Patrick's Rants


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12/23/2010

Flash of Brilliance

Filed under: Money,Politics,Taxes — site admin @ 5:02 pm

In This is What You Get I wrote

The so-called rich who supposedly created jobs, stuck their money in the stock market and reaped a 15% tax rate instead of starting businesses which would have been taxed at over 30% – higher if you count all the unemployment taxes, workers’ compensation, etc. See how that works? 15% versus over 30%, where would you put your money if you had it, start a business with all of the headaches or just put it into IBM stock?

which caused my mind to have a flash of brilliance – even if I do say so myself.

Here’s my tax plan: eliminate the reduced long term holding rate. See how easy that is? Of course you can’t just toss it right out the window, there has to be some kind of balance. Here’s my balance and my reasoning. Let’s use IBM stock from the quote as an example. If investors paid the same on net profits from businesses as they do for net profits on long term stock sales the negative tax consequence of hiring someone versus buying IBM stock goes away.

There has to be an exception of course and I think even Warren Buffett will like my idea. Drum roll please… allow lower tax rates on new stock issues or new company investments. If there are too many trees in this forest, let’s look around. If you buy 100 shares of IBM in the stock market you are not buying them from IBM and IBM gets no direct benefit from your purchase. In fact IBM may not have gotten any direct benefit from your purchase in years or decades1 when the shares were first issued. Let people who are willing to invest in startups or in new stock issues get a break similar to the small business stock break that true engines of the economy invest in. Let the stodgy investors have their IBM but give them no break for buying their shares from another shareholder.

So the following people would be on the same footing – tax-wise at least:

  • Small business owners who work in their business and hire people
  • Hedge fund investors
  • Old money families, living off the dividends and capital gains created by others
  • People receiving payments from their Traditional IRAs or other retirement plan deducted from taxable income at some point in the past2

I would leave the special treatment on government bonds alone. Ditto (whoops, Limpbaugh may try to sue me for using that word) the home sale exclusion. I say if you want reduced taxes from investments, loaning money to the government benefits everyone. If the rates on other investments rise, big money is more likely to seek non-taxed returns theoretically reducing the interest rate required to be paid due to demand.

Now, why did I write that Warren Buffett would like this idea? First, he’s stated that he doesn’t really think that it’s fair that he pays a lower rate than his administrative assistant. Second, he has infused GE (and others) with direct capital (taking out warrants and preferred stock) and would under these rules still benefit from lower tax rates since he has purchased his stock directly from the company.

So is it brilliant or what? I wonder if Obama or McCain read this blog?

  1. Of course the value of the shares boosts IBM’s ability to borrow money and issue bonds which admittedly does benefit IBM
  2. Who get screwed under the current system because their stocks and bonds and dividends are treated the same tax-wise as wages. They would still be treated as wages, but everyone else in the stock and bond boat would be taxed the same.

I was going to run all the calculations on owning IBM stock, but the sun is getting low in the west and I’ve real work to do.

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