Progressive capital gains tax

[it_aint_easy]

Something I was thinking of before the State of the Union address, and even more now

Comments

[billroper]

I tripped over this article this morning, which suggests that the favorable capital gains rate factors in corporate taxes that are applied first, so that the real tax rate to investors in corporations is much higher than it would otherwise seem to be.

[patoadam]

This seems similar to the claim you frequently hear about the double taxation of corporate dividends. I would love to be able to ask an economist if that is a valid argument or a plausible lie.

Suppose I buy a motorcycle. The motorcycle dealer is taxed on his profits. He takes his money and hires a painter to paint his house. The painter is taxed on his profits. Money is taxed over and over as it flows through the economy. Are corporate profits and corporate dividends any different? I don't know.

[billroper]

You need a simple example of how introducing the corporate taxes increases the overall tax burden. So let's try this:

I am the sole proprietor of a motorcycle dealership. I sell you a motorcycle and make a profit. Because I sell a lot of motorcycles, I pay taxes at the highest marginal rate which I'll take as being approximately 35% for this example. When that's done, I end up with X dollars in my pocket.

I own a motorcycle dealership which is organized as a C-corporation. It sells a lot of motorcycles and pays taxes at the corporate tax rate of 35%. Because I am Warren Buffett, I don't draw a salary, but I collect my income as dividends from the corporation which had the same X dollars on hand at the end of the year. If I collect those X dollars as dividends, then I pay 15% * X in personal income taxes.

So instead of having X dollars as a sole proprietorship, I have .85 * X dollars as a C-corporation.

[patoadam]

Thank you. That makes sense.