The Middle Class

Stop favoring speculators and investors over them.

That applies to both parties. The Republicans could make this an electorally popular strategy, but too many of their donors would object.

I would note, though, that if you’re going to tax capital gains more, you need to provide a way to factor out inflation, because a devaluation of the currency doesn’t provide a true capital “gain.”

26 thoughts on “The Middle Class”

  1. The war on the middle class — by both left and right, government, corporations, education and perhaps more — will not turn out well for the people making war on the middle class. Very briefly, something like this was going on in France in the 18th Century. It kept up until July 14, 1789. That day is now celebrated in France and elsewhere as Bastille Day — the day the peasants revolted, killed the aristocracy and began the French Revolution. Perhaps that event is now finally working out for the best in Europe. I do also remember Napoleon and his brief conquests, the Franco-Prussian War, WW I and WW II and more.

    Something like it was going on in England in the 19th century. Because of things like the English Civil War, the American Revolution and people like Charles Dickens, reform was chosen. It seems to have worked out better for everyone — especially people like Queen Victoria and Queen Elizabeth II.

    I will recommend that people read Charles Dickens’ A Tale of Two Cities.

    1. I’m buiding a full-size, working guiolltine, in case anyone is in tersted. Strange that those aren’t controlled, isn’t it?

  2. Gee Rand, this meme of stop favoring speculators and investors over The Middle Class is straight out of the Obama/Axelrod playbook.

    Where do you set the cutoff between Middle Class and the Speculator and Investor Class? Mr. Obama picked this number of 200K AGI for Married Filing Jointly, and everyone above that was “the rich” who needed to shoulder a higher tax burden? 200K AGI is pretty much in “the rich” category for many, many other taxpayers, but for a two-earner household in a big city with a high cost-of-living and child care expenses, 200K might not go all that far — it certainly didn’t go that for for the Obama family prior to “that book coming out”, and yes, there was a lot of information to that effect in their published tax returns from that time.

    1. “Where do you set the cutoff between Middle Class and the Speculator and Investor Class? ”

      The article was about capital gains not regular income. The real question is how do you separate out people investing for retirement and people investing as a form of business. The number of people getting rich off investment income is rather small. It doesn’t seem fair that in our zeal to target them, we catch up the tens of millions that have stocks for retirement. Increases in taxes can wipe out a lifetime of gains for these people.

      In all of the proposals to raise the capital gains tax, no effort is made to separate these two groups. Mitt Romney is treated the same was as the 85 year old retiree living off modest investment returns and social security.

      I am not even certain that a tax increase will be the silver bullet the author at the link wants. The market is the way it is today in large part because of two factors. The feds are printing and pumping money into the financial industry to the tune of what $60b a month? And the yields on bonds have been close to zero. People have been avoiding bonds and are forced to put money into the stock market if they want a return. Printing and pumping has been good for the financial industry which makes the stock market appear to be in good shape. This is by design. Which is why if you say how bad the economy is some Obama fan will retort look at how well the stock market is doing.

      If the problem is too many people (hundreds? thousands?) of people making a lot of money off stocks, is the answer to raise taxes on people investing for retirement or to stop giving financial institutions free money?

      1. “In all of the proposals to raise the capital gains tax, no effort is made to separate these two groups. Mitt Romney is treated the same was as the 85 year old retiree living off modest investment returns and social security.”

        Where do you draw the line?

        1. I am not sure. That is the key question. Retirees make things tricky because they appear wealthy but you have to consider how long they have to live on that wealth and how much things cost toward the end. A hundred k return in any given year sounds like a lot but not if a person is in assisted living.

        2. treat capital gains like income. A retiree with 1 million in savings, making 5% and
          50K will pay taxes just like an office worker making 50K.

          let a retiree deduct medical expenses.

          1. Retirees need safe investments because they don’t have much time to recoup losses. The government’s policy of keeping interest rates artifically low helps borrowers (especially the government itself) but hurts savers and retirees. Right now, safe investments like CDs are paying around 1% or less, so that million dollar nestegg may provide a return of $10,000 a year before taxes. Not much to live on, so people are either depleting their principle or switching to other investments. Annuities sometimes offer rates in the 5% range but there are risks and drawbacks to consider. Fixed annuities don’t increase with inflation so as the person gets older (often with higher medical expenses), the returns have less real value.

            Stocks and mutual funds can have higher rates of return but also much lower returns, even significant losses.

  3. When you have the Fed calling deflation a danger, that is anti-middle class. As long as the funding of stimulus goes to the banks for speculation, the middle class is hurt.

    Persistently low inflation poses a more immediate threat to the U.S. economy than rising prices, Federal Reserve Chair Janet Yellen said on Wednesday, stressing that the U.S. central bank would be delivering policy stimulus for some time to come.

    http://www.reuters.com/article/2014/04/16/us-usa-fed-yellen-idUSBREA3F1A420140416

    1. And maybe when the next President enters office, they will look at the downside of stopping QE and will continue pumping money into the financial industry. With all of the talk about money’s corrupting influence in politics, I have no idea how Obama gets away with printing tens of billions a month and giving it to his campaign donors. But we gotta stop those Tea Party groups from getting tax exempt status…

    2. Deflation poses an issue because a lot of people are bogged down in debt. That is how this economic crisis started in the first place. If there is a currency devaluation the debts become easier to pay.

      Of course the trick is how to do that without getting hiperinflation.

      1. Believe it or not, deflation is a good thing. Why do I have to suffer with my savings to help those in debt? Why do I have to pay exorbitant prices on medicine, real estate, education, etc? I remember my econ profs saying inflation was acceptable with a fiat currency. They said that deflation was bad. One professor was a socialist and the other a monetarist. In reality, deflation is a necessary component of a business cycle, and it rewards savers who go in to bail out those who are in debt.

        Our dollar is only worth 4% of what it was in 1913 when the Federal Reserve was established.

    3. Inflation punishes savers, while deflation punishes debtors.

      I was always taught to be frugal and put some money away for a rainy day, to put off instant gratification in exchange for financial security in the future.

      Today’s financial system runs on debt. Indidviduals, corporations, and most of all governments use debt to borrow from the future in order to live beyond their means today. Those people all prefer inflation, which reduces the value (and hence the pain) of their debt payments.

      Inflation also reduces the value of my savings, which makes me a chump for living responsibly.

      If we had a perfectly stable currency, deflation would be the natural state of things, as technological advances and manufacturing efficiencies brought down the price of goods over time. This means an increase in our standard of living, as it takes less cash to buy more goods.

      Inflation destroys our standard of living. By reducing the value of our savings, it forces us to run faster and faster just to stay in place.

  4. In a related vein, see this: Elon Musk’s Sacramento Pay Pals

    It’s behind the subscription wall, but I just read it in the dead tree edition. Apparently there’s a bill moving through the California legislature to exempt space firms from the personal property tax. Don’t you ust love it when politicians play favorites, or use the tax code as a system of rewards and punishments?

  5. “In the past, this differential in tax rates often was furiously justified – usually by conservatives – as sparking investment and job creation that would benefit younger and poorer Americans.”

    Um, no. The reason capital gains tax is lower is because money from capital gains is taxed twice. As a shareholder, you own x% of the profits of the company. But the company has to pay a tax on those profits, which directly comes from your share. Then the company either gives the money to you directly or reinvests it (increasing the stock value). When you get the income, either by selling your shares after the value increase or by accepting the dividend, you are then taxed again. This is called the “double taxation” problem. The best solution is the one put forth for small businesses – the business doesn’t pay the taxes, the shareholders do. But that isn’t workable for larger companies with too many shareholders…

    So they use a lower capital gains tax instead…

    1. the company has to pay a tax on those profits

      Had to pay taxes on the profits before Hollywood accounting became widespread for megacorps. e.g. Apple has limited its tax liability by claiming they have expenses paying patent royalties. Yet the patent royalties are being paid to an offshore holding company they own as well so the scheme is effectively a way to shuffle profits without paying taxes.

      So the solution they came up with is to tax at the end points of the transactions.

    2. that may be true for stock but it’s not true for Real estate.

      You buy a small island off the Hudson river for 24 dollars in trinkets, you sell it later for a billion.

      not a lot of taxes in the meantime.

      1. There’s the Alternate Minimum Tax. It creates a bunch of new problems by attempting to solve this perceived one.

      2. Depends on where you live. In many places, property taxes are high. There’s more than the income tax, you know. Or do you know?

        Federal income tax
        Social Security tax
        Medicare tax
        State income tax (most states)
        Property tax
        Gasoline tax (federal and state)
        Sales tax (most states)
        Utilities taxes (electric, gas, water, sewage)
        Phone taxes (landline and/or cell)
        Corporate taxes buried in the cost of everything we buy
        And many, many more including “fees” on many activities that are just taxes by another name.

  6. I figure there’s a simple way to do taxes on investment income that accounts for inflation: Buy an investment, 100 percent deduction on taxable income. Sell same investment or take a dividend, full sales price or dividend as ordinary income. For a buyer taking the deduction, a seller counting matching income, taxes accounted for. An investment bought and deduction taken in pre inflation dollars, sold and income paid in post inflation dollars. This should be as part of a larger flat rate tax reform.

    Of course the economically illiterate lefties will hate this to no end.

    1. A more straight-forward approach would be to factor in inflation to determine true capital gains. Let’s create a hypothetical investment and see what happens.

      In 1994, Joe buys $100,000 worth of some investment. In 2014, he sells the investment for $160,000, realizing a paper gain of $60,000. Not adjusted for inflation and with a 20% capital gains tax, he owes the government $12,000. According to an online inflation calculator, the inflated price of that 20 year old investment is $159,441.97, so his real gains were actually $558.03. His tax liability should only be $111.61, not $12,000.

      1. You presume the official inflation rate is somehow based on reality. With the current regime that is hardly the case.

        1. True, but that doesn’t disprove my point that gains should be indexed to inflation. The government plays with how it calculates inflation because under the law, things like Social Security payment increases are tied to the official inflation rate. They manipulate the interest rates to keep them artifically low because they’re borrowing so much money. Low interest rates help borrowers but hurt retirees who need to live off of their interest as much as possible to avoid depleting their principle. With so few investments paying any kind of returns (a “good” CD rate today is about 1% and many pay much less), people are either depleting their principle or switching to more risky investments like the stock market. This also puts their principle at risk.

      2. This is one of the uglier problems with a capital gains tax. Inflation inflates your capital gains taxes when you finally sell.

  7. I don’t see why investments should be taxed at all. Aren’t the things invested in already taxed?

    Taxing income required an amendment. Obama doesn’t need that pesky process.

    Taxed Enough Already. The government will never get smaller if we continue to grow what they take.

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