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# Hillary's Tax Plan is Disastrous

 Posts: 12,398 Add as FriendChallenge to a DebateSend a Message 7/26/2015 2:38:01 PMPosted: 2 years agoHillary Clinton unveiled part uno of her tax plan regarding income from capital gains. You can find comprehensive summaries of her plan both here [http://www.businessinsider.com...] and here [http://www.vox.com...].The crux of her proposal is to tax capital gains on a sliding scale, whilst maintaing the logic of the current system which provides preferential tax treatment to longer-term capital gains. Under the current system, investments held for under one year are taxed as ordinary labor income, plus the 3.8 percent ACA surcharge. In reality, of course, that isn't *actually* a rate of 39.6 percent, and here's why: capital income is, inherently, a double tax. It was taxed once as labor income prior to people opting to invest that money in a stock or a bond to earn a return, and then a second time as investment income. Therefore, the actual tax rate on a one-year investment can be calculated as follows:Let's say you earn \$100 in PV terms. You pay 39.6 percent -- of course, let's assume for the sake of argument this is the effective rate, which in reality, after accounting for state and local taxes, is a pretty fair assessment -- or \$39.60 in taxes. You then invest the remaining \$60.4 in lieu of consuming with it now, the implication being that you're *withholding* gratification today for the sake of a longer-term gain, and thus you ought to be rewarded for it. Irrespective of what your return is -- i.e., what the discount rate is -- we could levy the tax on the PV of your before-tax investment earnings, which is \$60.4. Drop the 39.6 percent tax, plus the 3.8 percent surcharge (or, in other words, a 43.4 percent tax) on that, and we get an additional \$26.21 paid from the initial \$100.\$39.60 + \$26.21 = \$65.81/100 = 65.81 percentSounds pretty harsh, right? If you knew you were bearing a 65.81 percent tax, in lieu of a 39.6 percent tax if you consumed with your earnings today, wouldn't you merely spend now? That is the inherent problem with capital taxation: it's a double taxation that discincentivizes saving today for the sake of consumption, and that has costs for longer-term trend growth. That's why there's a wide body of literature stipulating the optimal capital tax rate is 0 percent. If you were to look at a basic Solow model, for instance, capital accumulation can be expressed as follows:delta k = [savings * TFP * k^a] - [(delta + n)k]where delta k = change in capital, savings is the savings rate, TFP is total factory productivity, a is a parameter for the capital's share of income, delta is the depreciation rate, and n is population growth. If you drop the savings rate, you end up with a chronic imbalance of investment over savings, which reduces the PV of consumption today relative to the golden-rule capital-labor ratio.Now, Hillary's idea of impacting corporate culture such that they prioritize longer-term investments over short-term, quarterly earnings reports, is well-intentioned. However, it's not the least bit practical nor desirable in practice. Primarily, this is because of a well-documented phenomenon called "habitat preference": investors desired to hold assets of certain maturities. They're not, magically, going to switch to a six-year maturity or hold onto their assets for a longer period of time to receive preferential treatment under Hillary's tax plan: it's incredibly naive and devoid of reality to reason as much. Rather, they're simply going to forego investments and spend more today. Savings rates would plummet, trend growth -- which is already sh1t because of a number of other structural factors -- would fall further, and innovation would crater.This is possibly the worst way Hillary could seek to raise revenue, even worse than Bernie Sander's proposed tax on financial transactions. If more revenue is what she desires, the only reasonable way to go about it is with a transition to a progressive consumption tax.~ResponsiblyIrresponsible DDO's Economics Messiah
 Posts: 24,702 Add as FriendChallenge to a DebateSend a Message 7/27/2015 12:16:34 PMPosted: 2 years agoIndeed it's scary. That's the main reason a lot of jobs are leaving, because we're discouring them. Hell she almost wants to double it to 40%.-~-~-~-~-~-~-~-Lannan13'S SIGNATURE-~-~-~-~-~-~-~- "If you are going through hell, keep going." "Sir Winston Churchill "No one can make you feel inferior without your consent." "Eleanor Roosevelt "Sometimes it is hell, trying to get to heaven."- Undertaker Keep a Positive Mental Attitude! DDO Hall of Famer
 Posts: 5,200 Add as FriendChallenge to a DebateSend a Message 7/29/2015 2:49:52 PMPosted: 2 years agoI just read the article. What you have calculated is not right.If I make a \$60 investment. I don't pay any taxes unless there is a capital gain, just like it works today. In other words, if I sell it at \$60 there is zero gain and zero taxes. There is no double taxation. If I make a gain say I sell it at \$70, my gain is \$10 and I only pay taxes on the \$10. That is new income separate and distinct from the \$60 invested, no double taxation.If I loose \$10 in the investment, I actually get to write it off so my original income tax liability is reduced on the labor income, no double taxation.
 Posts: 12,398 Add as FriendChallenge to a DebateSend a Message 7/29/2015 3:20:15 PMPosted: 2 years agoAt 7/29/2015 2:42:52 PM, slo1 wrote:I don't get it. Your calculation of combining labor income tax with capital gains tax seems to be missing a capital gain. Are you really stating that Hillary wants to implement a tax on investment in addition to a capital gain tax? Something seems wonky here.No, not at all. I calculated an effective tax on short-term investment -- under one year -- under Hillary's tax plan, using PV terms. Every part of it was sound: income is taxed first as labor and then again as capital gains. To actually find an effective rate, I used a present value with a constant discount rate as the rate of return. Every step was perfectly sound.~ResponsiblyIrresponsible DDO's Economics Messiah
 Posts: 12,398 Add as FriendChallenge to a DebateSend a Message 7/29/2015 3:24:21 PMPosted: 2 years agoAt 7/29/2015 2:49:52 PM, slo1 wrote:I just read the article. What you have calculated is not right.If I make a \$60 investment. I don't pay any taxes unless there is a capital gain, just like it works today. In other words, if I sell it at \$60 there is zero gain and zero taxes. There is no double taxation. If I make a gain say I sell it at \$70, my gain is \$10 and I only pay taxes on the \$10. That is new income separate and distinct from the \$60 invested, no double taxation.There was double taxation; you're just obfuscating the issue entirely. The \$60 you had to invest was already taxed once as labor income, and applying some discount rate it'll grow if invested over X period of time. The additional income -- yes, you're right that I mistaken;y didn't calculate a tax rate solely on the marginal difference -- was already taxed once because it's merely pushing a cash flow forward a few years.If I loose \$10 in the investment, I actually get to write it off so my original income tax liability is reduced on the labor income, no double taxation.All that means is you were applying a negative discount rate; technically, that's a negative tax.~ResponsiblyIrresponsible DDO's Economics Messiah
 Posts: 12,398 Add as FriendChallenge to a DebateSend a Message 7/29/2015 7:35:49 PMPosted: 2 years agoI thought this over a lot, and slo is right -- I did make a slight mistake in the calculation, which would significantly push downward the effective tax rate on capital taxation. I maintain that it's a double tax nevertheless, but not nearly as profound as 65 percent.Let's re-do this.Starting pre-tax labor income: \$100Labor income tax rate: 39.6 percentAfter-tax income: \$60.40Then let's say we take the entirety of that \$60.40 and invest it over a 1-year period. For the sake of argument, let's say you put it in a safe asset, like a Treasury build. The current 1-year rate is 32 basis points, so that'll be our return. Therefore, after one year the \$60.40 will turn into \$60.59 -- that's merely pushing the cash flow one year into the future. The resulting .19, because it's a one-year investment, is taxed at 39.6 percent, meaning you pay 7.65 cents (let's not round to keep the calculation precise). In present value terms, using our same discount rate, that 7.65 cents is 7.62 cents (7.65/1.0032). That means that, without question, the effective tax burden in PV terms is higher. In particular, in PV terms you paid:\$39.60 + \$0.0765 = \$39.68 >>>> 39.68%Granted, that doesn't look like much, but that's because I used a risk-free, one-year discount rate. If that rate were higher, as it would be for any high-grade stock, our tax burden in PV terms would be far higher, and that's the problem with Ms. Clinton's proposal.~ResponsiblyIrresponsible DDO's Economics Messiah
 Posts: 10,539 Add as FriendChallenge to a DebateSend a Message 7/29/2015 11:46:52 PMPosted: 2 years agoyeah, her tax plan is cancerous. She has jumped to the left because of Bernie, and I dunno how moderate she will be in her first term if she were to win (because running to the center would label her a flip flop, which would hurt her for a second term).I much prefer Jeb to Hillary right now.https://www.youtube.com... https://rekonomics.wordpress.com... "A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
 Posts: 6,918 Add as FriendChallenge to a DebateSend a Message 7/30/2015 3:55:28 AMPosted: 2 years agoAt 7/29/2015 11:46:52 PM, 16kadams wrote:yeah, her tax plan is cancerous. She has jumped to the left because of Bernie, and I dunno how moderate she will be in her first term if she were to win (because running to the center would label her a flip flop, which would hurt her for a second term).I much prefer Jeb to Hillary right now.I'm so surprised that *you* prefer Jeb to Hillary. I mean, you've always supported Hillary the most, right?/sarcasmJust because you're magic doesn't mean you aren't real. http://gotejas.com...
 Posts: 10,539 Add as FriendChallenge to a DebateSend a Message 7/30/2015 5:13:52 AMPosted: 2 years agoAt 7/30/2015 3:55:28 AM, tejretics wrote:At 7/29/2015 11:46:52 PM, 16kadams wrote:yeah, her tax plan is cancerous. She has jumped to the left because of Bernie, and I dunno how moderate she will be in her first term if she were to win (because running to the center would label her a flip flop, which would hurt her for a second term).I much prefer Jeb to Hillary right now.I'm so surprised that *you* prefer Jeb to Hillary. I mean, you've always supported Hillary the most, right?/sarcasmJeb is better in pretty much every way :Phttps://www.youtube.com... https://rekonomics.wordpress.com... "A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
 Posts: 6,918 Add as FriendChallenge to a DebateSend a Message 7/30/2015 5:14:31 AMPosted: 2 years agoAt 7/30/2015 5:13:52 AM, 16kadams wrote:At 7/30/2015 3:55:28 AM, tejretics wrote:At 7/29/2015 11:46:52 PM, 16kadams wrote:yeah, her tax plan is cancerous. She has jumped to the left because of Bernie, and I dunno how moderate she will be in her first term if she were to win (because running to the center would label her a flip flop, which would hurt her for a second term).I much prefer Jeb to Hillary right now.I'm so surprised that *you* prefer Jeb to Hillary. I mean, you've always supported Hillary the most, right?/sarcasmJeb is better in pretty much every way :PLolJust because you're magic doesn't mean you aren't real. http://gotejas.com...
 Posts: 10,539 Add as FriendChallenge to a DebateSend a Message 7/30/2015 5:16:06 AMPosted: 2 years agoAt 7/30/2015 5:14:31 AM, tejretics wrote:At 7/30/2015 5:13:52 AM, 16kadams wrote:At 7/30/2015 3:55:28 AM, tejretics wrote:At 7/29/2015 11:46:52 PM, 16kadams wrote:yeah, her tax plan is cancerous. She has jumped to the left because of Bernie, and I dunno how moderate she will be in her first term if she were to win (because running to the center would label her a flip flop, which would hurt her for a second term).I much prefer Jeb to Hillary right now.I'm so surprised that *you* prefer Jeb to Hillary. I mean, you've always supported Hillary the most, right?/sarcasmJeb is better in pretty much every way :PLolI mean, except for a few things (like breaking up the big banks, which I don't even know if Hillary has a position on) Jeb is better in every way.https://www.youtube.com... https://rekonomics.wordpress.com... "A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
 Posts: 3,162 Add as FriendChallenge to a DebateSend a Message 7/30/2015 5:37:13 AMPosted: 2 years agoAt 7/29/2015 7:35:49 PM, ResponsiblyIrresponsible wrote:I thought this over a lot, and slo is right -- I did make a slight mistake in the calculation, which would significantly push downward the effective tax rate on capital taxation. I maintain that it's a double tax nevertheless, but not nearly as profound as 65 percent.Let's re-do this.Starting pre-tax labor income: \$100Labor income tax rate: 39.6 percentAfter-tax income: \$60.40Then let's say we take the entirety of that \$60.40 and invest it over a 1-year period. For the sake of argument, let's say you put it in a safe asset, like a Treasury build. The current 1-year rate is 32 basis points, so that'll be our return. Therefore, after one year the \$60.40 will turn into \$60.59 -- that's merely pushing the cash flow one year into the future. The resulting .19, because it's a one-year investment, is taxed at 39.6 percent, meaning you pay 7.65 cents (let's not round to keep the calculation precise). In present value terms, using our same discount rate, that 7.65 cents is 7.62 cents (7.65/1.0032). That means that, without question, the effective tax burden in PV terms is higher. In particular, in PV terms you paid:\$39.60 + \$0.0765 = \$39.68 >>>> 39.68%Granted, that doesn't look like much, but that's because I used a risk-free, one-year discount rate. If that rate were higher, as it would be for any high-grade stock, our tax burden in PV terms would be far higher, and that's the problem with Ms. Clinton's proposal.Not your best analysis to be honest, RI. First and foremost, you don't seem to understand how marginal tax rates work, and it is throwing off your math by a lot. Also, we are talking about the TOP rate here-- over \$400,000 income bracket. Second, you assume that investments are paid with labor income when they are surely often paid for by earnings from other investments.Also, you seem to be criticizing capital gains tax in general without actually addressing Clinton's plan specifically. It is similar to the current system except with a sliding scale tax penalty for investments held under 6 years rather than the current set penalty for holdings under one year."I don"t have faith in faith I don"t believe in belief You can call me faithless But I still cling to hope And I believe in love And that"s faith enough for me" -Rush
 Posts: 3,162 Add as FriendChallenge to a DebateSend a Message 7/30/2015 7:06:01 AMPosted: 2 years agoOops-- I meant *the history of capital gains TAX*"I don"t have faith in faith I don"t believe in belief You can call me faithless But I still cling to hope And I believe in love And that"s faith enough for me" -Rush