I recently came across this comment by Philip Greenspun:
“if you bought an asset for $10,000 in 2000, for example, the BLS says you spent $15,700 in today’s mini-dollars; if you sell it for $15,000 in 2021 you’ve actually suffered a loss, but will owe capital gains tax nonetheless” (https://philip.greenspun.com/blog/2021/04/29/economic-wisdom...).
I’m not a finance person, and this had never occurred to me. Does he have a point? Should the calculation of capital gains take inflation into account?
> Should the calculation of capital gains take inflation into account?
There is a good argument that capital gains, for fairness, should be taxed the same as other income, on a value calculated by adjusting the basis value for inflation. (Which is very different from maintaining current policy but for adjusting basis value.)
But fairness doesn’t seem to be a motivating principle of the existing capital gains tax in the first place. If you look at it as an effort to encourage the shortest possible “long-term” holding, the existing policy makes perfect sense.
He has a point. Imagine capital gains in a sustained high inflation period. Even if your investment exactly tracked inflation you’d end up with a very substantial nominal gain, and LTCG uses the nominal value.
It would be great for the taxpayer if you could do that but the government would lose out on so much revenue. So I think any such proposal is dead on arrival.
I think it’s important to recognize that taxes are not primarily about revenue. The government can just create/inflate as much money into existence as it wants. All taxes are about behavior control and signaling. We’re either trying to discourage a behavior or signal we’re sticking it to some group or other who is getting taxed. Once you see the world through this lens all of these tax laws make much more sense.
Isn't that the same way it works for buying stocks?
I don't live in the US, but if I buy stocks for 100$, then sell them five years later for 150$, I have to pay a percentage of the winnings (so a % of 50$). This means that if inflation was more than what's left over after the taxes are removed then I would effectively "lose" money.
Let's be clear though, if your stock grows as little as that such that after paying capital gains on profits and adding inflation into the equation would leave you on the negative or even, then it's a pretty bad performing stock.
Yes, he has a point. Just treading water with respect to inflation triggers a tax bill. I doubt the cap gains calculation will ever tax real gains rather than nominal gains.
Also there is always the standard deduction, and I think at the federal level there is even 30k on top of that you can take in LTCG without any taxes. So not a luxurious lifestyle, but certainly enough to survive.
I don't think WA is doing that though. They probably have a much lower threshold when the capital gains tax sets in.
Edit: just read a bit closer and WA is exempting the first 250k in gains per year. So they are offering an even better deal than the feds.
That is only likely to happen with housing (although not for the past 30 years in anywhere remotely desirable), and the tax breaks on moving your primary residence pretty much address that.
Not that I've ever heard. The only justification I've heard is that long-term investing is good for the overall economy, and therefore should be encouraged.
And as reduced down, it essentially gives the Fed the ability to seize 20% (soon to be 40%) of all property in the name of the IRS, by printing arbitrary amounts of money (which the Fed board can do independently of congress) to blow up the nominal "capital gains" on any asset, triggering capital gains tax.
It hasn't been an issue historically, in an era of hawkish fed leadership, but this year... we'll see.
"Double taxation" as a concept is complete nonsense. You pay sales tax, property tax, VAT, etc out of money (or assets bought with money) that has already been subject to your income tax. You pay both federal and local income taxes on the same money. Tax systems are naturally layered, and have been since the beginning of civilization.
There are good arguments against capital gains tax, but this is not one of them.
You pay capital gains on the nominal profit (versus real profit, which may actually be a real loss as in the example). You have not paid double the taxes unless you screwed up and selected a cost-basis of $0 versus the actual non-zero value.
Details are sparse in this article. Looks like 7% capital gains tax, first $250K excluded, real estate excluded. Proceeds to primarily fund childhood education (for now).
> For example, stock sales higher than $250,000 would be taxed at 7%. Real estate would not be.
7% (on top of federal cap gains, which are also increasing) is a significant tax rate to start with. If it was 1-2%, I could see people rolling with it. At a whopping 7%, I expect a lot of startup founders and small business owners looking for an exit will be moving across the border to Portland right before they sell their companies.
It's more like the 7000 highest filers in any given year. The richest people may not be realizing capital gains. It's likely to affect people who happen to be selling their businesses that year, probably the only year they would ever fall into that group. It makes creating such a business and selling it while living in the state less attractive. Have to move to Texas before you sell?
If I have a liquidity event at my startup, I'm going to be hit with this, right? Like many startup engineers, I've been taking less pay for shares for several years now. Funny, I don't feel like one of the richest 7000 individuals in Washington.
And I guarantee you as an early engineer, I'm likely going to hit 250k, but get nothing close to founder cashout money.
"Keep in mind we don't have any income taxes here."
That's not really what the supporters of this bill think. They claim an excise type tax already exists and that it provides precedent for this one since income taxes are unconstitutional.
“ It is estimated that this tax only affects the 7000 richest individuals in Washington.”
Careful, that’s how it always starts. Give it a decade or so and politicians will be upset at how few people are actually paying this tax. They’ll demand all sorts of changes to the exemption structure so that they can raise more revenue. All while saying it’s only going to effect other people.
The Alternate Minimum Tax was only supposed to affect less than 100 millionaires in the 1960's who were paying no taxes. Now, it is impacting 20+% of California tax payers most of whom earn under a million dollars a year and many of whom are not millionaires.
> Keep in mind we don't have any income taxes here.
Washington currently has 0.4% income tax for W2 employees, and another 0.6% coming on Jan 1, 2022 unless you have sufficient long term disability insurance by Jul 2021 to be able to opt out of it.
So WA will effectively have a 1% income tax beginning Jan 1, 2022 for W2 earners (aka employees).
So people who are able to move to escape this tax. 7.000 is not a big number, they could consult (maybe they did) with these guys and see if they are okay with such a tax.
It looks like Oregon has a 9.9% capital gains tax, so moving to Portland would add to the tax bill of founders relocating before selling their company instead of reducing it.
Oregon treats capital gains as regular income (so do most states, including CA).
Oregon also has one of the worst tax regimes in the country. For most earners, a resident of a state like CA without sales tax on groceries, medical care, or medical necessities will end up with a substantially lower tax burden than a similar earner in Oregon. To be more taxed than CA is crazy.
> At a whopping 7%, I expect a lot of startup founders and small business owners looking for an exit will be moving across the border to Portland right before they sell their companies.
Why? Oregon has income tax of 9-10% on all income over $9k/year.
This is just the state rate. The current federal rate is 20%, and is about to rise to 43%. So, the full tax rate on capital gains in WA is 27% and going to be 50%.
As a Washington resident, I think this is great. WA has one of the most regressive tax systems in the country, and this is a move in the right direction.
It's crafted to have a very narrow impact. It is capital gains, but essentially only for stock sales, and only for stocks sales over a quarter million dollars. If someone sells half a million dollars worth of stock, it seems very fair the state gets some cut of that - especially if it's earmarked for childhood education.
I can only hope I'm successful enough to one day pay this tax.
They won't be in WA. They've been underfunding education for years and are under a state Supreme Court mandate to increase funding. I'm not 100% sure that's still in effect but my property taxes nearly doubled 2017->2018.
I think it's even narrower than you point out, as it should be 250K of gains, not just of stock sales. If I, for example, sell 260K of an index fund that I bought for 240K, I shouldn't owe this tax. However, if I sell 260K of stock that I got at basically 0 monetary cost as a company founder, then I'd owe the tax.
I'm not a fan of labelling tax code as "regressive" in this case. It hasn't moved "backwards", it's stayed the same.
I also question the rationale behind giving our city and state more money... they haven't exactly exhibited forthright stewardship of existing tax resources. I have doubts that taking more capital gains taxes will be a net positive. This will in all likelihood negatively impact the region's yearly charitable donations. It will be interesting if someone does a before/after comparison of the net effect of this new tax.
I believe zacharycohn meant "regressive" as in "imposes a harsher burden on lower-income households than on households with higher incomes."[0] In this sense, Washington state does have a regressive tax system, in part thanks to 0% income tax and higher than average sales tax.
>If someone sells half a million dollars worth of stock, it seems very fair the state gets some cut of that
Yes very fair, after all the state took all that risk on those stocks and deserves something too. And to think that business you built should be all yours and not theirs also.
Like Warren said you are only successful because of the rest of us......
“You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
Actual nonsense coming out of this government. As a life-long resident one of the main reasons I continue to work in Washington is the lack of an income tax.
Exempting real estate is just an extra middle-finger to anyone young and trying to save.
This is so painful and short-sighted. Earmarking for education is yet another typical smoke and mirrors 'saint-hood' performance that this government puts on for its low-info voter base.
If all of that money can still be proven to be going towards childhood education by 2023, I'll deep-fry my socks and eat them. Hopefully we can get a State Supreme Court judge to knock this down as unconstitutional.
Managing real estate is a magnitude more difficult than managing 100 shares of Tesla or maintaining a website.
Let’s agree that value creation should not be the target of taxes. Sin or consumption on the otherhand would be more rational. Can someone enlighten me on the case for taxing value creation and not value consumption?
It seems like almost every new kind of taxation gets pushed as something to fund education. For example, I was recently looking at buying a used car from a private seller and it turns out I have to pay a state sales tax on the purchase. Why? Well that specific tax was passed decades ago to fund state schools. Does the money still go to the schools? I have no clue but maybe not since the state is still considering hiking taxes to pay for more education.
First, the ultra-rich won't pay it. They'll take out loans against their stock instead of selling it.
Second: The 14th amendment to the state constitution[1] says:
> All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.
This bans any sort of graduated tax. The state supreme court has upheld this in the past.[2] If the legislature wants to make a graduated tax on capital gains, they'll have to amend the constitution.
Third: This tax is counterproductive. If you tax something, you get less of it. Tax cigarettes and people smoke less. Tax alcohol and people drink less. Tax gasoline and people burn less gas. Tax gambling and people gamble less. And if you tax capital gains, then people invest less. If you're going to tax something, tax bad or neutral things, not good things. This tax won't ruin the state's economy, but it certainly won't help economic growth.
I dont buy that this tax will meaningfully reduce investment. With interest rates on bank accounts and and bonds so low, there really is no way to keep up with even relatively low levels of inflation without investing in stocks. People aren't stupid, they aren't going to make investments with a 0.5% rate of return just to spite the state.
Non-pessimistic answer: it’s largely the only place the middle class parks its wealth. Besides that it would be stuff like 401k and Roth IRA which would also be exempt already.
Pessimistic answer: it’s for developers and landlords
Yes, if you included real estate at the 250K number, you'd hit a much broader target than you would for stocks. But eliminating real estate entirely is a huge break for rent-seeking large landlords and developers. Probably should've simply chosen a higher dollar threshold for real estate.
There's a fairness argument that can be made (but probably should only apply to primary residences only) - you buy a house for $100k in Seattle 10 years ago - now you want to move to another neighborhood into an identical house, but both are now worth upwards of $500k - you'd have to come up with the tax difference on the "profit" even though all you're doing is moving between nearly identical properties.
Also stock sales are more easily "structured" to avoid this tax (sell half this year, half next year) whereas a house has to be sold as a "whole".
Can't be hard to invent an exemption for that case. When you buy the new house, the tax is deferred, in proportion to the cost. So if you trade down you pay and you will have the money. If you buy a more expensive place there's nothing to pay, but you have a balance. When you die, you pay the balance or your heirs inherit it.
I half agree, there are no doubt interested businesses. I don't know what the breakdown in benefits between people and businesses, but I do agree.
But when you think about housing and capital gains tax benefits at a federal level, specifically related to one's primary residence, I think it's reasonable to say that taxing real estate sales (or at least housing) is not very popular in like, a literal sense. Now obviously people don't usually go selling their home every two years, so it might not be frequently relevant.
I just feel that housing transactions are, I don't know, more in public consciousness, than like selling a mutual fund? That assertion is basically speculation though, i.e. people might more commonly identify more as home owners, than people with large amounts of equities etc.
And I guess part of that is mental, and part financial, in that it seems housing is more frequently the biggest piece of one's total picture than I would guess.
Not sure if this exempts all real estate. In other areas they often exclude the primary residence. I think it's because for most people, that's their biggest asset and would represent a huge loss of wealth for the lower and middle classes. Especially if they are selling it to move into a retirement home (they'll likely need that money to pay for it too).
In the specific case of Washington, they have an excise tax on the sale of real estate up to (IIRC) 3% of property value, which is substantial. Taxing the gain and the sale would put quite a significant tax burden on people moving house, particularly in very expensive markets like Seattle where most home sales will be subject to capital gains.
Because housing in WA has gone up like crazy so a ton of residents are sitting on huge capital gains. The feds might exempt $250k of gain, but they’d get hit in WA.
We can’t have people to hit the housing lottery pay a dime of those gains as taxes, can we?
I think if real estate is like stock, most real estate holders will be happier. Real estate is subject to property tax, which is pretty much a form of wealth tax.
I have the same question. For middle class we should exempt a certain amount of money from any investment and treat all capital gains the same. The real estate exemption just creates huge inflation in real estate prices.
Ah, so this bill will tax gains from productive activities like investing in and building companies, while exempting gains from rent seeking activities like real estate.
Real estate has a powerful lobby and many property owners are well-connected themselves. A lot of people own property and don't see it as free money. They empathize with property owners. Though it's easier money if you're politically connected and/or already wealthy.
Stocks are held by rich people and techbros, in the minds of the public. Whether something is valuable or not valuable depends on who you empathize with. Right now occupations held by the wealthy are disliked and unpopular.
Really you should just tax income at high rates and investment at near-0%. When people cash out their investments, tax them at ordinary income rates. This is how your 401(k) or IRA already works. You'll need to raise taxes on the affluent who spend instead of save, but that's not a bad thing.
If you borrow against your investments, you never have to sell, and your investments will simply grow faster than your borrowing costs. Wealth must be taxed, taxing income alone is insufficient.
We have property taxes for property, there’s no reason we can’t have investment taxes for securities.
Historically, real estate is exempted from taxes because "we the society" want to encourage home ownership. This manifests from an american romance with land ownership.
You used to be able to vote only if you owned land. You now can invest at (effective) discount. We've always favored land ownership.
This is like complaining that a news story is about topic A, but topic B is more interesting to you. It's a complete non-sequitur. Landlords should also be taxed, but that doesn't belong on this bill.
Maybe they’re promoting productive investments in real estate, while punishing people for rent seeking off of companies just because they fronted the capital.
Readit News
“if you bought an asset for $10,000 in 2000, for example, the BLS says you spent $15,700 in today’s mini-dollars; if you sell it for $15,000 in 2021 you’ve actually suffered a loss, but will owe capital gains tax nonetheless” (https://philip.greenspun.com/blog/2021/04/29/economic-wisdom...).
I’m not a finance person, and this had never occurred to me. Does he have a point? Should the calculation of capital gains take inflation into account?
There is a good argument that capital gains, for fairness, should be taxed the same as other income, on a value calculated by adjusting the basis value for inflation. (Which is very different from maintaining current policy but for adjusting basis value.)
But fairness doesn’t seem to be a motivating principle of the existing capital gains tax in the first place. If you look at it as an effort to encourage the shortest possible “long-term” holding, the existing policy makes perfect sense.
I don't live in the US, but if I buy stocks for 100$, then sell them five years later for 150$, I have to pay a percentage of the winnings (so a % of 50$). This means that if inflation was more than what's left over after the taxes are removed then I would effectively "lose" money.
Because cash obviously doesn't grow with inflation. You're only option to "get ahead" is to pick a better stock :)
I don't think WA is doing that though. They probably have a much lower threshold when the capital gains tax sets in.
Edit: just read a bit closer and WA is exempting the first 250k in gains per year. So they are offering an even better deal than the feds.
Dead Comment
In Turkey? Absolutely.
US has too much savings and there is strong pressure to get rid of the excess savings.
Turkey has the exact opposite problem, people stop saving in Turkey and they need as many incentives as possible.
Isn't this one of the justifications for cap gains rates typically (jurisdiction dependent) being lower than regular income?
Dead Comment
It hasn't been an issue historically, in an era of hawkish fed leadership, but this year... we'll see.
There are good arguments against capital gains tax, but this is not one of them.
If you invest a dollar today and get ten dollars tomorrow you’ve gained 9 dollars. When were you taxed for that?
> For example, stock sales higher than $250,000 would be taxed at 7%. Real estate would not be.
7% (on top of federal cap gains, which are also increasing) is a significant tax rate to start with. If it was 1-2%, I could see people rolling with it. At a whopping 7%, I expect a lot of startup founders and small business owners looking for an exit will be moving across the border to Portland right before they sell their companies.
It is estimated that this tax only affects the 7000 richest individuals in Washington.
Keep in mind we don't have any income taxes here.
And I guarantee you as an early engineer, I'm likely going to hit 250k, but get nothing close to founder cashout money.
That's not really what the supporters of this bill think. They claim an excise type tax already exists and that it provides precedent for this one since income taxes are unconstitutional.
Careful, that’s how it always starts. Give it a decade or so and politicians will be upset at how few people are actually paying this tax. They’ll demand all sorts of changes to the exemption structure so that they can raise more revenue. All while saying it’s only going to effect other people.
Washington currently has 0.4% income tax for W2 employees, and another 0.6% coming on Jan 1, 2022 unless you have sufficient long term disability insurance by Jul 2021 to be able to opt out of it.
So WA will effectively have a 1% income tax beginning Jan 1, 2022 for W2 earners (aka employees).
Oregon also has one of the worst tax regimes in the country. For most earners, a resident of a state like CA without sales tax on groceries, medical care, or medical necessities will end up with a substantially lower tax burden than a similar earner in Oregon. To be more taxed than CA is crazy.
Why? Oregon has income tax of 9-10% on all income over $9k/year.
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It's crafted to have a very narrow impact. It is capital gains, but essentially only for stock sales, and only for stocks sales over a quarter million dollars. If someone sells half a million dollars worth of stock, it seems very fair the state gets some cut of that - especially if it's earmarked for childhood education.
I can only hope I'm successful enough to one day pay this tax.
If it's earmarked for childhood education then don't be surprised if other childhood education funds are reallocated elsewhere.
I also question the rationale behind giving our city and state more money... they haven't exactly exhibited forthright stewardship of existing tax resources. I have doubts that taking more capital gains taxes will be a net positive. This will in all likelihood negatively impact the region's yearly charitable donations. It will be interesting if someone does a before/after comparison of the net effect of this new tax.
[0] https://www.thebalance.com/regressive-tax-definition-history...
Yes very fair, after all the state took all that risk on those stocks and deserves something too. And to think that business you built should be all yours and not theirs also.
Like Warren said you are only successful because of the rest of us......
“You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
- Elizabeth Warren
Dead Comment
Exempting real estate is just an extra middle-finger to anyone young and trying to save.
This is so painful and short-sighted. Earmarking for education is yet another typical smoke and mirrors 'saint-hood' performance that this government puts on for its low-info voter base.
If all of that money can still be proven to be going towards childhood education by 2023, I'll deep-fry my socks and eat them. Hopefully we can get a State Supreme Court judge to knock this down as unconstitutional.
It says the first $250k is exempt. Not a lot of young savers pulling down $250k in cap gains annually.
Let’s agree that value creation should not be the target of taxes. Sin or consumption on the otherhand would be more rational. Can someone enlighten me on the case for taxing value creation and not value consumption?
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Like the state gas tax, you still won’t get itemization of its breakdown to ensure that it is really where it is going to go.
So, color me surprise.
First, the ultra-rich won't pay it. They'll take out loans against their stock instead of selling it.
Second: The 14th amendment to the state constitution[1] says:
> All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word "property" as used herein shall mean and include everything, whether tangible or intangible, subject to ownership.
This bans any sort of graduated tax. The state supreme court has upheld this in the past.[2] If the legislature wants to make a graduated tax on capital gains, they'll have to amend the constitution.
Third: This tax is counterproductive. If you tax something, you get less of it. Tax cigarettes and people smoke less. Tax alcohol and people drink less. Tax gasoline and people burn less gas. Tax gambling and people gamble less. And if you tax capital gains, then people invest less. If you're going to tax something, tax bad or neutral things, not good things. This tax won't ruin the state's economy, but it certainly won't help economic growth.
1. https://leg.wa.gov/CodeReviser/RCWArchive/Documents/2019/WA%... (Amendment 14 is on page 59)
2. http://courts.mrsc.org/supreme/039wn2d/039wn2d0191.htm
Pessimistic answer: it’s for developers and landlords
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Also stock sales are more easily "structured" to avoid this tax (sell half this year, half next year) whereas a house has to be sold as a "whole".
But when you think about housing and capital gains tax benefits at a federal level, specifically related to one's primary residence, I think it's reasonable to say that taxing real estate sales (or at least housing) is not very popular in like, a literal sense. Now obviously people don't usually go selling their home every two years, so it might not be frequently relevant.
I just feel that housing transactions are, I don't know, more in public consciousness, than like selling a mutual fund? That assertion is basically speculation though, i.e. people might more commonly identify more as home owners, than people with large amounts of equities etc.
And I guess part of that is mental, and part financial, in that it seems housing is more frequently the biggest piece of one's total picture than I would guess.
We can’t have people to hit the housing lottery pay a dime of those gains as taxes, can we?
Why am I not surprised?
Stocks are held by rich people and techbros, in the minds of the public. Whether something is valuable or not valuable depends on who you empathize with. Right now occupations held by the wealthy are disliked and unpopular.
Really you should just tax income at high rates and investment at near-0%. When people cash out their investments, tax them at ordinary income rates. This is how your 401(k) or IRA already works. You'll need to raise taxes on the affluent who spend instead of save, but that's not a bad thing.
The article mentions income taxes are unconstitutional in Washington.
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Does this address taxes lost from people being paid in stock units?
We have property taxes for property, there’s no reason we can’t have investment taxes for securities.
You used to be able to vote only if you owned land. You now can invest at (effective) discount. We've always favored land ownership.
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Not to mention the first 250K is exempt. So basically this only effects those who are gaining a lot.
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This is a bizarre take.