Taxing Capital Gains

[SkyDivingDeacon]

The dividend rate and the capital gain rate are two different things, even though they are currently taxed at the same numerical rate.

Yeah, of course. Is that really all you took away from that?

 

[SkyDivingDeacon]

Huh? Lower cap gains rates was intended to open up investment money that would presumably invest in the US....meaning jobs. The most recent drop was in response to economic problems we had in 2001-2002.

Here's the disconnect: Once a company has already started to plan to expand, consumer investments (and thus any applicable capital gains on investment gains realized by 'investing' in that company) are two steps behind. This comes down to corporate tax rates, payroll tax and the cost for goods and services (all of which have nothing to do with capital gains rates).

If you want to expand the economy, drop the corporate tax rate from the 2nd highest rate in the world, promote small business with tax credits for hiring and raise the cap. on 729 deductions. Boom. Overnight, you would have companies expanding their balance sheet and regional/national footprint. Instead, we have an incredibly high corporate tax and small businesses, of which are mainly S-Corps, don't allow for the same rules and tax treatment of larger companies even though they create the vast majority of new jobs.

We're talking about capital gain rates when we should be talking tax policy in general. But, I basically disagree with the OP. Raising LTCG to ordinary income rates will have a net zero effect on virtually everything except how much additional money the federal government would be able to waste each year.

 

[ONW]

Agree with this completely. There should be delineation between IPOs/start-ups/non-publicly traded stock vs. some bro on E*Trade holding Apple stock for 366 days.

True, and clients that sell out of a profitable IPO ASAP, don't get offered the opportunity again usually.

 

[2&2 Slider To Leyritz]

Yeah, of course. Is that really all you took away from that?

No, I generally agree with your positions on dividend rates and the corporate tax rate as stated in this thread. Just pointing out that they aren't overly relevant to a discussion about the capital gains rate.

 

[buckets]

of course capital gains should be charged at a different rate

 

[SkyDivingDeacon]

No, I generally agree with your positions on dividend rates and the corporate tax rate as stated in this thread. Just pointing out that they aren't overly relevant to a discussion about the capital gains rate.

Fair point. If we're just talking capital gains, then a lot of that is in fact different. But I think there are a number of things to be done as it relates to the idea/purpose of taxes, jobs, economic expansion, etc... that the OP ties into.

Also, someone else stated something similar but cap gains rates alone won't really change investor attitudes or curb 'investing' (at least not from your every day consumer). Sovereign wealth funds and PE, maybe, but I doubt it. Only thing I could see happening is a larger emphasis on private placements and limited partnerships that would allow for a return of principal and spread gains out over an extended period instead of getting hit all at once.

Long story short, if capital gains rates change, great. It will just piss a handful of people off and lead us all astray from some of the much larger issues at hand. This and things like raising the SS income limits infuriate me, so I'm a little biased. If we want to make meaningful changes, we need to think big. All of these small 'fixes' amount to a hill of beans when it's all said and done.

 

[PhDeac]

What big fixes are you thinking about?

 

[BillBrasky]

I'd trade a higher cap gains rate for a reduced corporate rate.

This is probably where I am as well. I'd also like to cut out almost all loopholes and deductions for individuals.

Its not the government's responsibility to help you finance your new house, car or child.

Good discussion though. I've learned a good amount from reading y'all's posts.

 

[DeaconCav06]

They're not helping me finance my new house they're stimulating the housing market which drives up prices creating larger real estate taxes for local municipalities.

 

[bullets]

nothing has done more for the modern economy than the american capital markets

 

[ONW]

nothing has done more for the modern economy than the american capital markets

Oxygen?

 

[DeacMan]

True, and clients that sell out of a profitable IPO ASAP, don't get offered the opportunity again usually.

I have no idea wtf you are trying to suggest, but I do know this is completely inaccurate.

 

[ONW]

I have no idea wtf you are trying to suggest, but I do know this is completely inaccurate.

Well then you don't understand private placements, rewarding your best clients, and lock-up sell periods.

 

[DeacMan]

Good discussion.

A few thoughts.

1 - To a small business owner - of which there has been quite a bit of discussion here - raising any tax rates will impact choices they make relative to their business. Most small business owners want to grow their business. And their ability to do so is impacted by ALL the taxes they have to pay. I know, I am a small business owner. You raise my taxes - any of my taxes - and it will limit how much money I will have to funnel back into my business. Property taxes, sales taxes, LTCG taxes, whatever. It all matters. There's almost this notion in many of these posts that small business owners are not allocating risk among various asset classes or that the tax rate is the only item that will drive that decision. That, of course, is nonsense. I own a small business. I invest in it. I also invest in other asset classes. And how much money you take from me will impact how much money I invest in my business. Give me $1000 and some of it will go to my business and some of it will go elsewhere. Give me $1500 and I'll still allocate among different assets and the odds more money ends up in my business than if you give me just $1000 are extremely high.

2 - All that being said, the vast majority of people dealing with the LTCG rate do not own a business or employ anyone. So this general logic that raising the LTCG rate is a means in and off itself to driving any meaningful job creation is bizarre on yet another front. As some have pointed out tax policy generally matters for job creation. But the LTCG rate is probably one of the smallest elements in that statement, in a direct sense, when it comes to job creation.

3 - If you want to create more jobs you need to encourage businesses to take risk. That means creating a stable regulatory and tax environment and having a government that is supportive of business. We are missing the mark in that regard on a national level right now.

4 - This entire thread presumes we are better off funneling more money to the government as opposed to letting people keep more of their money. As some have pointed out, the government is not an efficient delivery vehicle of capital.

5 - We need tax reform in this country. The LTCG rate is not central to that reform. Where there is widespread agreement is the need to reform corporate taxes. That is where we should start.

 

[DeacMan]

Well then you don't understand private placements, rewarding your best clients, and lock-up sell periods.

This should be really fun given the 25 years I've spent working on venture transactions, public and private offerings of securities and all other sundry of corporate finance transactions. But have at it. Go on and educate me about how allocations of public offerings actually work in practice.

How about you start by telling me how anyone dumps stock they purchase in a "private placement"?

 

[ONW]

This should be really fun given the 25 years I've spent working on venture transactions, public and private offerings of securities and all other sundry of corporate finance transactions. But have at it. Go on and educate me about how allocations of public offerings actually work in practice.

How about you start by telling me how anyone dumps stock they purchase in a "private placement"?

I never said dump. I said selling ASAP after the IPO. And I do remember now your experience in this area.

 

[DeacMan]

I never said dump. I said selling ASAP after the IPO. And I do remember now your experience in this area.

So let's be really, really clear. Let's say I invest in a company 3 years before it is public. The company is about to go public. What will my options be upon the IPO taking place to sell my stock?

 

[ONW]

So let's be really, really clear. Let's say I invest in a company 3 years before it is public. The company is about to go public. What will my options be upon the IPO taking place to sell my stock?

Sell whenever you want. Wait for 6 months minimum if you want in on the next one. Selling an investment in a private company for over three years before an IPO, is above my pay grade. But honestly, I'd appreciate any knowledge you can share in that regard.

 

[DeacMan]

Not really. Here is what will happen:

1 - The underwriter will determine which holders it wants to have sign a lock-up agreement.
2 - If I am asked to sign a lock-up agreement the underwriter will have a lot of leverage to make me sign the damn piece of paper. I've literally seen them refuse to take companies public until all individuals and entities they have selected to sign the lockup agree to sign. Who they ask to sign is based on how they are affiliated to the company. And it is typically a very select group of people.
3 - When I sign the lockup agreement I'll be contractually obligated to abide by its terms.
4 - If I'm not asked to sign the lockup agreement, I'll be free to sell my shares into the open market - subject to any volume restrictions prescribed by law that may apply - and no one will care.

Never mind the fact that you are presuming how I behave in one private placement turned IPO somehow impacts whether other private businesses are willing to take my money. Which is way off base. The odds I'm investing through the same group of people are ridiculously low. And the odds they have a business that (a) goes public as opposed to realizing another exit event, (b) uses the same underwriter, and (c ) have an underwriter that wants me to sign a lockup in the first place are all really low. The person I'd piss off by refusing to sign a lockup is the underwriter - and the underwriter doesn't have some magic ability to put me on some global private placement blacklist.

 

[ONW]

Not really. Here is what will happen:

1 - The underwriter will determine which holders it wants to have sign a lock-up agreement.
2 - If I am asked to sign a lock-up agreement the underwriter will have a lot of leverage to make me sign the damn piece of paper. I've literally seen them refuse to take companies public until all individuals and entities they have selected to sign the lockup agree to sign. Who they ask to sign is based on how they are affiliated to the company. And it is typically a very select group of people.
3 - When I sign the lockup agreement I'll be contractually obligated to abide by its terms.
4 - If I'm not asked to sign the lockup agreement, I'll be free to sell my shares into the open market - subject to any volume restrictions prescribed by law that may apply - and no one will care.

Never mind the fact that you are presuming how I behave in one private placement turned IPO somehow impacts whether other private businesses are willing to take my money. Which is way off base. The odds I'm investing through the same group of people are ridiculously low. And the odds they have a business that (a) goes public as opposed to realizing another exit event, (b) uses the same underwriter, and (c ) have an underwriter that wants me to sign a lockup in the first place are all really low. The person I'd piss off by refusing to sign a lockup is the underwriter - and the underwriter doesn't have some magic ability to put me on some global private placement blacklist.

Thanks for the response. I was thinking about the brokerage side of things. You're allocating the big lots and moving on. I can understand that.