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Capital Gains and the Wealthy

The concept of an American President (Obama) going after people making a lot of money and paying a relatively low tax rate on it was particularly naïve; it displayed 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 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 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 having a high capital gains tax only served to drive a deeper wedge between the have- and have-nots in an attempt to level the economic playing field. Trump would do well to lower the capital gains rate and and restore a sense of trust with those who work hard, contribute to the economy, and attain the American Dream.

 

Obama’s Budget: $4.1 Trillion

President Obama’s final budget was submitted today, a $4.1 trillion millstone for American taxpayers. The budget was chock full of tax hikes in order to fund Obama’s pet projects, and “proposed investments in infrastructure, cyber security, education, and job growth.” The FY2017 budget has an $503 billion deficit, which would follow the heels of the projected budget deficit for the current FY2016, $616 billion.

Highlights from the bill include:

— $11 billion for the Departments of Defense and State to fight Islamic State militants and stabilize Syria
— $19 billion for cyber security investments across the U.S. government
— a $10.25 per barrel tax on imported and domestically produced oil to fund transportation infrastructure such as mass transit and high speed rail
— eliminating including the “carried interest” loophole allowing investment fund managers to treat income as capital gains
— impose the “Buffett Rule” to ensure that millionaires pay a tax rate of no less than 30 percent of their income after charitable contributions
— a new fee on the liabilities of the largest banks that would raise $111 billion over 10 years and discourage excessive leverage in the financial system.
— $152 billion for research and development

On the cost savings side, Obama’s budget seeks to reduce deficits by $2.9 trillion over the next decade. “The budget forecasts that deficits would average 2.5 percent of U.S. economic output over 10 years compared to about 4.0 percent in the Congressional Budget Office’s estimate, which is based on existing tax and spending laws.”

From the looks of this budget, President Obama clearly foresees or at least champions a Bernie Sanders presidency. Big tax increases on the wealthy are predictable, but the proposed bank “fee” is a new concept. It’s the last gasp of a failed presidency mired by economic illiteracy.

Class Warfare Continues With Clinton

After nearly 8 years of listening to Obama talk incessantly about the need for the wealthy to “pay their fair share,” Hillary Clinton has picked up the mantle in her new tax proposal unveiled this week.

Clinton spoke about the need for “an additional 4 percent tax on people making more than $5 million per year, calling the tax a “fair share surcharge.” It is reminiscent of the failed “Buffet Rule” proposal put forth by Obama a few years back.

According to a Clinton staffer, “This surcharge is a direct way to ensure that effective rates rise for taxpayers who are avoiding paying their fair share, and that the richest Americans pay an effective rate higher than middle-class families.”

The tax proposal is calculated to bring in $150 billion on revenue over a ten-year span. Nowhere does it calculate the cost of implementing such a plan, additional paperwork, hours spent on compliance and enforcement, and so forth. As a revenue raiser, it amounts to $15 billion a year for the federal government, pocket change really — something that could be more easily attained by cutting the size and scope of many federal budgets.

It’s not really about revenue anyway. It’s more about pandering to a segment of voters, vilifying the high income earners and stirring up class warfare. It was the one message that resonated most with Obama supporters in 2012; he continuously and intentionally railed against “millionaires and billionaires”, and talked about “the wealthy paying their fair share” in order to create a divide and separate that particular fiscal population from the rest of “mainstream America”. Hillary is merely following the leftist playbook and recycling stale ideas as her candidacy flounders.

Connecticut Monitors The Wealthy For Their Fair Share of Taxes


The recent article highlighting Connecticut’s “super rich” citizens and their effect on Connecticut’s income tax revenue was unwittingly a great example of how the state of Connecticut is unfairly grubbing more than its fair share of taxes — despite the author’s attempt to disparage the wealthy.

The AP writer, Stephen Singer, attempted to suggest how “the super-rich taxpayers in Connecticut and elsewhere shielded their income through charitable donations or other means to avoid a tax hit following the expiration of federal tax cuts” was somehow responsible for a decrease of income tax revenue in Connecticut.

Singer was incorrect when he declared his “result”: Connecticut income tax revenue plunged by nearly $281 million, more than 14 percent, compared with the same month a year before.

First, the author conflated federal tax revenue with state tax revenue, and therein lies his error. When high income earners make large charitable donations or create more capital gains from ordinary income tax to reduce their taxes, only the federal tax liability goes down. In Connecticut, like New Jersey, there is no deduction for charity, nor is there a reduced rate for capital gains either (the state taxes them as if they are ordinary). These tax policies actually translate into a windfall for state income tax revenue, because the deductions permissible at the federal level are not at the state level in Connecticut.

The only thing that could possibly explain Connecticut’s tax revenue loss would have been simply an overall reduction in income tax revenue by any and all taxpayers. Trying to suggest that the wealthiest taxpayers were somehow defrauding the state of Connecticut of potential tax income — when in essence their wealth provides an superabundance of revenue — shows both the ignorance and agenda of the author on tax policy.

What the author did properly reveal is that if the Connecticut state budget is so precariously dependent on the income tax revenue of less than 10 people — whom it must track and monitor to ensure it “gets” it income revenue — Connecticut certainly has its spending priorities severely out of whack.

Obama & Wealth Redistribution


While pushing for a Social Security payroll tax extension, Obama wants a 3.25% surtax on millionaires to pay for it.  This is wealth redistribution under the guise of “fairness”.

Are you going to cut taxes for the middle class and those who are trying to get into the middle class, or are you going to protect massive tax breaks for millionaires and billionaires?” he said. “Are you going to ask a few hundred thousand people who have done very, very well to do their fair share or are you going to raise taxes for hundreds of millions of people across the country?”