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Trump Considering Capital Gains Tax Cut

Discussion in 'GatorNana's Too Hot for Swamp Gas' started by gatorlover974, Aug 12, 2020.

  1. pcamera01

    pcamera01 GC Legend

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    No problem, Small business owner here, up since 5:00, at my office before 6:00 six day a week.

    The only excitement I get daily is posting on this forum. So just woke up is not asleep but is for sure not "WOKE" up :)
     
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  2. gator_lawyer

    gator_lawyer Premium Member

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    But smaller corporations elect for the S-Corp form over the C-Corp form in part due to the preferential taxation, so I'm trying to understand how that taxation is preferential for S-Corps but disadvantageous for C-Corps. Maybe this requires a much more complicated explanation than you have time to give. If so, that's fine.
     
  3. pcamera01

    pcamera01 GC Legend

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    Thanks for the information, that looks like the person you reference was training to be a politician.

    Hopefully like all other Federal politicians these days, he comes out of government richer than he came in.
     
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  4. Gatorhead

    Gatorhead GC Hall of Fame

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    We gotta hard working Gator here!
    Tough being a small business owner - Hang in there and keep cheering for UF!
     
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  5. beemerthegator

    beemerthegator All American

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    I think that is fairly easy to go over. I will give me as an example -- an attorney, solo practitioner, and I elected S-corp status in lieu of being a C-corp.

    As an S-Corp, let's say the profits from my practice were $100,000. (That would of course be after deducting payment of myself salary/wages that I took as an expense -- and of course I paid Social Security/Medicare tax on those wages and the wages were income). As an S-corp, the corporation was not taxed -- it was all imputed to me. So that $100,000 became part of my income (along with my wages and outside investment income). I would pay standard tax rates on that income. Some of all that income, all rolled into my own income, was of course taxed at high rates (35%) -- it was just subject to the regular scheudles.

    What if I had not elected S-corp?

    What would have happened is that the corporation would have been taxed at whatever tax rate applied to corporations at the time. I'm not even sure what it was -- probably 28% across the board? Or maybe 35%? Let's assume 28%.

    So, $100k in net profit for the corporation, taxed at 28% so $28k, is paid in taxes.

    After paying that $28k, the corporation still has $72k left. How do I get that money into my own hands? Pay a distribution, which is basically a dividend. That $72k then becomes my own income. I then end up paying tax on that $72k which is now income to me. Let's say 33% -- so I'm paying 33% of $72k so another roughly $24k.

    So on the $100k net profit from my practice, I just paid $28k from the corporation in federal taxes, then another $24k as my personal income taxes on what was left, so my taxes on the $100k is $52. So a 52% effective tax rate.

    If I am an S-corp, I probably just pay at most 35% on that money -- so $35k.

    What happens with small corporations that are c-corporations is all kinds of accounting and distribution schemes, often dealing with use of loans back to the business, to reduce the net profit of the corporation to zero. I had seen this with the first firm where I was employed and eventually became a partner. They basically disbursed all their profits every year as distributions to reduce corporate profit to zero. And that often required tapping into lines of credit (guaranteed by the partners) to keep the practice running and pay overhead since cash had to be drained to pay distributions. Lots of room for fiddling with things and schemes by smart CPAs.

    Why can't we just eliminate the corporate tax and impute the profits to shareholders?

    That presents all kinds of highly complex issues. First is just the size of publicly traded corporations -- we are talking many millions of shares. You have some shareholders who hold their shares in tax-deferred accounts of various sorts (do they pay any tax?). And then you have shareholders who don't have the cash to pay the taxes or it would create a hardship on them -- do you just distribute the money to them? -- if so, what cash and working capital is left in the large corporation to fund its operations? (You can't have millions of shareholders sign guarantees). Then of course dealing with billions of dollars you've got the problem of super smart CPAs and tax lawyers figuring out ways to show little or no profit for the corporation (that already occurs it would just continue on with new rules to the game).

    All this becomes enormously complex. While eliminating the corporate tax, and going to individual shareholders just paying, has merit, it would be enormously complex. I don't purport to know how to figure it all out.

    I tend to think we've got to move toward some form of elimination of favorable treatment of capital gains. I've often wondered why we can't just go to a distinction between passive income and active as opposed to the current ordinary income (wages, interest dividends) v. capital gains. Just tax active income (i.e. wages) with a progressive tax scheme as we have now and then tax passive income (capital gains, interest, dividends in a similar way with a progressive tax scheme).

    You are correct a far easier approach may be to just eliminate all distinctions and just say "it is all income, no more splitting hairs, we will all be subject to the same tax rates no natter where it comes from" and leave it at that. But whenever you try to apply very simple bright light rules to complex issues, you end up with all kinds of problems. For example, what do you do with the blue collar wage earner who worked for Publix for 40 years, has a million dollars in Publix "non-public" stock that he has to sell back and has a million dollar gain in one year? (In many instances tax deferred accounts might help solve that problem -- but it by no means fully erases it in some circumstances. What do we do with the cash poor elderly person who farmed 120 acres of land, that had been in his family for generations, and he sells it for commercial development for $2 million that then has to support him for the rest of his life. Does she/he get have almost no income for many years, then pays the highest tax rates on much of that income because the circumstance of his life work's being received in one tax year as opposed to someone else who earns $100k a year for 20 years and pays a much lower tax rate?

    Complex stuff. I don't have all the answers. But we need to start reassessing to ensure fair tax treatment. And there are some really smart folks who have some very good (if imperfect) answers.

    I read a great book earlier this year on tax policy in the U.S. Written by a couple of economic professors who Elizabeth Warren hired as advisors. A quick one sentence summary of the book:

    In the U.S., when considering all types of taxes (federal income, SS/Medicare, state income, sales tax, property taxes, excise fees such as you see on your phone bill, etc.), almost all citizens pay between 23-25% of their income in taxes -- expect the very very rich who pay WAY less and closer to the lowest capital gains tax rate.

    How does this happen if my marginal federal income tax rate was 33% or 35% in most years and many people pay zero in federal income taxes? The answer is they pay a lot higher percentage of their income in other fixed rate taxes (such as sales tax, vehicle registration, cell phone bill tax, gas taxes, and so on). That stuff is a much smaller portion of a wealthier person's income. It all evens out fairly well except for the super rich (I'm talking $1,000,000+ a year earners and those with very very high net worth $10,000,000+).

    Here is a link to the book:

     
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  6. Gatorrick22

    Gatorrick22 GC Hall of Fame

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    I understand that angle, but the rest of the world is in deeper doo-doo than even we are... so that should balance the devaluation in one aspect. Our nation needs this financial help right now and other than fully opening back up what else can we do?

    We cannot raise taxes in this economic climate. Although, later on down the road in say one year of two we might have to raise some taxes..
     
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  7. gator_lawyer

    gator_lawyer Premium Member

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    Thanks. I get it.
     
  8. l_boy

    l_boy GC Legend

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    Historically S Corp taxing was advantageous as it was only taxed once, at the owners individual tax rate, the maximum of which was 39.6%. The C Corp income tax rate previously maxed at 35%, and then the shareholder was subject to a 20% or more tax on capital gains and qualified dividends (cap gains and qualified dividends were put on equal footing during GWB admin). So the net to the C Corp shareholder was about 50%.

    Now with Trump tax cuts C Corp rates went to 21%. Then add shareholder cap gains/dividends of 20-28% you may be less than new individual top tax rate of 37%. But in the same tax bill they threw S corps a bone and let them take an additional 20% deduction off of SCorp profits, subject to some exceptions and limitations.

    So at this point whether SCORP or C Corp taxation is most favorable to owners really depends on the circumstances.
     
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  9. BobK89

    BobK89 GC Hall of Fame

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    To quote from "Hamilton":
    You don't have the votes
    Ha-ha-ha-ha-ha
    You're gonna need
    Congressional approval
    And you don't have the votes
     
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  10. beemerthegator

    beemerthegator All American

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    Unfortunately for me that whole 20% deduction for S-corp garbage did nothing for me. I think maybe it phases out at certain income levels. I'm pretty much retired form practicing law now, but this was an issue for me in 2018 and 2019 and it sure didn't help me.
     
  11. l_boy

    l_boy GC Legend

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    Yes there were certain exceptions, including professionals like accountants and lawyers, where the 20% benefit was capped at relatively modest levels.
     
  12. GatorNorth

    GatorNorth Premium Member Premium Member

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    The median household income in the US is about $62,000.How many folks in the lower 50% have securities or real estate investments to sell that would even generate a capital gain outside of their IRA/401K (the sale of which is fraught with other issues until you're 59.5 or unless you want to borrow against your own tax future)?

    Would be great for someone like me-long term investor with lots of appreciation in current accounts; I might even sell some of that AAPL I bought at $60 or that BofA that I bought around $6.

    but lowering the capital gains rate will do literally nothing for families who need help the most and whose only assets are either illiquid, like their home or their car, or deferred, like their IRA/401K.
     
    Last edited: Aug 12, 2020
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  13. HallGator

    HallGator Senile Administrator Moderator VIP Member

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    After reading all that my head hurts and I don't even suffer from headaches. :)

    Thanks for taking the time to write it out.
     
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  14. channingcrowderhungry

    channingcrowderhungry Premium Member

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    He leverages all the "socialism is the devil" folks to make money for the super wealthy. They somehow don't see it.
     
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  15. vaxcardinal

    vaxcardinal GC Hall of Fame

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    Rich lives matter too
     
  16. Gatorrick22

    Gatorrick22 GC Hall of Fame

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    Not everyone will benefit equally and not everyone will even benefit. No tax nor tax break is equal to all Americans. You just have to go back to the days before coronavirus and let the average income go up in the Trump economy like it did before. It was out pacing inflation by over 1.5%, that was over the 2% inflation rate increase annually. And the lower income wages were the ones that we increasing the most percentage wise.
     
  17. GatorNorth

    GatorNorth Premium Member Premium Member

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    it appears you’ve misspelled “let them eat cake”
     
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  18. Gatorrick22

    Gatorrick22 GC Hall of Fame

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    No... I just blunted Bolshevik nonsense.
     
  19. ursidman

    ursidman GC Hall of Fame

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    AAPL is about to split - 4 for 1 I've read.
     
  20. G8trGr8t

    G8trGr8t Premium Member

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    This, The debt service alone is going to consume the great majority of state and local taxes leaving even less for vital public services
     
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