. Even President Obama acknowledged that higher capital gains taxes won’t raise revenue – he was forced to admit that his irrational, hypocritical and wrongheaded rationale was to promote “fairness”!
A massive capital gains tax such as the one proposed by Biden will be inequitable, destructive, and clearly detrimental to our economy and the very people Biden states he is intending to help.
by | ARTICLES, BLOG, CONSTITUTION, ECONOMY, GOVERNMENT, HYPOCRISY, LAW
The most recent stimulus package gives money to one segment of the population by taking money from another segment of the population. Since wealth transfers cannot reasonably be inferred as any of the acts allowable by the federal government under the Constitution, the Stimulus Act is blatantly unconstitutional.
The recent stimulus checks from the federal government are a pure, vote buying giveaway. Neither need nor negative impact from Covid are factors in getting these payments. While some people have experienced financial difficulties over the past year, the majority of workers are doing okay or better than they were pre-COVID. Because the economy is in a strong growth spurt, there is really no need for a general stimulus at this point. (It would be reasonable to help those impacted by covid, but this is only a very small portion of the recipients). Yet these stimulus checks are being provided to all taxpayers who earn under the government-defined income threshold ($150,000 married, $75,000 single).
Now in order to pay for the stimulus, Biden is increasing taxes on the wealthy — which includes taxpayers who were above the arbitrary line and therefore ineligible to receive a check. There couldn’t be a more direct relationship of taking money from one group and giving it to another.
This very act is a constitutional violation as the Constitution does not allow for wealth transfer.
by | BLOG, CONSTITUTION, ECONOMY, FREEDOM, GOVERNMENT, HYPOCRISY, POLITICS, TAXES
On February 2nd Senator Elizabeth Warren announced that she will join the Senate Finance Committee, the committee tasked with writing this country’s tax laws. She stated, “I’m very pleased to join the Finance Committee, where I’ll continue to fight on behalf of working families and press giant corporations, the wealthy, and the well-connected to finally pay their fair share in taxes.”
Warren has often advocated for a wealth tax in the past, especially during her campaign last year for the Democratic presidential nomination. But now she is actually in a position to make proposed legislation happen. In fact, she’s promised that it will be her “first order of business.” This is wrongheaded on many levels, including fairness, constitutionality, impossibility of implementation, history of failure, negative effect on the economy, and morality.
Fairness: Senator Warren has always maintained that corporations and the wealthy are not paying their “fair share”. She has never addressed the question of what that “fair share” might be. That is not surprising, since corporations and the wealthy in the US pay a far higher share of the tax burden than is paid in virtually every other country in the developed world – and by a wide margin. This results not from very high rates, but rather from the fact that our poor and middle class – almost 50% of our population – pay almost no income tax. According to the Tax Foundation’s 2021 data analysis, in 2018 (the most recent figures available),“the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent.” Additionally, “The top 1 percent paid a greater share of individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent).” To add a wealth tax on top of the already extremely progressive tax system would be anything but fair.
The grotesque unfairness of a wealth tax is even more evident when it is actually calculated. This can be seen by the following example: Assume that an investor with $100M net worth in the present low interest environment (and because not all of his wealth is appreciating assets) has an average rate of return of 4%. His income therefore is $4 million. The investor would pay an income tax rate of about 45% total combined federal/state/local taxes which would be $1.8 million in taxes. Now consider a 2% wealth tax tacked on, which would be an additional $2 million. This would mean the investor would pay a total of $3.8 in taxes and he would have an effective tax rate of 95%. What’s even more sobering is that if he earns less than 4%, or if his tax rate was more than 45% (which it will be with Biden’s plans), then the investor’s taxes would be in excess of 100%.
Constitutionality: Our Constitution provides in Article 1, Section 9, Clause 4 that: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”
Both our income tax and a wealth tax would run afoul of this provision. To make the income tax constitutional we had to add the 16th Amendment. But no such amendment exists for the wealth tax. It may be that wealth tax proponents would argue that this tax is somehow taxing income potential using wealth as a proxy. But no Supreme Court, other than an off-the-charts progressive one, would approve of such strained logic. In fact, there’s currently a case before the Ninth Circuit Court of Appeals challenging Trump’s Mandatory Deemed Repatriation Tax on the ground that it is, in fact, an unconstitutional wealth tax.
Implementation: Taxing someone’s wealth requires determining the fair market value (“fmv”) of his or her assets, and then (presumably since no details are currently available) subtracting all liabilities. For anyone of considerable wealth, this would be an extraordinarily expensive, time consuming, and complicated effort. Even for assets that might have a publicly available market for valuation, it isn’t that simple. Consider volume. If someone has a substantial amount of something, you normally would apply a discount, since selling large volumes of assets can upset the market and reduce the overall value of an item.
But not everything has a value that can be determined easily. Investment in a closely held business, or real estate, or even paintings are examples of assets that are not susceptible to easy valuation on an annual basis, making it not very economically feasible to try to do so. Additionally, valuation can be determined in any number of ways — such as appraisals, discount rates, and reductions in the lack of marketability– so that valuations may be varied.
Another factor that makes valuations difficult are contingencies. For example, many assets have contingencies backed up with guarantees, and it’s difficult to value those contingencies. Finally, there is a question of liquidity/ability to liquidate or pay. Most people who have extraordinary assets like that often don’t have sufficient income or liquid assets to pay a wealth tax on them. Since many assets are not easily marketable, there could be a liquidity crunch.
Of course, a wealth tax would add even more burdensome complexity to the already byzantine tax code. The IRS would have to substantially increase its number of agents and its budget just to have the manpower to devote to compliance and enforcement. Given the IRS’s history of being discriminatory and incompetent, this is not a good thing.
Failure: It should also be noted that the wealth tax has already been tried — and failed — repeatedly. At one point, 15 European countries had a wealth tax. To date, all but four nations have since repealed it because it was ineffective in accomplishing its goals and was extraordinarily complicated and expensive to administer. Additionally, the wealth tax induced capital flight and asset hiding. For instance, in 2017 France decided to abandon its wealth tax after it caused the loss of “10,000 people with about 35 billion euros ($41 billion) in capital abroad” over a 15 year period according to the Prime Minister. Likewise, Switzerland — one of the four remaining wealth tax countries — experienced substantial tax evasion, noting that a mere “.1% wealth tax lowers reported wealth by 3.4%” according to a study by the National Bureau of Economic Research. As Switzerland has a wealth tax rate of 1%, that amounts to 34.5% in unreported assets.
Effect on the Economy: The growth of our economy is dependent on putting capital to productive use. Every time a corporation reinvests its retained earnings, or an individual puts his wealth to work by investing in an ongoing or new venture, the economy grows. This growth results in new purchases of equipment, facilities, hiring of employees, research and development, etc. Conversely, when capital is removed from the economy, such as by requiring the payment of a wealth tax, the economy shrinks. In fact, the wealth tax is a form of double taxation. Wealthy Americans already pay taxes on their income; under a wealth tax, they would then be taxed again for keeping that income in various assets. This not only punishes success, but discourages investment and savings.
Though progressives may argue that the capital taken out of circulation will be used to redistribute income to those who will spur the economy by consuming those funds, we revert back to Economics 101 – consumption has a much smaller effect on the economy than investment.
Morality: There is no moral justification to take something from someone just because they have it, even if they have a lot of it. One is reminded of the great scholar Thomas Sowell, who understands this quite well: “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” The wealthy in this country are an extraordinarily charitable group. But it should be their choice as to how charitable they wish to be with their hard-earned assets.
Senator Warren has argued that a real benefit of this tax is that it will only affect a relatively small number of people. This reveals what this tax really is – an attempt to foment class warfare by giving a large number of people (read: voters) a benefit through confiscating substantial amounts of money from a small group.
A wealth tax will certainly not bring in the revenue expected by the progressives – who relish the thought of punishing wealthy Americans in order to throw more money at their failed policies. Wealth redistribution is inherently the antithesis of the American Dream. Bastiat was right. No matter how you spin it, explain it, try to justify it, a wealth tax is simply “legal plunder.” Perhaps Senator Warren is being disingenuous (since the wealth tax would never be passed) but she will nevertheless score political capital among her constituents who do not know any better. She is taking advantage of the lack of economic knowledge among people who don’t understand the complexity and stupidity of a wealth tax.
by | BLOG, BUSINESS, ECONOMY
Gamestop stock may be fundamentally worth $10, or maybe even $20 if there is some hidden value in intangibles or some future prospects. But not $400. The only question is whether those buying at $400 truly had reason to believe that it was worth that amount (which is probably unlikely). Or were they just buying in the hope that the price would go up more irrationally, allowing them to make a profit before the stock tanked?
Those that were just blindly following the crowd simply deserve what will happen to them. If they are being induced to go along with a wrongheaded purchase by some forces merely trying to manipulate the market and/or squeeze out the short sale, there may be (I’m not an attorney) illegality going on.
Anyone with any trading acumen should have been able to see through the hype that billionaire venture capitalist Chamath Palihapitiya was peddling. He surely knows that when hedge funds do momentum trading and shorting, and when other hedge funds follow those funds, they are keenly aware of the prices of their trades related to the fundamentals of the underlying security. I can only think that his intimating that anybody could have been doing research that could validate such a price level is less than honest.
The outrage expressed by some that the broker of choice in this mania, Robinhood, was acting to support the short-selling hedge funds also has no basis. That Robinhood restricted trading in Gamestop is purely to be expected in a situation when the volume of transactions shoots the moon. The fact that they needed an immediate capital infusion of over $3 billion proves this.
At last look, the stock is selling in the $52 area. Many of the people induced to buy the stock at much higher levels have suffered severe losses, and my guess is that some pretty sophisticated investors are shorting the stock at present levels.
The lessons to be learned from this:
1) understand the real underlying value of a company before you follow the mania and buy, and
2) before you become a big short seller, remember that old adage – “the market can remain irrational for longer than you can remain solvent”
by | BLOG, COVID, ECONOMY, GOVERNMENT
Proposed legislation in Congress has at its core the addition of $1400 per person (on top of the $600 already passed in other legislation) creating a $2,000 per person payment. Its purpose is stated to be to “stimulate the economy” even though what we actually need to focus on is getting more people back to work.
The prospect of giving out an additional $1400 payment is absolute insanity. We don’t need it, as we have the highest rate of savings right now that we’ve had in a long time. The vast majority of “stimulus” funds go to working people who are in as good or maybe even better financial shape than before COVID, so the money is going into savings or to reduce debt. This is NOT stimulus. (Note that having to repay the money borrowed to make the stimulus payments 1) slows the economy by having to service this debt, and 2) adds extraordinary burdens to our children and grandchildren who must pay it back.)
However, the most egregious element of this stimulus fiasco are amounts going to non-working – but being paid – public service employees.
In the private sector, employees who could not or would not do their jobs would have been furloughed or fired, as a private business would do out of necessity. But the public sector can just abuse taxpayers by keeping them on – and even giving them raises! So many of them are home because there has been no productive work to do. In a horrific economy like ours, businesses simply can’t afford to carry people who are not performing work. Just like a hurricane hitting a factory, we have to furlough even public service employees because there is nothing to do.
But public service employees, in an absolutely unethical and immoral way, have, with help of unions, have put themselves in an undeserved place in society: they neither have to work, nor get furloughed. On top of it, we give them “stimulus” funds even after being already unjustly rewarded? To the detriment and abuse of everyone else who is paying them to do nothing? It’s an affront to all taxpayers.
by | BLOG, BUSINESS, ECONOMY, POLITICS
Stakeholder capitalism is all the rage these days, with Elizabeth Warren and Bernie Sanders at the forefront of the movement. Their participation is just another example of their economic ignorance.
The concept of stakeholder capitalism is itself a contradiction in terms; it would be more correct to call it “stakeholderism.” Just like crony capitalism (it is really just “cronyism”) isn’t real, as the terms are opposites of one another, the same with stakeholder capitalism. You cannot have both. It’s like saying libertarian statists. You can put the words together but they lose their meaning.
Stakeholder capitalism is a concept that suggests corporations should balance the needs of all the “stakeholders” who comprise the business, from shareholders to executives to employees to customers to suppliers and even to more nebulous stakeholders such as the environment or community. This is in contrast to traditional capitalism, which earns profit for the company owners and investors, the ones who put forth the risk capital to get and keep the company going. It earns this profit by providing products and/or services that their customers voluntarily pay for.
Stakeholder capitalism sounds good and looks altruistic but in fact are composed of different competing interests and goals. These various factors ultimately take away from the most singular purpose of a business: create a product or service for which another person or company sees value in that product or service and exchanges money (or goods or services) for it. If the finished product is good and has value, it will be consumed by another person or business for amounts in excess of the cost of resources to create the goods (profit). If the finished product is not good, then the cost of resources exceeds the perceived value and there will be a loss. It is only by focusing on this single-minded purpose that one can tell if the product/service has merit and should be continued. A company must be able to return a profit to its investors to induce them to invest more money for the company to increase its production of other valuable products and services.
Stakeholder capitalism seeks to undermine the traditional measure of profit and loss by insisting that various interests all mutually derive benefit. But this is not why a company exists nor should it. It misallocates resources and value and creates competing outside interests (that will not agree on how important each one is), all in the name of being socially beneficial. No company can sustain itself with that end result in mind, which ultimately hurts the very society stakeholder that capitalism would otherwise help.
by | BLOG, BUSINESS, CONSTITUTION, COVID, ECONOMY, GOVERNMENT, POLITICS
It is undeniable that people are hurting from COVID. It is also untenable that one of the continued solutions is an ongoing moratorium on evictions. Such a policy would seem to be blatantly unconstitutional.
A national moratorium on evictions picks winners and losers by government fiat by preferring one population (renters) over another population (landlords). The moratorium continues to allow people to live in their spaces without paying what they are contractually obligated to pay, putting the landlord at a loss. Would the same people championing this policy support the government letting people take food from a grocery store without paying for the food? How about taking clothing from a store without paying for it? It is the same thing. Those who argue that there is a moral right to housing would be hard pressed not to agree that this is also a moral right to food and clothing as well. Put it another way, the moratorium allows renters to consume their rental space for free that they would otherwise be purchasing through the payment of rent. What gives the government the right, therefore, to tell people they are allowed to consume their product — be it food, clothes, or rental property — without just compensation?
Originally, the moratorium was declared as a hedge against a perceived health hazard, namely that if people are evicted, they could contribute to the spread of COVID, and from this line of thinking was the flimsiest constitutional justification for the policy. If therefore, the government wants to assume the responsibility for avoiding an even bigger health emergency, it is only just that the government should cover the cost of the loss or rent to the landlord or guarantee that the rent is paid. You can’t have it both ways. The current policy is utterly ludicrous and puts many landlords at financial risk and ruin.
by | BLOG, BUSINESS, ECONOMY
A company will try to use its available funds to best improve its business, such as by expanding its operations, hiring additional workers, opening new factories and offices, research & development including creating new products, paying down debt, or acquiring new companies. But when it decides that it has more money than it could put to good use in its business, it can use the money in various ways. It could pay dividends. But another option is to buy back some of its shares on the open market. But progressives somehow believe that they know better about a company than the company itself and want to dictate what a company can choose to do with its own cash, especially with regard to buybacks.
What seems like a rather mundane topic for the average person is actually very important, particularly because several progressive Democrats such as Chuck Schumer and Bernie Sanders are threatening to prevent buybacks and will soon be in a strong position to influence policy. Unfortunately, because they are so economically ignorant, their policies could have a negative impact on the broader economy.
In a widely-publicized NYTimes Op-Ed last year, Schumer and Sanders penned a missive against buybacks, calling them “corporate self-indulgence.” Their solution is a bill to forbid buybacks unless and until companies first do things such as “paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.” In other words, Schumer and Sanders openly demand these preconditions to be met before a company can even engage in a buyback program. They have decided that they know better about a company’s needs more than the companies themselves. The hubris here is astounding.
A company has a duty to use its money in the most responsible and productive way possible. Getting the most out of available resources creates the best possible outcome for the economy, the company, and its workers. For instance, if the best use of money is to expand and increase R&D in its industry or build more shops or hire more workers, they will do it. But if this option is not worthwhile, that is, will not produce an adequate return on investment – for reasons such as a lack of growth in the industry or excessive government regulation – then the best option may be to buyback shares or pay dividends. In doing so, they are taking cash out of the company to give to the shareholders who will look for better opportunities. Sometimes this option is absolutely necessary in order to make the company stay both relevant and solvent for the sake of the company and its workers.
Freedom is at stake here, both philosophically and economically. Not only should a company have the freedom to do what it wants with its own money, but it won’t have the freedom to grow if the government is interfering, rather than allowing the free market figure out where to go. This is the worst of both worlds. Buybacks are an important tool despite those who wish to restrict buybacks under some progessive bloviations not rooted in economic reality.
