Archives For Taxes

Interesting piece by John Steel Gordon in today’s WSJ:

One of the artifacts of the tax code is that it treats “carried interest”—a share of the profits reaped by managers of an investment fund—as a capital gain. To most of us, this is a matter of little or no practical importance—but it is a big deal indeed for the managers of many private equity funds and some hedge funds.

Managers of these funds are compensated for their services in two ways. One is the annual management fee, usually 1% or 2% of a client’s investment. The other is a share in the net profits of the fund’s long-term investments. That share is often 30% or even more.

The management fee is taxed as ordinary income, but the long-term profits of investment are taxed as a long-term capital gain, for both clients and hedge-fund managers.

There is no doubt that the profits are true capital gains for the clients of these funds. They risk their money and hold the investment over time; if it loses money they experience a capital loss. Not so for the managers of these funds, who share in the gains but not the losses. They do not put their own money at risk; the reality is that the compensation for their services is income and should be taxed as such. (Of course when fund managers invest their own money their profits should be taxed as a capital gain.)

“Carried interest” SHOULD be taxed as ordinary income.

I agree.

I dream of the day when we can toss out this stupid tax code we currently have and bring in a flat tax. It’ll never happen but I can still dream about it.

One of the local TV Stations posted this question on their facebook page this morning:

Six This Morning Wants To Know : Would You Be Willing To Pay More In Taxes For Additional Security In Public Schools?

The facebook question linked to this article from the Houston Chronicle.

The article doesn’t mention anything about the cost of such a program. To be fair, the proposal doesn’t mention anything about doing this statewide. However, my thoughts went immediately to wondering how much such a program would cost taxpayers.

Let’s see…

There are 8,317 public schools in Texas.

If we put one policeman/guard at each school and paid them $40,000 a year, it would cost…

$333.6 million per year.

Can we afford that? Do we need to afford that?


13 Tax Increases in 2013

January 10, 2013

From 13 Tax Increases in 2013:

(Click on the link above for explanations for each of these)

1. Payroll tax

2. Top marginal tax rate

3. Phase out of personal exemptions for adjusted gross income (AGI) over $300,000 ($250,000 for single filers)

4. Phase down of itemized deductions for AGI over $300,000 ($250,000 for single filers)

5. Tax rates on investment

6. Death tax

7. Taxes on business investment

Obamacare tax increases that took effect:

8. Another investment tax increase

9. Another payroll tax hike

10. Medical device tax

11. Reducing the income tax deduction for individuals’ medical expenses.

12. Elimination of the corporate income tax deduction for expenses related to the Medicare Part D subsidy.

13. Limitation of the corporate income tax deduction

Isn’t it fun?

I wish we could move beyond this silliness and just set up a flat tax. Consider this:

“I made $75,000 this year. I contributed 10% to my 401(k). I owe $6,750 in federal income tax.”


“I made $1,500,000 this year. I put 10% away for retirement. I owe $135,000 in federal income tax.”

Interesting piece from IBD: Six Reasons to Keep Capital Gains Tax Rates Low

Two interesting points that I hadn’t really thought about:

Inflation. If an individual buys a stock for $10 and sells it years later for $12, much of the $2 in capital gain may be inflation, not a real return. Inflation — and expected inflation — reduce real returns and increase uncertainty, which suppresses investment, particularly in growth companies.

One solution is to index capital gains for inflation, but most countries instead roughly compensate for inflation by reducing the statutory rate on gains or providing an exclusion to reduce the effective rate.

Double Taxation. Corporate share values generally equal the present value of expected future earnings. If expected earnings rise, shares will increase in value, creating a capital gain to the individual. But those future earnings will be taxed at the corporate level when they occur; thus hitting individuals now with a capital gains tax is double taxation.

Dividends are also double-taxed, with the result that the U.S. tax system is biased against corporate equity and in favor of debt. This destabilizes companies and the overall economy.

Ernst & Young calculates the current U.S. combined corporate and individual tax rate on capital gains at 50.8% — compared to an OECD average of 42.0%.

Our tax burden on dividends is equally out of line. The U.S. disadvantage will get much worse next year with the scheduled tax hikes on capital gains and dividends.

I know I’ve said this many times before but I’m 100% for a low flat tax rate (say 10% to 15%) on capital gains, dividends (not taxed at corporate level), and earned income. Then, we could move on from these discussions. Our government should be able to operate on a 10% to 15% tax.

“While we are free to choose our actions, we are not free to choose the consequences of those actions. Consequences are governed by natural law.” – Stephen Covey in “The 7 Habits of Highly Effective People”

France raises taxes on the wealthy.

The wealthy leave France to escape the higher taxes.

France’s Prime Minister, Jean-Marc Ayrault, whines about the “greedy” rich leaving his country.

Question: What did Jean-Marc Ayrault expect would happen?

I suggest Mr. Ayrault memorize the quote at the beginning of this post.

Here it is (click on the graphic to see it as part of a much larger graphic):

Tax Burden

Source: NY Times

I have a couple of questions regarding the payroll taxes portion of the graphic:

• At the lower incomes, why are the numbers different? If the tax is the same percentage up to income cap, then why are the percentages different?

• Shouldn’t the employer portion of social security and medicare be included in the employee’s income? It’s obvious that they are including the employer portion in the taxpayer burden. This is misleading because I’m certain the employer portion is not being included in the employee’s income. In other words, by including it as part of the burden but not including it in income, it makes the burden seem high as a percentage of income. Lying (or misleading) with statistics 101.

I don’t trust the NY Times to be honest with their “facts.” Can you blame me?

I just spent the last few minutes reading Geoff Colvin and Allan Sloan’s piece in the latest issue of Fortune (sorry, no link available yet).

The article started out promising in that it made it sound as though they actually had a solution for the economy. Instead, I was disappointed because there is no solution, only generalities (much like politicians give us day in and day out).

What do I mean?

Well, they start out by talking about how bad everything is right now and about how childish Washington politicians are. I agree with that.

Then, they move on to address how they would fix certain parts of the economy. The first of those is spending.

Social Security and Medicare

Medicare first…

The biggest problem in dealing with Medicare is the endgame—when people enter their final descent and are kept alive, expensively, often with no statistically significant chance of leading what most people would consider a decent or rewarding life.

I agree with that. It’s very awkward to talk about elder care. Their solutions:

We propose that if you want to use heroic measures to keep yourself or any other Medicare or Medicaid recipient alive—we’ll leave it to experts to define “heroic measures”—either spend your own money or buy a supplemental end-of-life policy from the market that will doubtless spring up if our propsal is adopted.

Not sure I’m comfortable with “we’ll leave it to experts to define ‘heroic measures'” but I understand their point. At some point it’s time to let go.

I like this but wonder where they would draw the line:

We’d also surcharge smokers and the ultra-fat for their Medicare coverage.

Seems like we would eventually cross over into the nanny state. Smokers, ultra-fat, consumers of certain foods, etc. Seems scary to me.

They move on to talk about Social Security. This is where it starts getting vague.

The fixes are simple and obvious: Bring in more money by slightly adjusting the payroll tax, and change the benefit formula to reduce benefit growth over time to the highest-income beneficiaries. Social Security tax is levied only on salary income up to $110,100 (while Meidcare tax is levied on all salary income), and that wage base rises gradually over time. Let’s raise it a little faster while also edging up the reitrement age to keep pace with increasing life expectancies. That would do it.

Questions: How much? How fast? What age?

I won’t even get into why this idea of raising the income cap while lowering the benefit amount disgusts me so much.

They briefly address lowering defense spending before moving on to…


They use the phrase “Broaden the base and lower the rates” but they give NO DETAILS on how they would broaden the base and how they would lower the rates. One thing is for sure: their proposals would mean SIGNIFICANTLY INCREASED TAXES for my family. Why? Because they want to do away with…

• the exclusion for employer-sponsored health insurance

• the tax deduction for mortgage interest

• the tax deduction for state and local taxes and for charitable gifts

WOW! That would kill us.

I’m a reasonable person. If we want to do away with those things, fine. But, while we’re at it, why not just go with a FLAT TAX?

The authors don’t address welfare spending, which is unfortunate. Maybe that’s because this was a magazine article and not a book. Still, if I’m going to face higher taxes, I would like to see fewer people mooching off everyone else’s hard work.