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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 439313  
Subject: Re: Just stop it! Date: 9/22/2012 10:52 AM
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If corporations are people, why aren't they taxed at the same rate as people?

AM
===================================

This went way further than I thought it would...

Currently the corporate rate is higher than the personal rate.

There are a lot of corporations out there that aren't the big guys. Businesses, like mine and others in our town, that set up their small business as a corporation.

I remember the local furnace repair guy being upset because inventory increases were considered income. It was his first year in business. He bought common replacement parts to have on hand for repairs. The part is not an expense until it is sold.

He had very little actual income that first year, since he spent the money increasing his inventory. He had to pay income tax on the money he used to buy the inventory. This is true whether it's a sole proprietorship or a corporation. He ended up having to borrow money to pay the tax bill that year.

The capital gain and dividend rate is mostly the same for everyone. I understand some of the reasons for lower rates. I don't understand why lowering the rates would help hiring.

Dividend dollars have already been taxed at the corporate rate. Then when distributed they are taxable income to the individual. It's a bit like putting your income in a savings account and being taxed on it when you make a withdrawal. Currently you are only taxed on the interest.


Capital gains have changed over the years. In the beginning they were given a special rate because we wanted people to invest in businesses for the long term. It was believed that giving gains that were invested for the long term special tax rates would encourage long term investments.

For individuals capital gains were usually on the sale of their home. That has been eliminated entirely.

Capital gains only occur when a capital item is sold. Stocks were considered owning a portion of the business. If they were/are sold with in a year of purchase they are taxed like inventory. However, if they were/are held for more than a year the gain gets the lower rate. This encouraged investments in businesses.

With the times, the buying and selling of stock has become more of a business, with stocks as the inventory. Only the initial purchase is really buying part of the company. Stockholders, for the most part, don't really care about the company, they just care about what the stock price is doing.

I like the buffet rule. This WSJ article doesn't, surprise, surprise.

Think about this:

http://online.wsj.com/article/SB1000142405270230375390457745...

But that ignores the vital link between tax rates and capital investment. The lower the tax, the greater the incentive to take risks.

I don't know of a single start up (1poorguy, I'm not talking about how your company was started) that said, "Hmmmm, if I start this business when I sell I can get the capital gains rate."

The investors that helped start 1poorguy's company probably did think that way.

But most capital gains are NOT from initial investments in a company, but from the trading of stocks in existing companies. The price of the stock doesn't gain or loose the actual company anything, for the most part. Often gain isn't spent on anything but a different stock.

Increasing the capital gains tax may slow down stock turnover, which could slow down the growth of the stock price. I don't see how it would impact the actual operations of the company.

Maybe someone can tell me why I'm wrong.

Jean
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