For what’s wrong with the world, look in the mirror

“They [shareholders] dream of dividends, and their dividends are the ruin of mankind.

“No, it is we who are to blame. You, Domin, myself, all of us.

“For our own selfish ends, for profit, for progress, we have destroyed mankind. Now we'll burst with all our greatness.”

- Karel Capek, R. U. R. (Rossum’s Universal Robots), 1920

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".

Quote of the day: watering the weeds and pulling the flowers

In "The Dow has recovered, but what about 'The Doug?'" 2012-09-03, Jim Hightower wrote:

"[T]oday's corporate and political leaders are wretchedly-bad gardeners – by tending to the moneyed elites and ignoring America's workaday majority, they're watering the weeds and pulling the flowers. Where's that going to lead us?"

One of the ways that this is done is taxing dividends at a lower rate than wages.  If we tax dividends at a lower rate to encourage investment, do we discourage work by taxing labor at a higher rate?  Would anybody get dividends if there weren't people to do the work to generate those dividends?

Maybe I shouldn't complain. I am retired and derive a portion of my income from dividends and capital gains.  But how hard am I working to do that?  As for the dividends, my work consists either of having requested reinvestment by a financial institution or by typing a request to have accumulated dividends transferred to my bank account.

Sure, I'd like to pay less taxes, wouldn't we all?  But if we don't pay taxes, would we have any kind of civil society?

Entitlement is not a dirty word

Many are calling for a cutback in "entitlements" as a means of "cutting spending"; spending being another "dirty word".  The subtext of the use of "entitlement" is that the recipients are not deserving of the payments from Social Security, Medicare, or pensions for government employees.

My wife and I each get a small monthly pension payment from a company that we both had worked for long ago.  This pension was paid for by the company.  It was one of the terms of our employment.  Is this an entitlement that we don't deserve?  Should the company take the funds in the pension trust to spend elsewhere to balance its budget?

A fired CEO is granted a life-time pension far greater than many people even dream of for a regular income.  Isn't this an entitlement?  Maybe it's a bribe not to sue the company for wrongful termination.  We don't hear many who complain about Social Security being an entitlement complaining about how shareholder value is being decreased by these give-aways.

Many shareholders expect regular dividends from companies whose shares they own.  Isn't this an entitlement?  Shouldn't companies paying large dividends cut this spending so they can invest and create more jobs?

Social Security is a contract between the worker and the Federal government.  The worker (and employer) make payments to the Social Security Trust Fund based on the worker's wages.  The worker has been promised benefits in relation to the amount of payments made.  The employer is relieved of having a pension fund or can at least have a bit smaller pension fund.  Isn't Social Security an entitlement just like company pensions, CEO pensions, and dividends?  Why is one entitlement bad and why are the others good?

I think there are two reasons.

First, Social Security is bad because it is a government program; government programs are bad because government can't do anything right (except give subsidies to favored companies).  My wife just said, "Bail out bankers who plundered customer resources".  Aren't the super-big bonuses an entitlement?

Second, Social Security funds are placed in interest-bearing government securities.    These securities are part of the government debt and debt is bad.  Somehow, it is not bad for large corporations to hold these securities and be paid interest.

One can make all kinds of arguments about how much or how little is paid from Social Security and under what conditions.  But as long as people expect Social Security checks on retirement AND pay the payroll tax, we should consider Social Security not an entitlement, but a contract.

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/