As long as capital gains is significantly less than booking corporate profit plus dividend or passthrough of profit plus individual tax rate, I'm incentivized to grow the company with my excess revenue rather than book it as profit and distribute it.
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Trump Tax Reform - a total squeeze on middle class W2 workers
- Thread starter RedDuke
- Start date
Right, understand. Re-read your prior post but still don't see how the proposed changes to the top tier tax payer/bus owner gets rate below LTCG of 20% ?As long as capital gains is significantly less than booking corporate profit plus dividend or passthrough of profit plus individual tax rate, I'm incentivized to grow the company with my excess revenue rather than book it as profit and distribute it.
. Some business owners will keep growing their company and hiring.
In normal scenarios, that decision is typically made independent of taxes.
Yes, that's my point. A new tax structure dosen't require you to stop reinvesting capital.In normal scenarios, that decision is typically made independent of taxes.
I believe most business owners started their business because they believe they can grow capital better than the next guy. Why now take it out to invest elsewhere ?
It doesn't go below, it just gets a lot closer. Close enough that the utility of having that new French sailboat in May starts looking a lot more attractive than waiting 10 years to get slightly more money when the business is sold. Obviously I'm using some poetic license in my description of my thought process, but the point distilled down is that the closer your effective rate on profit to your capital gains rate the more you incentivize booking short term profits that are taken out of the business vice reinvesting extra revenue for the mythical "small business" used to justify this cut. Everyone has a different utility curve and so will react differently obviously, but the change in incentive is relatively beyond dispute.Right, understand. Re-read your prior post but still don't see how the proposed changes to the top tier tax payer/bus owner gets rate below LTCG of 20% ?
Yes, that's my point. A new tax structure dosen't require you to stop reinvesting capital.
I believe most business owners started their business because they believe they can grow capital better than the next guy. Why now take it out to invest elsewhere ?
That's the point. The decision to take out or reinvest in the business is not affected by tax rates. It is affected by tax incentives (like section 179).
I agree that the incentives is part of the decision making process but not in a vacuum. as Sig States everyone has their own utility curve, but the opportunity cost decision has to be made...is there a better use for my capital (whether it is a boat or the public eq markets, etc). Or is my own co the best place to maximize my future returns.That's the point. The decision to take out or reinvest in the business is not affected by tax rates. It is affected by tax incentives (like section 179).
Many business owners feel the later (tax policy be damned), that is why they started the bus in the first place.
Ya I see your point. I never thought that I would ever hear myself saying this but at my income level I dont need a tax break. I don't want a tax increase either. LOL. This tax plan is probably in for a lot retooling.Obviously everyone will manipulate their definition of "middle class" to support their side of the issue. If you've got medical problems you're f*cked no matter what class with this. If you live in a place with high property tax you're losing money no matter what class if you own a house. If you care about debt, $1.5 trillion is a bit of money regardless of class.
On the other hand, as a 1%er who owns my company I am estimating my taxes will go down by at least 30%,. Not marginal, this is the overall reduction in tax I have to pay when I take into account the elimination of AMT and the money I would save through changing my business structure to a pass-through and getting a 25% rate on 30% of my income. We're talking tens to hundreds of thousands of dollars less I and people like me are paying, while someone making under $86k saves a few hundred bucks at most!
I and people like me are the last people in the world who need this tax break, and even for purely selfish reasons would far rather that money from me and people like me went to potential customers in the middle class, or we just maintained this system that's giving us 4% unemployment and the largest economy in the world, and a 17 year low unemployment level without trying to "fix" it. And the most telling thing is that before this tax cut I put all the extra money my company made back into growing the company, which mainly consisted of hiring people, because that's what the tax structure incentivised me to do. Now I'm incentivised to pay more back to myself earlier, which I'm going to use to buy a better French sailboat. How does that incentive structure help the economy again?
That said, eliminating depreciation and allowing expensing is a spectacularly good idea if you want to incentivize investment. And although meaningless in the grand scheme I also like the fact that they made the joint filing numbers all twice the single filing numbers; making it slightly less by some completely arbitrary amount always bugged me.
You're looking at the decision as "do I take this $100 and invest it in my business or in the stock market", and your logic is imminently reasonable if that is the case. For many/most small business owners, that's actually not the decision. Most small business owners have most of their wealth tied up in the very illiquid ownership of their company and are making the decision to sacrifice liquidity now for a bigger return later. So they're not deciding where to deploy capital for the highest return, they're deciding if they stretch out buying that new car for a couple years, pass on the kitchen remodel and maybe moving up to a bigger house....in order to maximize the future value of their business. When capital gains taxes are significantly less than pulling money out now, they'll be incentivized to continue to roll everything into the business. At some point as they converge, they won't.I agree that the incentives is part of the decision making process but not in a vacuum. as Sig States everyone has their own utility curve, but the opportunity cost decision has to be made...is there a better use for my capital (whether it is a boat or the public eq markets, etc). Or is my own co the best place to maximize my future returns.
Many business owners feel the later (tax policy be damned), that is why they started the bus in the first place.
A related way to think about it is just the time value of money. Again it's not as simple as "do I take this $100.." It's a question of "Do I take this "$60 in take-home now or $80 in take-home when I eventually sell the company" When it's a choice of $79 now vs $80 in some undetermined future my decision is going to be different.
I might have skipped over it but i didn't see many that were pro trumps tax reform. Trump again is not delivering on his original promise and giving some bs version of it. Tax reform that doesn't gut the either system will NOT work. You think someone deducting home loan interest will be happy with this plan? or someone with multiple children in college? I think most people will agree with low income poor 5% "working poor ie middle class" around 10-15% uber rich paying about 20-25%. The issue will be defining what levels I would say low income single($50k or less) working poor( $50 - 5 million) uber rich(10 million year) and it would be like today where the first 50 taxed at 5 then 20-25%. each state would be different adding on cost of living family is double single. Tax accountants will be pissed but this will cut down on all the frustration and cost of doing taxes most people will be able to pay via payroll and have nothing else to do at the end of the year. Businesses should pay depending on size small business should pay 5% since most of the time they are paying individual taxes. middle size to larger 10% the same argument the people(employees and owners) will be paying taxes why double tax excessively?