Which income/tax bracket would you prefer?

[OohPooPahDoo]

Suppose your boss asked you which income you wanted and you got to pick. 390k or 410k. Suppose also the tax on that income is the tax that is being/will be levied in 2013, when the new tax rates are in effect.


Which would you pick?

The question is not properly phrased; you won’t get something for nothing. What additional effort and/or investment is required to earn the extra money?

Did I mention there was any extra effort required in the question? No.

Let’s say you invested $100,000 and expected a 10% return, or $10,000. The investment carries a level of risk. At what tax rate would you decide that investment was not worth making?

It depends on what my alternative investments vehicles are.

Would it affect your decision if you were going to make $7,000 after tax or $5,000? Of course it would; the expected tax may make the net returns on that investment unattractive and hence it will not be made.

Only if there is an alternative investment decision with similar or better risk and return and with a lower tax burden. If there isn't - and the alternative is to stash the cash under a mattress with negative real return - then I'll go with the $5,000. $5,000 is more than negative dollars.

When enough of those investments are not made, economic growth suffers.

Economic growth does not suffer because one investor decides not to buy a share of stock from another investor.

Liberals think money grows on trees and raising taxes has no effect on people’s financial decisions.

No we don't. Although its quite clear from the preceding discussion I've considered the impact of taxation on investment decisions far more in depth than you have.

I’m not sure which individual rates would be optimal to balance revenue needs with incentive to work/invest, but to assume that taking more of someone’s last dollar earned doesn’t make them less likely to expend the extra effort or investment to earn it is simply wrong.

What kind of fiscal sense does that even make? "Gee, I'm taking home LESS money now, so clearly the best way to counteract this is to find ways to take home EVEN LESS!" Is that the logic you think real people use?


Ordinary folks don't stop wanting money because taxes go up, do you realize this?

 

[Wyatt earp]

I pick ~ I prefer to make only 10k so I can pay hardly any taxes. Who would want to pay 39,6%?

This is a joke, right?

No if I had a few million stashed away somewhere. The most funniest, physical jobs are the low paying ones. Anyways they could make it up to me in stock options and perks....

 

[Rozman]

Trite question that covers a complicated subject. Typical of the left.

Its not that complicated. Do you want to make more money, or less?

I want to keep more of what I make.
Libs want to take more of what I make....

 

[OohPooPahDoo]

Trite question that covers a complicated subject. Typical of the left.

Its not that complicated. Do you want to make more money, or less?

I want to keep more of what I make.
Libs want to take more of what I make....

That isn't what I asked, but regardless I doubt you have much to take.

 

[Rozman]

Its not that complicated. Do you want to make more money, or less?

I want to keep more of what I make.
Libs want to take more of what I make....

That isn't what I asked, but regardless I doubt you have much to take.

much to take

Interesting your focus is on what government should be allowed to TAKE
My focus is on what I can keep....

 

[OohPooPahDoo]

I want to keep more of what I make.
Libs want to take more of what I make....

That isn't what I asked, but regardless I doubt you have much to take.

much to take

Interesting your focus is on what government should be allowed to TAKE
My focus is on what I can keep....

Its kinda the same fucking thing, moron, unless what you get to keep plus what is taken no longer adds up to your total pay.

Though its obvious why you would focus on what you get to keep - you get to keep damn near all of it.

 

[Rozman]

We seem to keep having the same issue kicking around.
Liberals believe all money earned belongs to government first.

 

[OohPooPahDoo]

We seem to keep having the same issue kicking around.
Liberals believe all money earned belongs to government first.

I don't.

 

[BillyV]

Suppose your boss asked you which income you wanted and you got to pick. 390k or 410k. Suppose also the tax on that income is the tax that is being/will be levied in 2013, when the new tax rates are in effect.


Which would you pick?

The question is not properly phrased; you won’t get something for nothing. What additional effort and/or investment is required to earn the extra money?

Did I mention there was any extra effort required in the question? No.

The fact that you didn’t mention it doesn’t make it any less relevant or true. Even a hypothetical question has to reflect reality.

Would it affect your decision if you were going to make $7,000 after tax or $5,000? Of course it would; the expected tax may make the net returns on that investment unattractive and hence it will not be made.

Only if there is an alternative investment decision with similar or better risk and return and with a lower tax burden. If there isn't - and the alternative is to stash the cash under a mattress with negative real return - then I'll go with the $5,000. $5,000 is more than negative dollars.

Investing often results in negative dollars (you were around in 2008-2009, right?); there are times when “the mattress” (or some secure investment with little or no return) is the proper place for your cash. The $5,000 is not guaranteed. If an investor foresees that the risk of losing money in an investment doesn’t justify the pitiful after-tax return he will receive, he will not invest. This is really simple stuff.

When enough of those investments are not made, economic growth suffers.

Economic growth does not suffer because one investor decides not to buy a share of stock from another investor.

But when enough investors decide not to buy shares from other investors, or when investment capitalists decide not to invest in startups, economic growth clearly does suffer. Also, the capital markets are not just a place for investors to buy from other investors; it is a place where public companies raise capital for expansion.

Liberals think money grows on trees and raising taxes has no effect on people’s financial decisions.

No we don't. Although its quite clear from the preceding discussion I've considered the impact of taxation on investment decisions far more in depth than you have.

Your simplistic view of “I’ll make $5,000 rather than zero” certainly bears that out.

I’m not sure which individual rates would be optimal to balance revenue needs with incentive to work/invest, but to assume that taking more of someone’s last dollar earned doesn’t make them less likely to expend the extra effort or investment to earn it is simply wrong.

What kind of fiscal sense does that even make? "Gee, I'm taking home LESS money now, so clearly the best way to counteract this is to find ways to take home EVEN LESS!" Is that the logic you think real people use?

Your understanding is limited; I’ll try to clarify. There is a rate in which the government can get the maximum revenue without unnecessarily keeping investors from participating in the marketplace; that rate may well be 39.6% or it may be more or less. However, the higher it goes, the more likely that it will stunt growth due to the disincentive to invest.

 

[OohPooPahDoo]

The question is not properly phrased; you won’t get something for nothing. What additional effort and/or investment is required to earn the extra money?

Did I mention there was any extra effort required in the question? No.

The fact that you didn’t mention it doesn’t make it any less relevant or true. Even a hypothetical question has to reflect reality.


Investing often results in negative dollars (you were around in 2008-2009, right?); there are times when “the mattress” (or some secure investment with little or no return) is the proper place for your cash.

In hindsight, sure. When you spoke of return I was under the impression you meant expected return, not the actual return as determined by sending a time traveller into the future and then back to tell us what it is.

The $5,000 is not guaranteed. If an investor foresees that the risk of losing money in an investment doesn’t justify the pitiful after-tax return he will receive, he will not invest. This is really simple stuff.

The government only taxes profits and losses offset profits. If the expected before tax return of the investment is positive, the expected after tax return will also be positive, just not as positive. But as I've mentioned before, some > negative.

Say there is an investment with a 50% chance of paying out -8% in one year and a 50% chance of paying out 10%. The expected return is thus 1%. If the tax rate is 10% and losses offset gains, the expected after tax return will be 0.9%. If the tax rate is 20% and losses offset gains, the expected after tax return is 0.8%. On the other hand, the expected after tax return bank notes is actually slightly less than 0% since they pay out zero in dividends and there is always at least a tiny risk you will lose them to theft or fire.

But when enough investors decide not to buy shares from other investors, or when investment capitalists decide not to invest in startups, economic growth clearly does suffer.

They will only make that decision if they can find a more profitable (after taxes) investment vehicle. If the the investor HAS money - the question isn't WHETHER to invest the money, but IN WHAT to invest.

Your simplistic view of “I’ll make $5,000 rather than zero” certainly bears that out.

I'd prefer to not complicate the $5000 > $0 inequality.

Your understanding is limited; I’ll try to clarify. There is a rate in which the government can get the maximum revenue wit`hout unnecessarily keeping investors from participating in the marketplace; that rate may well be 39.6% or it may be more or less. However, the higher it goes, the more likely that it will stunt growth due to the disincentive to invest.

Taxes that are too high don't stunt growth because they create a "disincentive" to invest - they stunt growth because they limit demand for the economy to produce.

Even the phrase "disincentive to invest" is absurd. If you have money you can either invest it or you can spend it - those are the only two choices. If you aren't spending it - its not a question of WHETHER you will invest it - but IN WHAT. Bank notes? Bank deposits? Stocks? Bonds? REITs? Gold? Baseball cards? All are investments, some risky, some not.

 

[boedicca]

The poll choices are inadequate.

They assume a preference for a progressive tax structure.

 

[OohPooPahDoo]

The poll choices are inadequate.

They assume a preference for a progressive tax structure.

No they don't. They only assume that you'd prefer one of the three choices to the other two.

 

[BillyV]

The government only taxes profits and losses offset profits. If the expected before tax return of the investment is positive, the expected after tax return will also be positive, just not as positive. But as I've mentioned before, some > negative.

Say there is an investment with a 50% chance of paying out -8% in one year and a 50% chance of paying out 10%. The expected return is thus 1%. If the tax rate is 10% and losses offset gains, the expected after tax return will be 0.9%. If the tax rate is 20% and losses offset gains, the expected after tax return is 0.8%. On the other hand, the expected after tax return bank notes is actually slightly less than 0% since they pay out zero in dividends and there is always at least a tiny risk you will lose them to theft or fire.

The mistake in your logic is that losses are not always deductible, and even when they are, they sometimes take time to realize. You see, losses on capital assets like an investment can only be offset against capital gains; you have to have gains at least large enough to shelter your loss or it is carried forward until you can deduct it, if ever. Only $3,000 per year is allowed against other types of income.

So let's look at your investment with that in mind. Instead of just a 50% chance of a -8% loss, let's take it a step further and say of that 50% that there's a 30% chance of that being immediately captured against other gains and 20% chance that it isn't because you don't have gains to offset it against. Then your expected return, pre-tax, is still 1%, but your after tax return, at a 20% rate, is .48%; still positive. However, when the tax rate rises to 40%, your return then becomes -.04%. That investment will not be made. So you then put your cash into a short term Treasury bill paying .25% interest and pay your 40% tax with at least the knowledge that you will get your principal back (probably), but that doesn't grow the private sector nor create wealth. Risk assets are what create wealth.

There was a good article in Forbes that addresses this issue pretty well:

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here's the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you'll pay on the assumed cash flow—and you only count the amount you'll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa.

“Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate” (except for a 100% rate!). He's also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It's just math and logic, unassailable and commonly accepted regardless of one's political persuasion.
Clifford Asness: Buffett Knows That Tax Rates Matter - WSJ.com

 

[Rozman]

I just want government to take as much money from me as possible....
After all it really is their money and I'm grateful they let me keep some of it.

 

[OohPooPahDoo]

The government only taxes profits and losses offset profits. If the expected before tax return of the investment is positive, the expected after tax return will also be positive, just not as positive. But as I've mentioned before, some > negative.

Say there is an investment with a 50% chance of paying out -8% in one year and a 50% chance of paying out 10%. The expected return is thus 1%. If the tax rate is 10% and losses offset gains, the expected after tax return will be 0.9%. If the tax rate is 20% and losses offset gains, the expected after tax return is 0.8%. On the other hand, the expected after tax return bank notes is actually slightly less than 0% since they pay out zero in dividends and there is always at least a tiny risk you will lose them to theft or fire.

The mistake in your logic is that losses are not always deductible, and even when they are, they sometimes take time to realize. You see, losses on capital assets like an investment can only be offset against capital gains; you have to have gains at least large enough to shelter your loss or it is carried forward until you can deduct it, if ever. Only $3,000 per year is allowed against other types of income.

The losses are applied against gains in the same year or future years. So unless you're worried that we aren't providing enough incentive to invest to investors that are so shoddy they have so many losses they can't even realize them over their lifetimes, I don't see the problem. Its clearly not the federal government's fault if you go belly up because of multiple consecutive years of massive negative returns.

You're also ignoring the fact that the 3k in losses allowed usually offsets income that is taxed at a higher rate than capital gains.

So let's look at your investment with that in mind. Instead of just a 50% chance of a -8% loss, let's take it a step further and say of that 50% that there's a 30% chance of that being immediately captured against other gains and 20% chance that it isn't because you don't have gains to offset it against. Then your expected return, pre-tax, is still 1%, but your after tax return, at a 20% rate, is .48%; still positive. However, when the tax rate rises to 40%, your return then becomes -.04%. That investment will not be made. So you then put your cash into a short term Treasury bill paying .25% interest and pay your 40% tax with at least the knowledge that you will get your principal back (probably), but that doesn't grow the private sector nor create wealth. Risk assets are what create wealth.

Your model is faulty. It ignores the fact that losses can be counted against future year's gains. If an investor truly feels he has a 20% chance of never being able to apply the loss in his life time, he should seek another profession.

I would also point out that a corporate investor has an infinite life so long as its owners don't decide to break it up, so all of its losses will eventually be able to be applied.

There was a good article in Forbes that addresses this issue pretty well:

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here's the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you'll pay on the assumed cash flow—and you only count the amount you'll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa.

“Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate” (except for a 100% rate!). He's also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It's just math and logic, unassailable and commonly accepted regardless of one's political persuasion.
Clifford Asness: Buffett Knows That Tax Rates Matter - WSJ.com

Re: the first bold print that I added - That is true - but it is true for all investments. If you turn the ordinary income tax rate up high enough while leaving the capital gains rate low - you will drive money from the bond market to the stock market. If you do the reverse - the opposite will apply. All you're doing is changing the type of investment. Investors still have to have a place to put their money - and as I have demonstrated, taxation will only turn a positive return into a negative one (over the long term) for the shoddiest of investors.



In fact - taxation reduces investment risk by lowering the effective volatility of the investment. If the investment goes up 10% and is taxed at 20%, it effectively only went up 8%. If it goes down by 10% - then you get 2% in reduced tax liability (that may not be applied in that year but will be eventually applicable). So the investment is no longer a +/- 10% proposition, its a +/- 8% proposition the risk profile is lowered.

 

[OohPooPahDoo]

I just want government to take as much money from me as possible....
After all it really is their money and I'm grateful they let me keep some of it.

You're such a drama queen

 

[auditor0007]

Suppose your boss asked you which income you wanted and you got to pick. 390k or 410k. Suppose also the tax on that income is the tax that is being/will be levied in 2013, when the new tax rates are in effect.

Which would you pick?

$410k after taxes is $247,640
$390k after taxes is $253,500..... so probably $390k.

Also to note, would be more willing to donate my hard earned money to the gov't if so much of it wasn't going to blowing up people in the middle east with billion dollar helicopters, and spying on our Facebook, Email, and Phone Records.

I'd rather keep that money and pay off my student loans (ie use it towards something that provides actual value).


.

Do you have any idea how the tax rates actually work? I can't believe someone who tries to make themselves seem so smart can actually be this stupid. Your entire income does not get taxed at the top rate.

 

[auditor0007]

$410k after taxes is $247,640
$390k after taxes is $253,500..... so probably $390k.

Are you seriously this stupid?

Whoops, I'm no tax accountant, but just realized this is likely a sliding scale where all income up to x is taxed at a 35% rate, then income that follows taxed at x, etc (so my analysis was off a bit).

Thanks for the insult OohPah, total lack of respect for anyone. Par for the course, I'd say.

What's with your constant hostility? Did you have a bad childhood and/or are you currently being bullied at your place of work/school?

.

When you post stupid shit, you get your ass handed to you. I have to admit, I've posted a dumb thing a couple of times. Most of us do. Just don't get upset if you get called out on it.

 

[BillyV]

The government only taxes profits and losses offset profits. If the expected before tax return of the investment is positive, the expected after tax return will also be positive, just not as positive. But as I've mentioned before, some > negative.

Say there is an investment with a 50% chance of paying out -8% in one year and a 50% chance of paying out 10%. The expected return is thus 1%. If the tax rate is 10% and losses offset gains, the expected after tax return will be 0.9%. If the tax rate is 20% and losses offset gains, the expected after tax return is 0.8%. On the other hand, the expected after tax return bank notes is actually slightly less than 0% since they pay out zero in dividends and there is always at least a tiny risk you will lose them to theft or fire.

The mistake in your logic is that losses are not always deductible, and even when they are, they sometimes take time to realize. You see, losses on capital assets like an investment can only be offset against capital gains; you have to have gains at least large enough to shelter your loss or it is carried forward until you can deduct it, if ever. Only $3,000 per year is allowed against other types of income.

The losses are applied against gains in the same year or future years. So unless you're worried that we aren't providing enough incentive to invest to investors that are so shoddy they have so many losses they can't even realize them over their lifetimes, I don't see the problem. Its clearly not the federal government's fault if you go belly up because of multiple consecutive years of massive negative returns.

You're also ignoring the fact that the 3k in losses allowed usually offsets income that is taxed at a higher rate than capital gains.

It’s true that for individual taxpayers, capital losses carry over indefinitely. However, money has a time value; if it takes you five years to realize the tax benefit, it isn’t worth what it was when it was incurred. Corporations, on the other hand, have five years to capture the loss; otherwise the deduction is completely lost. The $3k allowed to individual taxpayers is a pittance and the rate it is applied against is therefore meaningless.

And this isn't about "shoddy" investing; a good investor knows his risks, one of which is the potential that the tax benefit of a loss could take many years to realize.

Your model is faulty. It ignores the fact that losses can be counted against future year's gains. If an investor truly feels he has a 20% chance of never being able to apply the loss in his life time, he should seek another profession.

I would also point out that a corporate investor has an infinite life so long as its owners don't decide to break it up, so all of its losses will eventually be able to be applied.

The model is necessarily simplistic, but illustrates the point; I didn't see the point of adding present value calculations, etc.

Corporate investors have five years to capture the loss or it is forfeited; sorry. And as I said, an individual recapturing the loss in, say, year 7 has received a greatly reduced benefit.

There was a good article in Forbes that addresses this issue pretty well:

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here's the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you'll pay on the assumed cash flow—and you only count the amount you'll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa.

“Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate” (except for a 100% rate!). He's also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It's just math and logic, unassailable and commonly accepted regardless of one's political persuasion.
Clifford Asness: Buffett Knows That Tax Rates Matter - WSJ.com

Re: the first bold print that I added - That is true - but it is true for all investments. If you turn the ordinary income tax rate up high enough while leaving the capital gains rate low - you will drive money from the bond market to the stock market. If you do the reverse - the opposite will apply. All you're doing is changing the type of investment. Investors still have to have a place to put their money - and as I have demonstrated, taxation will only turn a positive return into a negative one (over the long term) for the shoddiest of investors.

As the article states, investment decisions occur and have an effect at the margin. Higher investment taxes will eliminate marginal projects which will stunt growth. When growth is 2-3% we feel good about the expanding economy; when it’s -.5% everyone screams recession. This is a relatively small difference in percentage terms. It’s the marginal decisions that drive those differences.

In fact - taxation reduces investment risk by lowering the effective volatility of the investment. If the investment goes up 10% and is taxed at 20%, it effectively only went up 8%. If it goes down by 10% - then you get 2% in reduced tax liability (that may not be applied in that year but will be eventually applicable). So the investment is no longer a +/- 10% proposition, its a +/- 8% proposition the risk profile is lowered.

Oh my gosh; I never thought of that! The government is doing us a favor by reducing our effective volatility! You know, we could eliminate all volatility by simply raising the rate to 100%; the investor could neither win nor lose. Risk free investing! They could call the bill the INFORIT act (Investing Free Of Risk to Insure Trading); we’d all be "in for it"!