OT: Tax Cuts 2.0?

[1Clemson]

To really dig into entitlements there would need to be big cuts in social security and Medicare. Neither party is willing to take that on.

Cutting into those does not affect income taxes as they are taxed separately.

I ask, if my 401k/IRA is taxed at normal income tax rates (either up front or on withdrawal) why aren't other investments? Aren't my investments also helping fund new businesses and expansion? Apparently only the guy working (lower/middle class) must pay full taxes on investment income.

 

[FLaw47]

Cutting into those does not affect income taxes as they are taxed separately.

I ask, if my 401k/IRA is taxed at normal income tax rates (either up front or on withdrawal) why aren't other investments? Aren't my investments also helping fund new businesses and expansion? Apparently only the guy working (lower/middle class) must pay full taxes on investment income.

You pay full income tax PLUS capital gains tax on regular investments The lack of capital gains tax is the tax advantage of IRAs and 401ks.

 

[BRENTPWC]

Wasn't talking about him. Was talking about johnhugh.

The same johnhugh that won’t even pony up $10 a month for his own account?

 

[FedFan]

The same johnhugh that won’t even pony up $10 a month for his own account?

The very same one.

 

[SimpsonvilleTiger]

Sooooo no concerns about the deficit?

Sadly it appears there is none. However, tax cuts aren’t the issue. Tax receipts went up after the last cuts. But spending went up even more. It’s outrageous.

 

[CLEMSON96JDH]

You pay full income tax PLUS capital gains tax on regular investments The lack of capital gains tax is the tax advantage of IRAs and 401ks.

What? One is pre-tax money and one is post-tax money.

 

[FLaw47]

What? One is pre-tax money and one is post-tax money.

You pay income tax only on all retirement accounts either when you contribute (Roth) or withdraw (Traditional). You've already paid income tax on any money you put into a taxable account but then you owe Capital Gains tax on the growth of your investment. Not paying capital gains is really the main advantage of retirement accounts.

 

[1Clemson]

You pay full income tax PLUS capital gains tax on regular investments The lack of capital gains tax is the tax advantage of IRAs and 401ks.

My muddled thinking, I was thinking more of the supposed tax advantages of carried interest and developer income streams (unfortunately I don’t have any).

 

[CLEMSON96JDH]

You pay income tax only on all retirement accounts either when you contribute (Roth) or withdraw (Traditional). You've already paid income tax on any money you put into a taxable account but then you owe Capital Gains tax on the growth of your investment. Not paying capital gains is really the main advantage of retirement accounts.

Let me provide an example. You put $10,000 in a regular 401k and it appreciates to $15,000 before you withdraw it. Your W2 income is reduced by $10,000 when you contribute and you pay ordinary income tax on $15,000 when you withdraw.

You put $10,000 into a taxable brokerage account that appreciates to $15,000. You pay ordinary income tax on the $10,000 when it is part of your W2 salary. When you sell the stock/mutual fund in the brokerage account, you pay capital gains tax on $5,000

So in a retirement account, you have paid ordinary income tax on $15,000. If a taxable brokerage account, you have paid ordinary income tax on $10,000 and capital gains tax on $5,000. The statement "Not paying capital gains is really the main advantage of retirement accounts" is not accurate.

The advantage of the retirement account (pre-tax) is that you get to defer more income and earn the appreciation on more money over time and then presumably pay tax on income in your retirement years when your total taxable income is lower. You also presumably get a company match, in the case of a 401k.

 

[FLaw47]

Let me provide an example. You put $10,000 in a regular 401k and it appreciates to $15,000 before you withdraw it. Your W2 income is reduced by $10,000 when you contribute and you pay ordinary income tax on $15,000 when you withdraw.

You put $10,000 into a taxable brokerage account that appreciates to $15,000. You pay ordinary income tax on the $10,000 when it is part of your W2 salary. When you sell the stock/mutual fund in the brokerage account, you pay capital gains tax on $5,000

So in a retirement account, you have paid ordinary income tax on $15,000. If a taxable brokerage account, you have paid ordinary income tax on $10,000 and capital gains tax on $5,000. The statement "Not paying capital gains is really the main advantage of retirement accounts" is not accurate.

The advantage of the retirement account (pre-tax) is that you get to defer more income and earn the appreciation on more money over time and then presumably pay tax on income in your retirement years when your total taxable income is lower. You also presumably get a company match, in the case of a 401k.

My statement is still accurate. All of the tax advantages you listed are moot if you're contributing to a Roth or if your taxes are higher are higher in retirement. The employer match isn't worth mentioning because not everyone offers one (and obviously free money is better than not free money). You'll always have the capital gains advantage.

Besides, I was replying to the guy who was acting like regular investment accounts were somehow taxed less than retirement account.

 

[CLEMSON96JDH]

My statement is still accurate. All of the tax advantages you listed are moot if you're contributing to a Roth or if your taxes are higher are higher in retirement. The employer match isn't worth mentioning because not everyone offers one (and obviously free money is better than not free money). You'll always have the capital gains advantage.

Besides, I was replying to the guy who was acting like regular investment accounts were somehow taxed less than retirement account.

There is no capital gains advantage with a pre-tax retirement account.

 

[nytigerfan]

Correct me if I’m wrong, but defense spending was only up 0.3% in the WH budget - far below the rate of inflation. Seems like a start?

And defense is around 15% of the federal budget. Entitlements make up like 59% when you factor in SS, Medicare, safety net programs, etc. That’s obviously a much bigger opportunity for savings than anything else.

Also shows why we don’t need to enact an expansion of entitlements, like more government healthcare or free college.

I have made this point before... entitlement spending was the same when trump took over (actually he even cut it some with his limitation of food stamps). So the unprecedented increase in the annual deficit under trump and the GOP has little to do with entitlements.

that said, I hope trump continues to talk about cutting Medicare between now and the election. That would be a gift for the future dem candidate.

 

[1Clemson]

You pay full income tax PLUS capital gains tax on regular investments The lack of capital gains tax is the tax advantage of IRAs and 401ks.

Long term regular investment profits on investments are only taxed at capital gains tax rate, almost always greater than the marginal tax rate of the taxpayer. However, my original thought was regarding carried interest, etc. (benefits for the wealthy/lucky few). In both cases, the tax system is designed to protect those with wealth, specifically wealth earned via investment rather than labor.

There is little doubt our tax system favors capital over labor which was the basis for my premise that the investor class is taken care of far better than the working class. Luckily (or unluckily) I find myself closer to the top of the W2 class with a small foothold in investments.

The latest round of tax changes did little for me for everything it gave it found something to take. It provided tax cuts for the wealthy/investor class and increased the chances that low wage earners will pay any tax which isn’t terrible as they have been locked in a flat wage structure for over 20 years.

I don’t expect a second round to do any more to address the imbalance, but it will likely increase our annual debt, which will ultimately come home to us all.

 

[FLaw47]

There is no capital gains advantage with a pre-tax retirement account.

You are not factoring some stuff in correctly. Maybe you end up paying less in taxes in your scenario (I didn't bother doing the math) but you'll end up with less money in taxable account. There is absolutely a capital gains advantage. Here:

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[CLEMSON96JDH]

You are not factoring some stuff in correctly. Maybe you end up paying less in taxes in your scenario (I didn't bother doing the math) but you'll end up with less money in taxable account. There is absolutely a capital gains advantage. Here:

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But it's not a capital gains advantage. It is a time value of money advantage. You have more money in the end because you had more money to invest.

 

[FLaw47]

But it's not a capital gains advantage. It is a time value of money advantage. You have more money in the end because you had more money to invest.

It's still a capital gains advantage; look at at the numbers again. You'll see that the after tax value of the Roth and Traditional are the exact same (assuming the same tax rate). You can also see that the only difference between the Roth and the taxable is the capital gains. So if A=B and B!=C, then A!=C. If you had to pay capital gains taxes on a traditional 401k, there would be less money in that account.

There CAN be other advantages to traditional 401k's (paying a lower tax rate upon withdrawal, for example) but the capital gains advantage is ALWAYS there (unless your income is so low that you don't pay capital gains).

 

[FLaw47]

Long term regular investment profits on investments are only taxed at capital gains tax rate, almost always greater than the marginal tax rate of the taxpayer. However, my original thought was regarding carried interest, etc. (benefits for the wealthy/lucky few). In both cases, the tax system is designed to protect those with wealth, specifically wealth earned via investment rather than labor.

There is little doubt our tax system favors capital over labor which was the basis for my premise that the investor class is taken care of far better than the working class. Luckily (or unluckily) I find myself closer to the top of the W2 class with a small foothold in investments.

The latest round of tax changes did little for me for everything it gave it found something to take. It provided tax cuts for the wealthy/investor class and increased the chances that low wage earners will pay any tax which isn’t terrible as they have been locked in a flat wage structure for over 20 years.

I don’t expect a second round to do any more to address the imbalance, but it will likely increase our annual debt, which will ultimately come home to us all.

Capital gains are almost always LOWER than marginal tax rates (maybe this was just a typo on your part). You don't JUST pay taxable gains on regular accounts, you also paid income tax (relative to the retirement accounts, at least). I don't disagree that our system is set up primarily to benefit the wealthy, I just don't think retirement accounts are a good example of this. Retirement accounts are really a boon to the upper middle class; the contribution limits are relatively low if you're a high earner.

 

[CLEMSON96JDH]

It's still a capital gains advantage; look at at the numbers again. You'll see that the after tax value of the Roth and Traditional are the exact same (assuming the same tax rate). You can also see that the only difference between the Roth and the taxable is the capital gains. So if A=B and B!=C, then A!=C. If you had to pay capital gains taxes on a traditional 401k, there would be less money in that account.

There CAN be other advantages to traditional 401k's (paying a lower tax rate upon withdrawal, for example) but the capital gains advantage is ALWAYS there (unless your income is so low that you don't pay capital gains).

Appreciation in a tradition 401k/IRA is taxed at ordinary income rates. Appreciation in a Roth 401k/IRA is not taxed. Your 'capital gains advantage' is a misnomer.

 

[FLaw47]

Appreciation in a tradition 401k/IRA is taxed at ordinary income rates. Appreciation in a Roth 401k/IRA is not taxed. Your 'capital gains advantage' is a misnomer.

Look at my chart again. Paying 25% of $10k before it's invested will leave you with the EXACT SAME amount of money as paying 25% of ($10k + gains). Capital gains would have been an ADDITIONAL 15% on the gains, effectively. Maybe I'm not describing it very well but the advantage of a retirement account is that EFFECTIVELY you pay no capital gains on growth.

 

[1Clemson]

Capital gains are almost always LOWER than marginal tax rates (maybe this was just a typo on your part). You don't JUST pay taxable gains on regular accounts, you also paid income tax (relative to the retirement accounts, at least). I don't disagree that our system is set up primarily to benefit the wealthy, I just don't think retirement accounts are a good example of this. Retirement accounts are really a boon to the upper middle class; the contribution limits are relatively low if you're a high earner.

Correct its a typo. I was organizing the thought from the opposite angle then changed.... Obviously, not a good morning for me to be thinking. I'll depart the discussion....

 

[scotchtiger]

I have made this point before... entitlement spending was the same when trump took over (actually he even cut it some with his limitation of food stamps). So the unprecedented increase in the annual deficit under trump and the GOP has little to do with entitlements.

that said, I hope trump continues to talk about cutting Medicare between now and the election. That would be a gift for the future dem candidate.

Not exactly. SS, Medicare and Medicaid spending have increased close to $400 billion since 2016. That’s a pretty big deal...

And I’m not defending the spending. Wish we would cut across the board. I’d love a bold plan to cut $1T over the next ten years with actions addressing SS, Medicare and other major areas.

Remove Trump from the equation for a moment. We all need to realize that entitlements are the runaway freight train. Nearly two thirds of the federal budget and growing rapidly every year without check. This isn’t politics, it’s math.

 

[FLaw47]

Not exactly. SS, Medicare and Medicaid spending have increased close to $400 billion since 2016. That’s a pretty big deal...

And I’m not defending the spending. Wish we would cut across the board. I’d love a bold plan to cut $1T over the next ten years with actions addressing SS, Medicare and other major areas.

Remove Trump from the equation for a moment. We all need to realize that entitlements are the runaway freight train. Nearly two thirds of the federal budget and growing rapidly every year without check. This isn’t politics, it’s math.

We could also raise taxes to pay for that stuff and I don't care if it takes money out of my paycheck or yours. I agree that the way we're handling entitlements is a problem but you act like yours is the only solution - and it certainly is if your only concern is what benefits you.

 

[scotchtiger]

We could also raise taxes to pay for that stuff and I don't care if it takes money out of my paycheck or yours. I agree that the way we're handling entitlements is a problem but you act like yours is the only solution - and it certainly is if your only concern is what benefits you.

Come on. When Medicare was passed, there was a 5 year age gap between benefits kicking in and average life expectancy. Today, there is a 15 year age gap. On that fact alone, Medicare has to cover people on average 3X longer than the original intent. It’s completely logical to begin closing that gap and thus, begin addressing the second largest spending category next to SS.

Speaking of, the life expectancy was 61 years when SS was passed.

These programs weren’t intended to support the majority of the country for 20 years in retirement. They need to be remodeled accordingly. This isn’t even political. It’s just logical.

 

[FLaw47]

Come on. When Medicare was passed, there was a 5 year age gap between benefits kicking in and average life expectancy. Today, there is a 15 year age gap. On that fact alone, Medicare has to cover people on average 3X longer than the original intent. It’s completely logical to begin closing that gap and thus, begin addressing the second largest spending category next to SS.

Speaking of, the life expectancy was 61 years when SS was passed.

These programs weren’t intended to support the majority of the country for 20 years in retirement. They need to be remodeled accordingly. This isn’t even political. It’s just logical.

You and I want to go in TOTALLY different directions on the Medicare age. You can also fix social security (largely) by raising the payroll tax cap.

So yeah, you have what you WANT to do but it's not the only path forward.

 

[1Clemson]

Come on. When Medicare was passed, there was a 5 year age gap between benefits kicking in and average life expectancy. Today, there is a 15 year age gap. On that fact alone, Medicare has to cover people on average 3X longer than the original intent. It’s completely logical to begin closing that gap and thus, begin addressing the second largest spending category next to SS.

Speaking of, the life expectancy was 61 years when SS was passed.

These programs weren’t intended to support the majority of the country for 20 years in retirement. They need to be remodeled accordingly. This isn’t even political. It’s just logical.

Interesting that revenues from the programs werent to be used to fund the general government, but for decades was used as a slush fund to prevent balancing the budget. Now that the shoe is on the other foot its a big problem.


Do whatever is necessary to the payroll tax and address the liberal application of disability claims to ensure general taxes arent paying ss/mc, then drop the issue from the tax discussion.

 

[scotchtiger]

You and I want to go in TOTALLY different directions on the Medicare age. You can also fix social security (largely) by raising the payroll tax cap.

So yeah, you have what you WANT to do but it's not the only path forward.

Ah, you want to expand the entitlements that are dragging down the budget. Good idea. And have people pay even more toward SS when they won’t receive the benefit. Totally different directions is right.

I’m more of a pay-for-yourself fan rather than government dependence. These programs were intended to take care of the old and sick and they have turned into a federally funded retirement plan. That’s an individual’s job to prepare for, not the government’s.

 

[Rychek4]

Looks like it could be a possibility later this year.

https://www.foxbusiness.com/economy/trump-tax-cuts-retirement-savings-tax-break

https://www.foxbusiness.com/money/larry-kudlow-china-trade-deal-trump

Not sure how it will play out, but conceptually I love that they are exploring options to help Americans save more in a tax advantaged way.

Looks like a middle class rate reduction is on the docket too. Would love for them to tweak higher bracket rates down a bit as well in exchange for maybe a new top rate of 40% on high earners in the $5M+ range.

One negative is potentially making the $10K limit on SALT deductions permanent. That’s too low IMO and adversely impacts plenty of regular folks. Would love to see it more like $25K individual and $50K family.

Without a cut in spending to offset things, this could be a very bad idea. It appears like you have a more nuanced understanding than I do though.

 

[Rychek4]

I’m more of a pay-for-yourself fan rather than government dependence. These programs were intended to take care of the old and sick and they have turned into a federally funded retirement plan. That’s an individual’s job to prepare for, not the government’s.

You are correct, baby-boomers have largely created a huge entitlement system, based on government dependence.

 

[metalman82]

The one thing everyone seems to forget is that Social Security was meant to be a supplement to retirement. It was never designed to be the sole source of retirement income. Yet so many people have become dependent on SS only. That and the fact that they have stolen from the SS fund to pay for general fund activities such as Entitlements has wrecked the system. Taxing more isn't going to cure the problem. It is like a person that gets a job making Minimum wage and learns to live off of wages earned (paycheck to paycheck). They get a better job making 3x more money and guess what they do? They adjust their lifestyle to match their earnings, still living paycheck to paycheck, and can't figure out why they are always broke. Our federal government is exactly the same. Give them more money and they find a way to waste more money. Politicians won't fix this because the government has become to lucrative for them to change the status quo. Still haven't found a politician that has left office worst off than when they began their career, if they have kept their noses clean.

 

[CU Alumnus]

Entitlements and Military spending

Hate to say it but we really need to look at military spending. I know we probably need the F35 (if it can do what it is supposed to be able to do) but do we really need a new class of aircraft carriers? I'm not saying we need humongous cutbacks but we do need to take a good hard look at what we are getting vs what we are spending. That said - the Ford does have some stuff (electromagnetic catapults) that saves money in the long run. So I dunno.

Trump (who is no military genius mind you) made comments on the electromagnetic catapult system on the USS Ford. I have heard it has issues.

To really dig into entitlements there would need to be big cuts in social security and Medicare. Neither party is willing to take that on.

Gonna argue that Social Security is not an entitlement. It's a program we pay into and are supposed to be able to withdraw from later.

What it ACTUALLY is, is a government sanctioned Ponzi scheme.

 

[IcelandTiger]

Hate to say it but we really need to look at military spending. I know we probably need the F35 (if it can do what it is supposed to be able to do) but do we really need a new class of aircraft carriers? I'm not saying we need humongous cutbacks but we do need to take a good hard look at what we are getting vs what we are spending. That said - the Ford does have some stuff (electromagnetic catapults) that saves money in the long run. So I dunno.

Trump (who is no military genius mind you) made comments on the electromagnetic catapult system on the USS Ford. I have heard it has issues.



Gonna argue that Social Security is not an entitlement. It's a program we pay into and are supposed to be able to withdraw from later.

What it ACTUALLY is, is a government sanctioned Ponzi scheme.

I would love the possibility of opting out of social security... 12.4% of your pay is a lot

 

[scotchtiger]

I would love the possibility of opting out of social security... 12.4% of your pay is a lot

Ah, wouldn’t that be nice. A $17K annual raise and growing.

But nah, let’s give that to the government to use completely inefficiently.

Imagine if even a HS graduate was able to save 12.4% of his income in his own investment account until age 70. Regardless of income, he would almost certainly be a millionaire and change his family tree in a generation.

But nah, give it to the government.

 

[CU Alumnus]

I would love the possibility of opting out of social security... 12.4% of your pay is a lot

But then the system crashes.

Spoiler

Which it should

 

[Rychek4]

But then the system crashes.

Spoiler

Which it should

History proves this out, if you don't spend some amount on a safety net then you spend that much or more on security.

We aren't giving people a handout for no reason, we are giving them incentive not to rob us or break into our houses. The solution might be more police or bars on your windows but it's a matter of the most efficient way to deter people with things like mental illness from doing these things.

 

[scotchtiger]

History proves this out, if you don't spend some amount on a safety net then you spend that much or more on security.

We aren't giving people a handout for no reason, we are giving them incentive not to rob us or break into our houses. The solution might be more police or bars on your windows but it's a matter of the most efficient way to deter people with things like mental illness from doing these things.

My argument is that we simply have a very inefficient system, which is typical of government. His post was about SS specifically, so let's run with that. Take this scenario:

• 18 year old starts his career at $25K per year.
• CPI salary increase only for his entire career - no new jobs, promotions, etc. (i.e. an extremely conservative example)
• 12.4% of his income goes into a protected personal account, not to the government SS fund.
• He earns a 6% ROR during his working years.
• He retires after 50 years, at age 68, in line with full SS benefit age.

Value in his personal account?

• $1,450,412 account balance
• $58,016 annual income on 4% draw down
• Gets to pass the principle to his kids, changing his family tree in one generation

Which would be a better use of his $350K lifetime contribution? That scenario or a government run entitlement program?

 

[CU Alumnus]

History proves this out, if you don't spend some amount on a safety net then you spend that much or more on security.

We aren't giving people a handout for no reason, we are giving them incentive not to rob us or break into our houses. The solution might be more police or bars on your windows but it's a matter of the most efficient way to deter people with things like mental illness from doing these things.

I'm not sure how Social Security - which pays out in someone's 60s - would affect the crime rate. I suppose it could. But that seems kind of odd. I think what you're saying is more about "entitlements" such as welfare, food stamps, etc. Maybe I don't fully understand the program that IcelandTiger is talking about because 12.4% is a high number for social security.

In any case the problem is how the system is managed. The idea may not be so bad but if you run it like a giant Ponzi scheme - which it is - it will eventually fall apart.

 

[Rychek4]

I'm not sure how Social Security - which pays out in someone's 60s - would affect the crime rate. I suppose it could.

It trickles down through lots of lower income families.

And I am not here to say it's the right thing to do, I don't know the answer to that. I just think it's a conversation that often people assume has an obvious answer. Not to put words in your mouth, I enjoy the debate.

 

[Rychek4]

My argument is that we simply have a very inefficient system, which is typical of government. His post was about SS specifically, so let's run with that. Take this scenario:

• 18 year old starts his career at $25K per year.
• CPI salary increase only for his entire career - no new jobs, promotions, etc. (i.e. an extremely conservative example)
• 12.4% of his income goes into a protected personal account, not to the government SS fund.
• He earns a 6% ROR during his working years.
• He retires after 50 years, at age 68, in line with full SS benefit age.

Value in his personal account?

• $1,450,412 account balance
• $58,016 annual income on 4% draw down
• Gets to pass the principle to his kids, changing his family tree in one generation

Which would be a better use of his $350K lifetime contribution? That scenario or a government run entitlement program?

Put his money in SPY and don't allow any exceptions or early withdrawals, I think we are on the same page.