I want to bring up an important point made by our Differently-Winged denizen gary in another thread, in which he brings up a number of places that he might look to cut spending in the MA budget:
First, I'd cut costs in MassHealth/Medicaid by, oh, say $325 Million. Like Mr. Patrick promised before the November 2006 election.
I'm not sure whether or how far this proposal has progressed. But considering that health care spending is what's eating destroying blowing a hole through becoming our budget, it's a worthy thing to ask. gary would apparently also entertain making other cuts in services from MassHealth, such as eyeglasses and dental care. (In argumentation terms that's called “biting the bullet“, i.e. acknowledging an unpleasant consequence of one's position — but it's hard to bite with bad teeth.)
But hey liberals … this is a real question, and a real choice. Under our current state of health spending inflation, we can:
- Spend more money every year for the same services. That means raising taxes.
- Spend the same amount of money, and get worse coverage/services every year.
- Spend the same amount of money; use government leverage/control to demand that our service providers/insurers control their prices.
Providers, of course, are nursing homes (big time), doctors, hospitals, pharma companies … whomever the state does business with. Esteemed members of our community. Anchors of our economy. Powerful interests on Beacon Hill. Perhaps even a defining characteristic of our quality of life in Massachusetts, and New England as a whole.
And it's our tax money.
These things are in conflict.
Remember when Eisenhower was president, and the Republicans controlled both houses of Congress? And the top marginal tax bracket was 91% – yes, 91%? And “capital gains” were taxed at the same rate as earned income? And a middle-class family could get by on one median wage?
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p>We could also enact single-payer healthc… ah, nevermind.
Still, it’s two-thirds more than today. All told, the wealthiest Americans paid taxes at about a 50% rate back then, vs. 17% now.
Suppose you’re working guy and you take $50,000 you’ve saved and it represents a year’s earnings. You take it and invest it in some mediocre successful company and the stock grows at about 4% per year, just barely keeping pace with inflation.
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p>Ten years from now, it’s worth about $80,000, and of course with inflation, the $50K living standard is now about $80K.
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p>You’ve retired and you cash out. And you pay cap gains tax on the $30K gain. But wait! What gain? You put a year’s salary aside, and now the government is charging you to spend it?!
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p>So how high a rate do you think it’s fair to levy on this capital gain?
Suppose… blah blah blah blah blah blah blah.
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p>First off, that person could have put their money in a CD and get at least the same, if not more. It’s very unlikely that a person would receive such a small return on years and years of investing in the stock market, at least if they weren’t insanely stupid. Furthermore, that person could have put their money in a 401k and not have been taxed – plus have benefited from the diversity of mutual funds and experts controlling them. So, really, let’s not propogate useless, stupid and silly anecdotes. Ok?
Think about the capital gains tax, don’t just dismiss the anecdote because you don’t understand it.
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p>The point is that capital gains are preferentially taxed for two reasons: first, to not hender the free exchange of capital by exacting too great a cost on the transfer, and second, because to tax inflation–as my example showed (i.e. nothing happened to the poor guy’s value yet he owes tax)–simply isn’t fair.
That’s rather arrogant. Your quote is broken, though, so let’s fix it.
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p>There, that’s better.
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p>I’m not exactly against the little guy saving up a nice nest egg so he can retire in relative elegance. I’m against the obscenely rich paying no where near his or her fair share in revenue toward keeping this great nation great. I feel so stongly about both of those principles, that I gave a way in which the poor old Mr. Joe would not only have avoided paying taxes, but wouldn’t have even had to record part of his income as taxable income. Low capital gains taxes don’t exist because of the little guy, that much is for certain. So next time when you feel the need to be arrogant, pick on someone who doesn’t have at least some understanding of the economy or why things are the way they are.
You seem to know little about tax policy yet you persist. Ok. So now it’s not about the capital gain rate, it’s about the obscenely rich not paying their fair share.
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p>To your points that average Joe doesn’t invest in the stock market other than 401(k) which are already tax free.
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p>True that 401(k) accumulate tax free, but he distributions from 401(k) plans are fully taxable at top rates when the money is taken out.
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p>So, the “the average Joe” puts his money away into a 401(k) plan. Then, when he retires or otherwise takes the money, he takes out money to pay for costs that are now inflated since the day he placed the money in trust.
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p> i.e. when he put money away he could live on $50K per year and now he must live on $80K per year. He is taxed on the full distribution including the inflated portion. Why is that fair? He puts away enough to live for a year; he takes out enough to live for a year and pays the government a cut?!
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p>That’s fair to you? If so, that’s ok. We’ll just agree to disagree.
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p>And to the other point that average Joe doesn’t invest in the stock market. In 2005, 56.9 million households did invest in the stockmarket Whether or not it’s owned outright an IRA, 401(k), 403(b) is irrelevant to any thoughtful economic discussion.
… a progressive scaling of tax rates for capital gains? If the problem is that a rich guy who gets most of his ‘income’ from capital gains isn’t taxed on that money in a fair way, but that the investment income of the ‘little guy’ is taxed at what doesn’t seem to be a fair rate… graduate the rates to make things more fair. The current flat system on capital gains creates some weird results such as this.
How progressive?
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p>Right now, the capital gains rates are progressive, not flat. For a couple earning $63,700 per year are 10%. Couples earning over $63,700 pay 15%.
…of the granularity of the brackets? Just two? When you are pointing out mention ‘earning’ above I assume you are referring to the earnings from capital gains.
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p>I would think that the ranges of tax brackets should reflect in some manner (at least better than two brackets) the range of actual capital gains reported each year.
The $63,700 is the point where is the couple’s taxable income exceeds $63,700 (including capital gains) then the cap gain rate is 15%.
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p>That’s $63,700 after deducting mortgage interest, state and local taxes, exemptions, etc…
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p>Look at it another way. If you’re “rich”, as in a couple earning more than $63,700 and sell some stock, you’ll pay combined Federal and State income tax on the gain of 25%.
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p>That strikes me as terrible. YMMV.
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p>And it’s not just stocks. Take this example. It’s real:
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p>Mom give family home to the kids while she was still alive to avoid its loss if Mom had to go into Long Term care. Mom and dad built it back in the 1940 for about $10,000. Mom eventually died at home and the kids then sold the home for $225,000. Tax due was over $53,000. Fair?
Then, when it come to be implementation time, “obscenely rich” is redefined as “not poor” and the middle class takes it on the chin.
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p>gary’s question was: why should a guy have to pay tax on a “gain” that is not a gain, but is a simple product of inflation? This is unfair, regardless of whether the taxpayer is rich or poor, or indifferent.
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p>Your answer is, he should pay because he is rich. F–k ’em!
… taxation works on regular income as inflation adjusts it? Are the marginal tax brackets adjusted for inflation from year to year (as opposed the the AMT or the SS tax cap)? If so then its all a wash. If your only raise in salary is from inflation then you don’t change brackets and you pay the same percentage. The result is that the real spending power of that money after tax hasn’t changed either.
The ordinary income tax rates are adjusted yearly for inflation, but not the AMT, nor SS cap.
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p>In other words, as your income rises because of inflation your marginal rate becomes no higher, purely as the result of inflation.
… like I said above right? By design, income gains from inflation shouldn’t, by themselves, knock anyone into a new bracket and therefore, the ‘new’ taxes taken out of the inflationary income is neutral with respect to the income’s buying power.
Agree with respect to regular rates. But it’s not the case with capital gains or AMT.
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p>IMHO, the cost basis of an asset ought to be indexed for determination of cap gains tax.
My point was that the majority of people who use the stock market in ways other than as 401(k)s are getting far better returns than the 4ish% Gary used as an example.
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p>However, Mr. Lynne made a great point. For the little guys who are investing in the stock market, I’m all open to progressively taxing them… with low rates for small players, medium rates for bigger players, big rates for huge players, etc. I’m not against profit, but unfortunately services we all depend on – and that make us better, more successful people – cost money. We have to raise that money somewhere. Currently, the obscenely rich are able to pay obscenely low taxes on their income via the stock market. I’m sorry if you don’t think people should have to pay their fair share, but I’m not in the policy of paying for government off the backs of the people who can’t afford it.
Let’s take another look at your story.
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p>Your working guy puts his $50k in the market at 4%. At the end of 10 years, he has roughly $74k. Inflation, which has averaged 2.78% over the past 8 years has driven his cost of living from $50k up to $66k. He pulls out his money; pays $3.6k (15% of $24k) on his capital gains and ends up with $71.4k, which is now MORE than a year’s living expenses. He actually makes money in real, economic terms.
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p>OK, but let’s say for the sake of argument that inflation does average 4% for the next 10 years. Your working guy ends up with $71.4k, which is a whopping 3.5% less than his $74k annual cost of living.
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p>Now compare this to the working guy who takes his $50k and sticks it under his matress. He ends up with, you guessed it, $50k at the end of the 10 years, which is 32% below his $74k standard of living. He’s much worse off and the government has had absolutely nothing to do with it.
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p>The culprit here, as it was in you example, is inflation. AND the working guy’s failure to invest wisely.
The culprit in yours and my examples is inflation.
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p>Some irony that money saved in the mattress results in a non-deductible real loss, yet assets increasing in value, partially or wholly from inflation, when sold result in taxable gain.
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p>So, given that inflation is a given in a debt based economy like ours, should the individual be hit twice? Once for the inflationary loss, and then for taxes on that portion of the gain that is inflation gain? Seems unfair to me. YMMV.
Would you be willing to compromise on an increased capital gains rate or an increasingly graduated capital gains rate if inflationary gains were deductible? In other words if you were only taxed on the gain in excess of inflation?
Now all we have to do is get ourselves elected to the Senate on opposite sides of the aisle, amass a bit of support from our fellow senators and, bam!, we can have this whole thing wrapped up in no time.
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p>I’m game if you are. 🙂
.. when you say “yet assets increasing in value, partially or wholly from inflation, when sold result in taxable gain”
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p>If the value of my asset increases solely by inflation, the ‘value’ doesn’t change at all since value is a measure of buying power, which, adjusted for inflation, remains the same in this example, right?
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p>Am I missing something?
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p>Precisely correct.
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p>But, although the real value doesn’t change, the price goes up because of inflation and this rise in price is taxable upon the sale of the asset.
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p>I’ve given a couple of examples and Ryan keeps saying that my ROI assumption are too low or 401(k)s are involved, but all that is purely irrelevant. I’ll try one more time.
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p>Here’s a gift for you. It’s one shares of XYZ company worth enough today –$40,000– to send your kid to college, today. Now, it just so happens that your kid is 2 years old, so you intend to hold the XYZ company share for a few years.
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p>Back to the future:
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p>Say the XYZ company stock I gave you worth $40,000 then, is worth $200,000 today. If the stock had merely kept pace with inflation, it would be worth $157,000 and the REAL gain would be $43,000.
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p>But that’s not how the government/tax code sees it.
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p>You pay federal income tax on the entire $160,000 “gain,” including tax on the $117,000 adjustment for inflation.
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p>You may not share my sense of injustice, but as I’ve said, YMMV. Rich versus poor, 401(k)s, ROI assumptions…have nothing to do with it–mine is purely an economic argument. My point is that unless the Government enacts laws to index capital gains for inflation–just as the regular tax brackets are indexed–it make complete sense to keep capital gain rate low, to accomodate the unfair taxation of inflation gains.
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…
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p>We have established that a certain amount of gain that you get taxed on is in fact value neutral because of inflationary adjustments on income brackets. For this portion of the gains the tax in terms of value and spending power isn’t any different from the day the asset was aquired. The ‘balance’ of gains is also taxed, but isn’t that as it should be?
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p>Yes.
… in purchasing power interacts with the income brackets as described, what’s so unjust about it?
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p>Nothing. The tax brackets for regular tax were indexed for inflation. Capital gains rates are not indexed.
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p>Economists refer to ‘real’ gains, meaning the actual gain after considering inflation. The capital gains tax is applied to all gains, whether real or not. That’s the injustice.
Like PP says, or maybe it was The Great Gadsby, “the rich, they’re not like you or me…”
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p>After the ’54 tax code, the game was afoot. Anyone who worked in the financial markets in the 70s new the secret of tax shelters and off-shore investing. There was a top rate of 95% but no one paid it.
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p>It was like the vietnam draft. Sure we had it, but the “rich kids” knew how to beat it.
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p>The common ploy of the 50s was to invest in an offshore corporation and shelter all the passive interest. This gave rise to Subpart F during the Kennedy administration to get at the offshore earnings. Next the shelter market caught fire: collectibles, cattle, real estate, equipment leasing…Rich people never paid the 95% top rate, although it was on the books. Shelters in turn gave rise to the Alternative minimum tax with its top rate of 28%.
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p>The Reagan 1980 tax bill recognized that the 70% (top rate then) was rediculous and overhauled the Code and dropping cap gains to 28% and the top ordinary rate to 50% (I think), leaving the rich to pay what they pretty much paid all along.
They have the resources and mobility to move their money to avoid taxes. Say, by becoming legal residents of the Cayman Islands who happen to spend a lot of time in Palm Beach. Most tax-the-rich schemes actually hit entrepreneurs and the middle class.
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p>That aside – Medicaid is overwhelmingly going to nursing home care rather than health care for the poor. And anybody who doesn’t think this is a problem has to look no further than the ads by lawyers, offering to help hide any money so you too can artificially qualify – reduce your ‘income’ to $11,000, in your $2.4 million ‘homestead’, by putting the rest into trusts and annuities – and hey, presto! You’re an impoverished senior! WE NEED ASSET/MEANS testing, not just income qualification.
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p>Also – and Bill Weld first proposed this 16 years ago before things got really bad – we need a Federal waiver to require a residency period requirement before you become eligible for Medicaid. New Hampshire doesn’t pay for nuring home care, so people can live tere all their lives and sneer at our taxes – and then move here and immediately qualify for Medicaid so you and I can care for them with our taxes in their declining years.
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p>I could go on.
I know someone who did not, and wound up blowing through nearly a half million dollars over about 2 – 2 1/2 years in a nursing home (not a palatial one, either), while slowly wasting away with Alzheimer’s, leaving an estate of zero, and some unpleasantly surprised next of kin.
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p>Eventually, this will mean that, except for the very rich, and those lucky enough to proceed from perfect health to dead with extreme rapidity, there will be no such thing as leaving something for the kids. Because it is pretty easy for a married couple–even a wealthy coupple– to burn through an entire life savings in just a few months of nursing home care.
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p>Though this might be a feature, not a bug, for many ideologues, it is an awfully tough political sell, which is why it has not been sold thus far.
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p>Indeed, at the crisis point it may be the very thing that suddenly makes liberal health care system proposals salable.
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p>Forget the medical insurance; consider the costs of Long Term Care. Liberal health care systems may sound good, but who will pay for the cost of all these old boomers who’ll be in the nursing homes for the next 40 years?
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p>IMHO,the trend is to extend the ‘look-back’, meaning that Medicaid doesn’t, for eligibility, consider finacial gifts made outside of 5 years–it was previously 3 years.
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p>I think the trend will be to extend that lookback period even further. Government will stretch it because the person in the home who didn’t impoverish himself quickly enough by giving the cash to his kids won’t i) have much political voice because the truly elderly don’t and ii) won’t be thought of as a sympathetic figure because he won’t be spending his own money; he’ll be spending his kids’ money.
Far from it. But as the look back gets longer, it reaches into the point in people’s lives when they do not think about such things. Which means more and more people get burned by poor planning.
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p>At some point, enough adult children are going to watch the value of their parents’ life savings swallowed by Medicaid to be willing to consider alternatives.
How sympathetic will Government be to see adult kids’ inheritance being eaten away by long term care?
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p>Then, assuming the government is sympathetic, and gives subsidies, what a kick in the teeth it will have been to those seniors with the foresight to have purchase long term care insurance.
First off, “liberal health care systems,” spend less money and get better care, without leaving a huge chunk of their populations without health coverage. Honestly, I don’t know how many times we can stick a fork into your silly arguments, but rest assured you’re only embarrassing yourself here.
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p>However, I’ll bite at your bait and say there’s plenty of proposals out there to help save money. More home care. Assisted living as opposed to nursing homes. And, heaven forbid, reigning in some of the extra costs of special interests – such as the overly-expensive perscription drugs. However, it’ll take political courage.
After all, we’ve got the Kerry-Healey-overhoused seniors now living in their homes even longer. That means more large homes lived in by a single person, resulting in either (a) young families living even further from their employment, (b) unwanted by neighborhoods [though perhaps otherwise great] infill development, or (c) families living in some other state, or (d) something else?
When my father was growing up, his grandfather, who could no longer support himself lived with them. Nowadays, it’s throw grandma in the nursing home and maybe visit once a month. While there will always be some people who don’t have children or whose children aren’t able to support them, we, as a society, have decided that taking proper care of our older relatives is not a priority. So we’re stuck with ever high long term care costs and ever deteriorating quality of life for people in their elder years. Ah, progress!
A lot of people live a lot longer now than Great-Grandma. And a lot of those people are sick for quite awhile before they pass away. It is therefore unfair to simply characterize end-of-life care as chucking grandma in a home and visiting once a month, because it mischaracterizes the burdens on families.
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p>Now that people don’t die of everything else, cancers and Alzheimer’s are becoming the thing that gets us in the end. But these things oftem make it dangerous or impossible for people to live without professional care, even if there is a spouse in the next generation who is willing and able to stay at home to provide care.
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p>Why is this relevant? Should the working taxpayers pay for this person’s nursing home so his kids can pick up a cool half-million for doing nothing but having the right parents?
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p>I have zero sympathy for people who whine about not being able to leave their kids money or who whine about not getting the inheritance they feel they deserve. We live in a meritocracy, there should be little transfer of wealth between generations. The existence of any such transfer is a way for the rich to get richer because of who they are, not what they do.
Option two is out, unless you’re the sort who likes to hit his head with a hammer because it feels so good when you stop.
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p>I think we start with option three. Use government’s financial leverage to keep drug costs under control, use the political process to fix the inefficiencies of the health care system.
Reportedly, just simplifying the paperwork (not saying that’s the only problem) would save quite a bit. Funny thing, they’ve been saying this for years. I’m sure there are other items I can’t think of right now.