Less tax for little work

I've started doing our income taxes for the year and had a pleasant surprise.  If I calculate the tax in a straightforward way, we will owe a few hundred dollars.  If I calculate the tax with the worksheet for capital gains and dividends, we will get a refund of a few hundred dollars!

This is surprising because our income consists of Social Security, IRA withdrawals, two teensy-weensy pensions, and capital gains and dividends.  Capital gains and dividends are less than a quarter of our total income.  Social Security is about half, but it isn't all taxable.

An interesting thought: Social Security is considered an entitlement, but the capital gains and dividends are considered our due.

We worked for decades paying Social Security withholding; we buy and sell stocks with a click of the mouse.  The capital gains are a form of gambling and really don't contribute to the economy other than providing liquidity for the market and fees for the brokerages.  The dividends are based on the profits created by thousands and thousands of workers providing goods and services.  And again, we didn't provide the capital for these companies; we bought it from someone else.  For providing market liquidity, we supposedly are "makers".  As Social Security recipients we are "takers".

A different idea for capital gains tax

Many don't want capital gains to be taxed any amount, even if a stock was bought and sold in seconds.  But how does such a short term profit make any real contribution to the economy compared to an hourly worker producing a tangible product such as vegetables or automobiles?

We really should tax capital gains on a sliding scale.  Securities held for less than a year should be taxed at the same rate as earnings.  Securities held for more than a year should be taxed at a progressively lower rate until securities held for, say, ten years should be taxed at zero percent.

Of course, we are still rewarding people for luck at throwing darts more than people who show up for work everyday.

I'm probably preaching to the choir on this.  I've been writing for some time on this and you can see how much it's caught on.

See "Let's do away with capital gains taxes, dividend taxes, and estate taxes by…" or do a search for "Irregular Blog" and "Capital Gains".

Throw darts to pay less taxes

I finally finished and filed my 2010 Federal income taxes.  I found out that by throwing darts I had certain income that was charged ten percent lower taxes than other income.  To get that income, I didn't sit in a cubicle, I didn't dig ditches, I didn't wait table until my feet hurt.  I just threw some darts a few years ago, and bingo!  I pay less taxes because I'm "stimulating the economy."

What were these darts?  They were decisions to buy certain stocks.  It really didn't take a lot of work to do that.  I just read a few reports, looked up some history, or followed Motley Fool's advice.

Of this income that was taxed less, half was from gains for selling some stock and half was for "qualified dividends", whatever those are.

None of this was based on helping a business get started.  I bought shares in existing companies, and so all I was really doing was providing liquidity for previous owners of those shares.  That is an important service because people need to sell stock from time to time for a variety of reasons, but should providing liquidity gain special treatment?  Congress after congress seems to think so.

Congress did give a sop to people who actually show up to work.  It was called "Making Work Pay".  I don't remember what the upper limit on this deduction was, but my wife got an eight-dollar credit for the one day she was an election judge.

I don't have any clear ideas on what a more fair tax system would be, but I do think we should take a good look at what the true purpose and result of various tax gimmicks are.

Let's do away with capital gains taxes, dividend taxes, and estate taxes by...

Replacing them with taxing withdrawals from savings. Not withdrawals from your passbook savings account or your money market fund. That could well be money that was already taxed, especially considering the low interest on these currently.

I think a better plan would be to create investment accounts similar to IRAs. If you put money into an IRA it is not taxed. When you withdraw money from an IRA you are taxed at the wages rate on the full amount of the withdrawal, regardless of the source of the money: original contribution, capital gains, dividends, or interest.

In one way, you can look at an IRA as a lousy investment tax-wise. You may have saved some taxes at time of deposit, but you may be paying for more taxes than if you had put the money in a traditional mutual fund, especially if you had large capital gains over the life of your account.

However, if we move all investments to IAs, we solve the problem of taxing capital gains, dividends, and interest at a lesser rate than taxing work at a desk or bench. We also eliminate many of the side effects of people changing investments to get some tax advantage. The markets may be less chaotic at year's end as people buy or sell stock for some advantage.

We also solve the problem of estate taxes. Those who bequeath or who are bequeathed often don't want a penny of taxes to come out of the estate. But what happened to all the capital gains taxes that might have been paid if the deceased had lived. If an Investment Account is bequeathed, the beneficiaries would only be taxed on the money they withdrew. They would be free to buy and sell investments in the Investment Account without being concerned about the tax consequences of the transactions.

Probably most opposition to this plan would come from those benefiting from the current tangle of tax laws - lawyers, estate planners, and so on.

I've been sitting on this idea for some time; I was prompted to write about it after reading "Savings Accounts for All: Simple, but Not Easy" by Ron Lieber for the New York Times and republished today on Yahoo! Finance.

I also posted the above to http://www.whitehouse.gov/contact/