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The Annual Bailout of 'Investors'
Much huffing and puffing on the Potomac about a $700 billion bailout. Not a peep about one that could be just as big.
Every spring, thanks to a generous tax code provision, the Treasury picks up part of the tab for losing bets on Wall Street. Given last year's historic plunge, these personal bailouts might wind up rivaling TARP's $700 billion—and there's no dollar cap or cut-off date.
It all adds up to a looming hit on the Obama Administration. No matter how large the losses realized in 2008, no matter how long it takes investors to recoup, Uncle Sam will be sharing the pain. Deeply sharing: up to 35 percent depending on the loser's tax bracket, or 39.6 percent if Obama ends the Bush tax cuts for higher-income Americans.
Capital loss offsets are the tax code provision that soothes investor wounds. When the year's trades are reported on tax returns, losses offset taxable gains dollar-for-dollar. If net losses exceed gains, the loss offsets taxable income—by up to $3,000—and provides another tax saving.
Offsets never lose their tax-reducing power. Losses greater than $3,000 (as last year's probably were) are carried forward indefinitely until they're used up.
At 15 percent, the tax on long-term capital gains is low compared to the rate on ordinary income like wages. With capital loss offsets, the deal is even sweeter on the downside. While gains are taxed at less than half the top rate, losses are written off at 100 percent across the board. Could losing come any closer to winning?
Yes, say Senator John McCain and Michael Boskin, a former chairman of the Council of Economic Advisers. Senator McCain has proposed raising the capital loss offset against ordinary income from $3,000 to $15,000 per-year for 2008 and 2009. Boskin would up the number to $20,000.
All of which raises some interesting questions. Who profits from these write-offs? Is there good reason for the government (read: taxpayers) to subsidize investment losses? Might the tax system be fairer, and rates perhaps lower, if these subsidies were curbed or even ended?
The first question is easy. Roughly 50 percent of Americans own no stocks, so offsets hold nothing for them. Of the half who do own stocks, most have their portfolios in tax-sheltered retirement accounts. They don't get those write-offs, either.
That leaves a fairly narrow layer, those affluent enough to have non-retirement stock portfolios. In other words, the benefits of capital loss offsets flow solely to those who have ample capital. (If this hints at class warfare, here it is served neat by Warren Buffett: "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.")
As to whether subsidies for investors are a sound government policy, sure they are—but it's foolish to hand out tax breaks just for playing the market. Real investors, a thimbleful of the total, put seed money into initial public offerings (IPOs) and follow-on offerings. They grow jobs and grow businesses. The rest of us play the game at the tables down on Wall Street: we grow portfolios (if we're lucky), nothing more. Real investors have a strong claim to tax breaks. "Investors" have a frail claim, and it's time that Congress caught on.
Tax fairness—as always—is in the eye of the 1040 filer. Still, facts matter. Capital loss offsets benefit the few at the expense of the many. Like all tax deductions, they're paid for by taxpayers in the aggregate—through higher rates, fewer government services, or both. Taxes would be fairer without offsets. Short of repeal, Congress could set a dollar or percentage limit (a form of which was on the books years ago). At the least, the offset against ordinary income should be scrapped.
Except for real investors, who are 100 percent deserving of 100 percent offsets (and an income offset too). If they lose more than $3,000 in a year, Michael Boskin's $20,000 income offset is a starting point. Do I hear $30,000?
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15 Comments so far
Show AllIf a corporation is a "person" for Constitutional purposes, why aren't they all taxed like actual people?
Some persons are more equal then others.
The article is about capital loss write offs for *individuals*.
"Who profits from these write-offs?..... Roughly 50 percent of Americans own no stocks, so offsets hold nothing for them. Of the half who do own stocks, most have their portfolios in tax-sheltered retirement accounts. They don't get those write-offs, either."
While top managers in our failing "bankster" system are walking away with $$millions in bonuses after recieving "TARP" (taxpayers' money), our Congressional leaders want to hand them even more money in tax-breaks?
What a f%#@**g scam!
A key word on any proposal for tax increases is "graduated". Phase in increases for those with higher gross incomes, or likewise, phase out tax breaks for those with higher gross incomes. That spares the small investors who may have simply invested in stocks instead of a house, but still catches the bulk of the tax income on richer people that the author wishes to catch.
Congress is already allowing home builders to write off 2008 losses against previous years' profits. Many will be getting refunds for the taxes they paid when they were making big profits during the real estate boom.
It pays to have a strong lobby.
A good way to fix this problem would be to eliminate all federal taxes for everyone forever.
One important correction: $700 billion is NOT the "bailout" total.
From Dec, 2008: "The total potential cost of the financial bailout to the U.S. taxpayer is already rapidly approaching $5 trillion, over seven times as much as the meaningless $700 billion bailout bill figure."
Since then, Bloomberg guesses the number is now approaching $7.5 trillion.
$700 billion was nothing more than an arbitrary number meant to placate the "little people." And even that was a lie when TARP was passed, cause it included an additional $150+ billion in "tax relief" and misc. pork.
The promotion and encouragement of a highly rewarding form of parasitism, and the lack of attention to production and the common welfare, over the decades leads to a hollowed out economy and economic catastrophe? And during such catastrophe the parasites continue to play the government for their own benefit, worsening the fiscal situation? Who woulda thunk it?
"...it's foolish to hand out tax breaks just for playing the market."
I would suggest it's foolish to hand out tax breaks for anything. The damage done by abuse of the basic principle negates its value. The government should not be in the business of incentivizing anyone or anything. It really doesn't work and this articles points out one of many pitfalls. Ethanol, oil depletion allowance, S&L debacle for starters.
"Who profits from these write-offs?"
Profit? We are talking about capital *loss*! If I buy something at $10,000 and sell it for $7000 for the mere $3000 loss in question, my tax bill is reduced by my marginal tas rate on the $3000. Taxes are an *expence*! What "profit" are you talking about? I still lost $3K!
"Of the half who do own stocks, most have their portfolios in tax-sheltered retirement accounts."
Citation needed, as to how many ordinary Americans who have tax-sheltered retirement accounts and *don't* also have a regular non tax sheletered account like I do. My income is less than the national median.
"That leaves a fairly narrow layer, those affluent enough to have non-retirement stock portfolios."
The author is merely guessing, having provided no break down, so this statement is safe to reject out of hand in the absence of evidence. There is no requirement of "affluence" to have a non-retirement portfolio. All you have to do is live within your means, max out your 401K, and put additional savings in a non retirement account like I do.
"Who profits from these write-offs?"
Or instead, who finds the write offs helpful? The middle class by far. Or those who don't quite qualify for that status like me. It's *only* 3K a year! For the "elite" that's nothing. Let's try to answer the question next time.
"The author helped pass a bill that tightens the rules for reporting capital gains on tax returns."
Before messing around trying to get laws passed I'd strongly suggest he take a couple 101 courses, or at least crack open some of th "For Dummies" books.
"His op-eds on tax policy have appeared in several major dailies and on numerous websites."
His op-eds would be much more effective if he didn't twist the language and make broad demographic assumptions.
Giving money to still deregulated banks is akin to giving a beer to an alcoholic and hoping that he will remain sober after drinking it.
You want tax fairness? Tax property, not income.
How much property does a billionaire control? Well, a billion dollars worth. Tax it say at a ninety percent rate per year. In a few years we would not have billionaires, nor the great divide between the super rich and everyone else.
But, you just keep electing the same corporate shills, don't you?
To Jake Newton:
You have much to say, but you never address the issue: give me one reason why taxpayers should help pay for your stock losses.
To: Jake Newton
Citations? The information I used has been printed time and again. For a recent example, see "Investment Tax Cuts Help Mostly the Rich," an article by Floyd Norris in the 1/10/09 NY Times. Here's a portion:
"...while the pain of the bear market has been spread widely, the tax benefits of stock ownership have become more concentrated among the wealthy.
"That seeming paradox stems from the differing treatment of profits on capital gains, depending on whether the stock or other asset is held in a taxable account or a retirement account.
"Most Americans hold stocks, and stock mutual funds, in their retirement accounts, principally in 401(k) accounts. Those accounts are not taxed until the money is taken out, usually after retirement. But then, the money is fully taxed at ordinary income tax rates, regardless of whether or not it came from capital gains.
"As a result, the reduction of the tax rate on long-term capital gains to 15 percent in 2003, and the accompanying reduction of the tax on most dividends to the same amount, provided no additional benefits to most Americans. But it produced substantial benefits for those who owned stocks in taxable accounts."
The same applies to capital loss offsets.