More Proof of the USA's FUBAR Tax Code

[wiggin]

Actually, dividends are taxed at a flat rate. The rate is currently 15%. Also, the Obamacare national health bill contained a separate 3.8% additional investment tax (on top of dividends).

Uh... as I understand that, it only applies to 'qualified' dividends, though that's most dividends that have been paid out in the US in the last 8 years. It's also income-sensitive; I believe qualified dividends have 0% tax for the bottom two tax brackets (e.g. the same as long-term capital gains taxes). Regardless, the rate is set to go up in January to income tax levels if the law isn't changed.

As for the investment tax, while I agree with you that it's not a great idea expanding the base for Medicare taxes, it does only apply to incomes over 200k/250k. Effectively for dividends, it's raising the 2011 rate from 39.6% to ~43% (I'm not sure if the extra 0.9% is included or just the 2.9% inclusion).

Separately, capital gains taxes could possibly go anywhere. Obama's proposal to set capital gains rates at 20% is a mess because this Congress has been using blunt "pay-as-you-go" rules to interpret all tax cuts as revenue cuts. This means it's procedurally impossible for them to stick to Obama's proposal. In April the Senate Budget Committee advanced a bill setting the 2011 capital gains rate at 39%. Basically, it's a mess. Hopefully Tuesday will clear it up.

Wait a second, I though long-term capital gains would revert to 20%, not the marginal income tax rate?

[agamemnus]

The rate also varies. Capital gains taxes are currently 15%; they're scheduled to rise to 20%. This is in contrast to income taxes, which are heavily progressive. Of course, capital gains taxes aren't really double taxation since the stock price theoretically represents the value of the company, not its net revenues.

The reason why I didn't cite stock trades as a way to avoid the US corporate income tax difference (in my tax thread) is because capital gains taxes exist. If they didn't, the company could simply sell off foreign subsidiary stock in order to transfer money back, without having to pay the higher US tax rate. It would be really foolish for companies to use this method at a 15% capital gains tax rate because it is just an extra income tax, though stretched over time.

An extreme example of when the rate stretched: Company A invests 100 million in new company B (via an IPO) to fund some sort of one year mining operation. For the sake of example, let's say it buys the entire stock. In a year, the mine dries out and new company B has no more future income, but has realized a 20% profit. Company A sells all of its stock to some other company C which wants to make use of the remaining infrastructure and equipment (for its own project/operations) for exactly $114 million: the $20 million profit, plus the 100 million asset value, minus $6 million in taxes that company B owes.


Company A must now pay an extra $2.1 million (a 15% tax rate) on its $14 million investment income: on top of the 30% rate its subsidiary already paid. Thus, the effective tax rate is 40.5% ($8.1 million/$20 million).


Let's also conveniently avoid the fact that the location of the mine and the expertise to mine it could be something that company A actually sells to company B. (I'm terrible at making examples.)

Obviously, no company in its right mind would structure the mining operation like this, because it can avoid what is essentially double taxation by a variety of ways. The most simple one is making B a foreign subsidiary and then transferring the money back without paying anything extra, assuming the tax rates in both countries are the same.

[Dreadnaught]

Wait a second, I though long-term capital gains would revert to 20%, not the marginal income tax rate?

Nominally you would think so. But because this Congress is using paygo rules, some members of Congress (not everyone) are seriously thinking that keeping the rate that low is a procedural issue. I don't quite understand it to be honest. But I do know that the Senate Budget Committee did feel compelled to vote on a number in April that was that high -- and while the issue is obviously not going to be voted on today, they did pass that very high number for upper brackets.

[GGT]

Indeed, if we want the government to remove its greedy hands from our pockets, we must stop reaching into the pockets of our fellow citizens in order to reduce our tax bills. The Obama deficit commission seems to be reaching a similar conclusion, and if so, this is something both political sides should embrace. Each seeks benefits for preferred constituents, investment styles and lifestyle choices, and it’s time for that to cease.

http://blogs.forbes.com/johntamny/20...ur-tax-breaks/

Some interesting ideas.