I.R.S. Cracks Down on Hedge Fund Tax Strategy(nytimes.com)
nytimes.com
I.R.S. Cracks Down on Hedge Fund Tax Strategy
http://www.nytimes.com/2015/07/09/business/dealbook/irs-cracks-down-on-hedge-fund-tax-strategy.html
135 comments
The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions.
I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock?
It's even the same word: A retail business sells its stock (product), and sells it's stock (shares)
Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Taxing consumption is relatively straighforward to describe (but hard to implement), and taxing wealth is slightly harder (since it's hard to mark the value of some assets)
I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock?
It's even the same word: A retail business sells its stock (product), and sells it's stock (shares)
Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Taxing consumption is relatively straighforward to describe (but hard to implement), and taxing wealth is slightly harder (since it's hard to mark the value of some assets)
The difference is the people who make the tax rules want to encourage one kind of behavior over another, regardless of anything else. You're free to think that's a fundamentally bad idea, but it isn't "arbitrary," it's the basic idea of Behavioral Economics.
They could have done that much better with linear interpolation instead of a step function.
Today's step function, with made-up tax percentages: 20% if held for less than a year, 10% if a year or more. You end up with a bunch of trades held for a year and a minute.
My proposal, with interpolation: 20% if held for less than 6 months 10% if held for 18 months or more Between 6 and 18 months, we interpolate between 20 and 10%.
The difference between waiting 364 or 365 days is now minimum. I chose 6 and 18 because they're 12 +/- 6. However, a different curve could be drawn. The idea is to replace the step with a gradual increase.
Today's step function, with made-up tax percentages: 20% if held for less than a year, 10% if a year or more. You end up with a bunch of trades held for a year and a minute.
My proposal, with interpolation: 20% if held for less than 6 months 10% if held for 18 months or more Between 6 and 18 months, we interpolate between 20 and 10%.
The difference between waiting 364 or 365 days is now minimum. I chose 6 and 18 because they're 12 +/- 6. However, a different curve could be drawn. The idea is to replace the step with a gradual increase.
That sounds like a nightmare to do without software computing it. I realize you and likely everyone reading this use tax software, but many people still do them by hand, and this would involve an individual tax-rate lookup for each transaction rather than just grouping them into short/long-term capital gains.
Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports?
I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.
I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.
> Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports?
I use an intermediary, but have to report individual stocks nonetheless (fraud avoidance?) And you can only require what they can provide. During tax season, I have to dive through filing cabinets to fish out the cost basis information that's missing on older investments made before they were required[1] to start recording that information, plus double checking splits online to make sure this wasn't a partial sale that I have to calculate the cost basis on. They report what they have on Form 1099-B.
Right now you have to file a separate Form 8949 for each combination of: (Short Term, Long Term) x (Reported to IRS & Me via 1099-B, Reported to only Me via 1099-B, Unreported to Me), plus Schedule D, plus maybe Schedule B. Last year that was "only" five pages of tax forms filed for two stock transactions + various dividends, plus a few worksheets that you don't file. I forget if there was a cabinet dive.
Given how obtuse tax forms get, a tax-rate lookup for each transaction would probably involve a worksheet per stock, just to do the date time calculation of "how long was this stock held".
[1] At least, I think I read they were required to start tracking this.
I use an intermediary, but have to report individual stocks nonetheless (fraud avoidance?) And you can only require what they can provide. During tax season, I have to dive through filing cabinets to fish out the cost basis information that's missing on older investments made before they were required[1] to start recording that information, plus double checking splits online to make sure this wasn't a partial sale that I have to calculate the cost basis on. They report what they have on Form 1099-B.
Right now you have to file a separate Form 8949 for each combination of: (Short Term, Long Term) x (Reported to IRS & Me via 1099-B, Reported to only Me via 1099-B, Unreported to Me), plus Schedule D, plus maybe Schedule B. Last year that was "only" five pages of tax forms filed for two stock transactions + various dividends, plus a few worksheets that you don't file. I forget if there was a cabinet dive.
Given how obtuse tax forms get, a tax-rate lookup for each transaction would probably involve a worksheet per stock, just to do the date time calculation of "how long was this stock held".
[1] At least, I think I read they were required to start tracking this.
You have to assume that the brokerage must retain and report the information, otherwise you can lie all you want about your cost basis without any way for the IRS to cross check at scale. If caught in an audit, you can just claim a bookkeeping error; probably not what they want given the lengths they've gone to in order to fill common holes (c.f. the whole "provide a 1099 to pretty much everyone you have a financial relationship with" pile of bullshit).
Your stock broker or investment manager should be doing all this for you. Normally you receive end of year tax documents and all you do is copy some numbers from them onto your tax return. It's pretty easy but it could definitely be even more automated.
Maybe some stock brokers or weird investments don't do this?
I would hate having to do all that stuff by hand.
Maybe some stock brokers or weird investments don't do this?
I would hate having to do all that stuff by hand.
If you've held a position for long enough it may have been purchased before brokers were required to keep track. Your broker may not have enough information to provide the cost basis.
I have a couple small positions I've held for more than 20 years now. At this point it will be more trouble to deal with the taxes than they're worth, so I'll probably just hold onto them and let my heirs deal with it.
I have a couple small positions I've held for more than 20 years now. At this point it will be more trouble to deal with the taxes than they're worth, so I'll probably just hold onto them and let my heirs deal with it.
There are probably thousands of laws on the books that would be written differently now that we have software running everything. No sense in writing laws for the world of 20 years ago.
Are you a lobbyist for TurboTax? (I kid I kid... but seriously, are you?)
Well, just to caveat, not everyone who makes the rules is a pigouvian. Some arguments over taxes are actually about finding ways to maximize revenue while minimizing distortions. It's a mix.
> Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality.
Trading an asset vs. holding it is a non-fictional concept very much grounded in reality.
Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.
Trading an asset vs. holding it is a non-fictional concept very much grounded in reality.
Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.
Financial instruments come in a variety of flavors the tax treatment is definitely arbitrary and not possible to be very consistent or logical about.
1- Over the course of a year I buy and sell hundres of stock issues, constantly incuring taxable events, and at the end I sell off the entire portfolio including short term cap gains rate (same as income rates).
2- I buy an ETF that does all the same trades, but when I sell I only get long term cap gains taxes.
3- I loan a company money (sell an note) to do this trading and a clause written for at the end of the year call the note for a value equal to the previous two scenarios. I incure taxation from a bond investment,
4- I buy an ETN (exchange traded note) that repays based on a formula as if the previous trades were made. Once again I pay long term capital gains on an equity investment.
5- I buy a future on the index I'm managing and invest an an amount equal to current price of the stocks in bonds to replicate the price performance on the ETN. When I sell a year, I incure two taxable events.
6- I have't even brought up options, so I can keep going.
These are all the same, but they all have different taxable events and consider a realized gain something different.
1- Over the course of a year I buy and sell hundres of stock issues, constantly incuring taxable events, and at the end I sell off the entire portfolio including short term cap gains rate (same as income rates).
2- I buy an ETF that does all the same trades, but when I sell I only get long term cap gains taxes.
3- I loan a company money (sell an note) to do this trading and a clause written for at the end of the year call the note for a value equal to the previous two scenarios. I incure taxation from a bond investment,
4- I buy an ETN (exchange traded note) that repays based on a formula as if the previous trades were made. Once again I pay long term capital gains on an equity investment.
5- I buy a future on the index I'm managing and invest an an amount equal to current price of the stocks in bonds to replicate the price performance on the ETN. When I sell a year, I incure two taxable events.
6- I have't even brought up options, so I can keep going.
These are all the same, but they all have different taxable events and consider a realized gain something different.
I think people are getting tripped up on the difference between "fictional" and...I dunno..."fungible"? In a sense all money is fictional, but obviously despite that no one is willing to trade a $10 bill for my $1 bill. So taxing people differently for having $10 vs $1 might make sense.
But $10 and ten $1 bills are equivalent. A tax that applied to one and not the other would be very weird; it's not clear what behavior it's meant to encourage, and anyway lots of people would avoid paying it.
So the argument above is that "realizing" gains is a lot like getting change for a dollar bill. I don't know whether that's right, but anyway it's different from arguing about whether money is real :)
But $10 and ten $1 bills are equivalent. A tax that applied to one and not the other would be very weird; it's not clear what behavior it's meant to encourage, and anyway lots of people would avoid paying it.
So the argument above is that "realizing" gains is a lot like getting change for a dollar bill. I don't know whether that's right, but anyway it's different from arguing about whether money is real :)
"Trading an asset"
What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?
What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?
There is nothing fictional about the ownership of a fraction of a profitable enterprise. This shouldn't be more difficult than the concept of negative numbers, or any other useful non-physical concept. Ditto for options or any other construct that has a mathematical or market-based value.
>There is nothing fictional about the ownership of a fraction of a profitable enterprise.
Please read more carefully. I never claimed any such thing.
'fictional' modifies 'entity', not 'ownership'.
Please read more carefully. I never claimed any such thing.
'fictional' modifies 'entity', not 'ownership'.
[deleted]
Wow, down modded for a factual post.
Will need to rethink my involvement here.
Will need to rethink my involvement here.
Not a 'fictional' entity; a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people.
The company is in that sense a "legal fiction," which seems to confuse people.
https://en.wikipedia.org/wiki/Legal_fiction
https://en.wikipedia.org/wiki/Legal_fiction
The fiction is to believe that 'a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people' is an entity.
You're basically saying that contracts are fictional. Try entering into a contract, then behaving as if it's fictional by ignoring your responsibilities in the contract, and you will quickly find out how real they are.
>You're basically saying that contracts are fictional.
Nope (although, that may be true, in some sense), I am not saying that. I am saying the thing many refer to as an 'entity', as in, 'the corporate entity', is a fictional thing. It has no real, inherent or independent physical existence apart from the people that choose to represent it.
Nope (although, that may be true, in some sense), I am not saying that. I am saying the thing many refer to as an 'entity', as in, 'the corporate entity', is a fictional thing. It has no real, inherent or independent physical existence apart from the people that choose to represent it.
There's no fundamental difference between a corporate entity and a contract. Just because it has no physical manifestation doesn't mean it's a fiction.
"What exactly are you trading?"
Part ownership of a company.
To say anything else is to show yourself to be completely naive.
Part ownership of a company.
To say anything else is to show yourself to be completely naive.
All 'assets' that are traded are not necessarily part ownership of a company. Some are pure voting rights. Some are rights to dividends. Some are rights to loan payments.
To believe that all assets are 'part ownership of a company' is not only naive, but incorrect and delusional.
To believe that all assets are 'part ownership of a company' is not only naive, but incorrect and delusional.
I buy a stock for $10.
2 years later, I sell it for $20.
I get taxed on a $10 capital gains income tax.
How is this not "logical" ? Can you explain better?
How is this not "logical" ? Can you explain better?
You can nest a financial asset arbitrary layers deep in funds and holding companies.
See other comments in this subthread that illustrate the various ways to structure assets.
See other comments in this subthread that illustrate the various ways to structure assets.
Stockholders who hold less than a year are going to have very different goals for the company than those who hold for several years. That's the difference.
“A retail business (...) sells it's stock”
The contraction “it’s” means either “it has” or “it is”. So, the quoted expression expands either way to a syntactically malformed expression with two verbs.
Could it be intended to mean the following?
A retail business’ (...) sells — it has stockA fairer way to resolve this might be letting Renaissance pay the long-term while Deutsche pays at least the difference between the short-term and the long-term rates. If Deutsche Bank wants to pay Renaissance's taxes for the latter, that's fine by me.
U.S. Constitution, Article I, Section 9:
No Bill of Attainder or ex post facto Law shall be passed.
"The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011."
?
Ex post facto laws are criminal laws making criminal acts that were not criminal before the law was passed, or increasing the criminal punishment for crimes committed before the law was passed.
Retroactive tax laws are not ex post facto laws, and, anyway, this isn't even a retroactive tax law, its a decision about the manner in which the IRS will apply a law already on the books, which is only sustainable to the extent to which it is, in fact, consistent with the law already on the books. Its essentially the IRS coming to the view that they have not been properly enforcing existing law, and that will change for enforcement going forward (there are limits to how far back the IRS can go in enforcement actions, which presumably is the basis for the 1/1/2011 date.)
Retroactive tax laws are not ex post facto laws, and, anyway, this isn't even a retroactive tax law, its a decision about the manner in which the IRS will apply a law already on the books, which is only sustainable to the extent to which it is, in fact, consistent with the law already on the books. Its essentially the IRS coming to the view that they have not been properly enforcing existing law, and that will change for enforcement going forward (there are limits to how far back the IRS can go in enforcement actions, which presumably is the basis for the 1/1/2011 date.)
1. In the US, the supreme court has repeatedly held that the ex-post-facto clause only applies to criminal laws (See Calder v. Bull, which was decided in 1798).
This is actually consistent with the history of the clause (It was understood to apply to criminal laws. Motions were made to change the wording to say it also applied to civil cases, they were turned down)
2. This is not a law, and may not even be administrative rulemaking (depending on what exactly they issued)
Of course, even if it was, you have a mechanism to challenge it if they hold you to it: the courts.
This is actually consistent with the history of the clause (It was understood to apply to criminal laws. Motions were made to change the wording to say it also applied to civil cases, they were turned down)
2. This is not a law, and may not even be administrative rulemaking (depending on what exactly they issued)
Of course, even if it was, you have a mechanism to challenge it if they hold you to it: the courts.
I wouldn't be so quick to buy into the modern idea that this prohibition was always aimed at criminal laws. Excerpted from a paper I wrote in law school on the topic (sources at end of post):
Newly independent Americans in the late 1700s were very concerned with “this shameful abuse of power”, “those engines of oppression”, ex post facto laws. American businessmen were concerned with the macroeconomic effects and unfairness of interference with contracts by provincial/state legislatures.
One of the shameful abuses was the “paper money laws” that changed outstanding debts by permitting payment in paper money where the contract originally called for the use of gold or silver. There was widespread fear of the drying up of credit (in the context of an ongoing major depression at the time) as a result of concern that loans might not be paid back due to legislative intervention.
The dictionary of reference in 1739, Giles Jacob’s Law Dictionary, defined “ex post facto” as “a Term used in the Law, signifying some Thing done after another Thing that was committed before”.
Check out these sources: William Winslow Crosskey, “The True Meaning of the Constitutional Prohibition of Ex-Post-Facto Laws” (1947) 14 U Chicago L Rev 539
Roger W Weiss, “The Issue of Paper Money in the American Colonies, 1720-1774” (1970) 30 J of Economic History 770
Elmer E Smead, “The Rule Against Retroactive Legislation: A Basic Principle of Jurisprudence” (1935) 20 Minn L Rev 775
Harold J Krent, “The Puzzling Boundary Between Criminal and Civil Retroactive Lawmaking” (1996) 84 Georgia L J 2143
W David Slawson, “Constitutional and Legislative Considerations in Retroactive Lawmaking” (48) California L Rev 216
Newly independent Americans in the late 1700s were very concerned with “this shameful abuse of power”, “those engines of oppression”, ex post facto laws. American businessmen were concerned with the macroeconomic effects and unfairness of interference with contracts by provincial/state legislatures.
One of the shameful abuses was the “paper money laws” that changed outstanding debts by permitting payment in paper money where the contract originally called for the use of gold or silver. There was widespread fear of the drying up of credit (in the context of an ongoing major depression at the time) as a result of concern that loans might not be paid back due to legislative intervention.
The dictionary of reference in 1739, Giles Jacob’s Law Dictionary, defined “ex post facto” as “a Term used in the Law, signifying some Thing done after another Thing that was committed before”.
Check out these sources: William Winslow Crosskey, “The True Meaning of the Constitutional Prohibition of Ex-Post-Facto Laws” (1947) 14 U Chicago L Rev 539
Roger W Weiss, “The Issue of Paper Money in the American Colonies, 1720-1774” (1970) 30 J of Economic History 770
Elmer E Smead, “The Rule Against Retroactive Legislation: A Basic Principle of Jurisprudence” (1935) 20 Minn L Rev 775
Harold J Krent, “The Puzzling Boundary Between Criminal and Civil Retroactive Lawmaking” (1996) 84 Georgia L J 2143
W David Slawson, “Constitutional and Legislative Considerations in Retroactive Lawmaking” (48) California L Rev 216
If the IRS doesn't think I've paid my taxes, I can go to prison.
Doesn't that make this particular case a criminal one?
Doesn't that make this particular case a criminal one?
> If the IRS doesn't think I've paid my taxes, I can go to prison.
No, if the IRS doesn't think you've paid your taxes, they can attempt to collect the unpaid taxes.
OTOH, if the Department of Justice can prove in a criminal prosecution that you've violated the criminal provisions of the tax law, you can go to prison. If the IRS thinks you've done that (which is different from just not paying your taxes), they can refer you to the DoJ for prosecution.
This change to IRS guidance doesn't change the criminal provisions of the tax law that would apply were the government to prosecute you, therefore, the change is not a change to criminal law, retroactive or otherwise.
No, if the IRS doesn't think you've paid your taxes, they can attempt to collect the unpaid taxes.
OTOH, if the Department of Justice can prove in a criminal prosecution that you've violated the criminal provisions of the tax law, you can go to prison. If the IRS thinks you've done that (which is different from just not paying your taxes), they can refer you to the DoJ for prosecution.
This change to IRS guidance doesn't change the criminal provisions of the tax law that would apply were the government to prosecute you, therefore, the change is not a change to criminal law, retroactive or otherwise.
Fortunately, tax law has been made so complex that the Supreme Court eventually decided that ignorance is a defense: https://en.wikipedia.org/wiki/Cheek_v._United_States
So you may end up with penalties and interest, but you have a high probability of avoiding prison absent doing something stupid like trading emails with your broker on how you plan to evade taxes.
So you may end up with penalties and interest, but you have a high probability of avoiding prison absent doing something stupid like trading emails with your broker on how you plan to evade taxes.
It's only a criminal matter if the IRS thinks you broke the law deliberately. If it's the result of crappy record keeping or something you didn't understand they'll usually tack on some penalties and interest and call it a day.
I know a guy who didn't even file for five or six years. Eventually he got a lawyer and made a deal which had him paying some fraction of his original tax liability.
They'll put you in jail if you make them, but they don't really want to put you in jail. They just want your money.
Oh, this guy? After getting his sweet deal he didn't actually pay them. I think he may end up in jail.
I know a guy who didn't even file for five or six years. Eventually he got a lawyer and made a deal which had him paying some fraction of his original tax liability.
They'll put you in jail if you make them, but they don't really want to put you in jail. They just want your money.
Oh, this guy? After getting his sweet deal he didn't actually pay them. I think he may end up in jail.
I'm guessing the idea here is that the IRS is changing how they interpret their own internal policy for how they will use the powers given to them by an existing law, rather than outright passing a new law with retroactive effects.
...but that justification seems like a horribly slippery slope. If you accept that logic, what stops congress from passing a law that creates the "Criminal Investigation Service" and gives their director the power to make things illegal? Would he then be allowed to make a "policy change" retroactively making something illegal and arresting them for it?
edit: I think Peugh v. United States actually answers this. Retroactive application of changes to US sentencing guidelines by a government commission were ruled to be a violation of ex post facto protections.
...but that justification seems like a horribly slippery slope. If you accept that logic, what stops congress from passing a law that creates the "Criminal Investigation Service" and gives their director the power to make things illegal? Would he then be allowed to make a "policy change" retroactively making something illegal and arresting them for it?
edit: I think Peugh v. United States actually answers this. Retroactive application of changes to US sentencing guidelines by a government commission were ruled to be a violation of ex post facto protections.
Well, in this case the IRS isn't passing a retroactive law, they are clarifying the interpretation of an existing law.
The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.
Interpretation isn't law, so in any legal dispute over the IRS actions under the current interpretation, the law which would be controlling is not retroactive.
Not to mention that there is solid precedent that retroactive taxes are not, in general, ex post facto laws in the first place, such that even if this was Congress adopting a retroactive tax law, it still wouldn't fall afoul of the ex post facto prohibition.
Not to mention that there is solid precedent that retroactive taxes are not, in general, ex post facto laws in the first place, such that even if this was Congress adopting a retroactive tax law, it still wouldn't fall afoul of the ex post facto prohibition.
> Interpretation isn't law, so in any legal dispute over the
> IRS actions under the current interpretation, the law which
> would be controlling is not retroactive.
This is to me a very weak argument (not that I disagree that this may be the standard that is applied in practice). If the Congress passed a law saying "the IRS can set tax code as it sees fit" and the IRS proceeds to levy taxes all the way back to 1980 on people as however it so desires, you should not be allowed to use that law as grounds for not having violated the ex post facto requirement. If this is the current understanding of what is allowed, I must vigorously object to whichever judgement left this precedent.
> IRS actions under the current interpretation, the law which
> would be controlling is not retroactive.
This is to me a very weak argument (not that I disagree that this may be the standard that is applied in practice). If the Congress passed a law saying "the IRS can set tax code as it sees fit" and the IRS proceeds to levy taxes all the way back to 1980 on people as however it so desires, you should not be allowed to use that law as grounds for not having violated the ex post facto requirement. If this is the current understanding of what is allowed, I must vigorously object to whichever judgement left this precedent.
> If the Congress passed a law saying "the IRS can set tax code as it sees fit"
Then this would be an unconstitutional delegation of legislative authority to the executive. [0] Rendering the consideration of whether any executive action under it would constitute an ex post facto law moot -- if Congress purports to delegate enough power to the executive that retroactive executive action under it would be an ex post facto law, than the whole scheme is an unconstitutional delegation of legislative power whether or not it is applied retroactively.
Heck, even though retroactive taxation isn't generally ex post facto law (which is retroactive criminalization or enhancement of criminal penalties), the law you propose would be an unconstitutional delegation.
> If this is the current understanding of what is allowed
Its not, its just the prohibition that prevents it has nothing to do with (and is much broader than) the ex post facto law prohibition.
[0] See, e.g., https://en.wikipedia.org/wiki/Nondelegation_doctrine#United_...
Then this would be an unconstitutional delegation of legislative authority to the executive. [0] Rendering the consideration of whether any executive action under it would constitute an ex post facto law moot -- if Congress purports to delegate enough power to the executive that retroactive executive action under it would be an ex post facto law, than the whole scheme is an unconstitutional delegation of legislative power whether or not it is applied retroactively.
Heck, even though retroactive taxation isn't generally ex post facto law (which is retroactive criminalization or enhancement of criminal penalties), the law you propose would be an unconstitutional delegation.
> If this is the current understanding of what is allowed
Its not, its just the prohibition that prevents it has nothing to do with (and is much broader than) the ex post facto law prohibition.
[0] See, e.g., https://en.wikipedia.org/wiki/Nondelegation_doctrine#United_...
> Then this would be an unconstitutional delegation of legislative authority to the executive
And yet this is what we seem to be experiencing in this case, where the IRS can make a policy interpretation retroactively to the tune of $6 billion for a single taxpayer. Your source indicates that congress allows the IRS to decide tax policy, but since tax evasion is itself a crime it seems to indirectly violate the ex post facto law prohibition.
And yet this is what we seem to be experiencing in this case, where the IRS can make a policy interpretation retroactively to the tune of $6 billion for a single taxpayer. Your source indicates that congress allows the IRS to decide tax policy, but since tax evasion is itself a crime it seems to indirectly violate the ex post facto law prohibition.
> And yet this is what we seem to be experiencing in this case
No, Congress passing a law saying that "IRS can set taxes at any level they want" is not what we are seeing.
If you want to argue that the actual laws Congress has passed are unconstitutional delegations, please, point to the specific laws, and make that argument.
> but since tax evasion is itself a crime it seems to indirectly violate the ex post facto law prohibition.
Evasion is a different thing than non-payment. No act that occurred in the past that was not evasion when it occurred becomes evasion as a result of this change in application.
No, Congress passing a law saying that "IRS can set taxes at any level they want" is not what we are seeing.
If you want to argue that the actual laws Congress has passed are unconstitutional delegations, please, point to the specific laws, and make that argument.
> but since tax evasion is itself a crime it seems to indirectly violate the ex post facto law prohibition.
Evasion is a different thing than non-payment. No act that occurred in the past that was not evasion when it occurred becomes evasion as a result of this change in application.
> Evasion is a different thing than non-payment. No act that occurred in the past that was not evasion when it occurred becomes evasion as a result of this change in application.
Incorrect, but I can see how you might think so. It is the same because if I disagree with the IRS and refuse payment then according to https://www.law.cornell.edu/wex/tax_evasion, I have committed tax evasion.
So yes, since the IRS can adjust my tax burden retroactively, tax evasion is involved. Suppose in 2012 I filed my tax returns and was fully honest. The IRS agreed, but now in 2015 they change the 'interpretation', and if I disagree with the new tax they are levying on me, presto chango! I can now be convicted of tax evasion for refusing to pay this arbitrary retroactive tax.
Incorrect, but I can see how you might think so. It is the same because if I disagree with the IRS and refuse payment then according to https://www.law.cornell.edu/wex/tax_evasion, I have committed tax evasion.
So yes, since the IRS can adjust my tax burden retroactively, tax evasion is involved. Suppose in 2012 I filed my tax returns and was fully honest. The IRS agreed, but now in 2015 they change the 'interpretation', and if I disagree with the new tax they are levying on me, presto chango! I can now be convicted of tax evasion for refusing to pay this arbitrary retroactive tax.
> It is the same because if I disagree with the IRS and refuse payment
Nonpayment and refusing payment are different things. The act of refusal would happen after the policy change, therefore, the only act that might even arguably be criminalized is an act that would occur after the change, and no retroactive criminalization has occurred.
No act before the policy was adopted is criminalized, even by your characterization.
Now, if the actual law allows arbitrary changes to tax calculation by the IRS, you could argue a nondelegation doctrine violation, rather than an ex post facto violation. But to argue that, you'd actually have to point to the provision of law at issue.
Or you could argue that the policy change is inconsistent with the law Congress has adopted. But, again, you'd have to actually point to the specific provisions that are violated to do that.
If, finally, the IRS simply failed to correctly apply the law as Congress wrote it previously, and the change in guidance is simply closing a gap between IRS policy and the law written by Congress, then you can maybe fault what the IRS was doing before (though, of course, no taxpayer would challenge an overly lax application of the law -- or even have standing to do so), but not what they are doing now.
Nonpayment and refusing payment are different things. The act of refusal would happen after the policy change, therefore, the only act that might even arguably be criminalized is an act that would occur after the change, and no retroactive criminalization has occurred.
No act before the policy was adopted is criminalized, even by your characterization.
Now, if the actual law allows arbitrary changes to tax calculation by the IRS, you could argue a nondelegation doctrine violation, rather than an ex post facto violation. But to argue that, you'd actually have to point to the provision of law at issue.
Or you could argue that the policy change is inconsistent with the law Congress has adopted. But, again, you'd have to actually point to the specific provisions that are violated to do that.
If, finally, the IRS simply failed to correctly apply the law as Congress wrote it previously, and the change in guidance is simply closing a gap between IRS policy and the law written by Congress, then you can maybe fault what the IRS was doing before (though, of course, no taxpayer would challenge an overly lax application of the law -- or even have standing to do so), but not what they are doing now.
Or I could ignore what are obviously semantics following a clear retroactive change in US policy that affects criminal law. It doesn't have to be as complex as you make it out to be.
The NYT even called it a retroactive policy change!
The NYT even called it a retroactive policy change!
> Or I could ignore what are obviously semantics following a clear retroactive change in US policy that affects criminal law.
You can ignore whatever you want, but it doesn't change what the words in the Constitution meant in the context they were written, and have been consistently been interpreted by the courts to mean. Arguing that something is unconstitutional just because you've invented an entirely ahistorical set of definitions of the words used is, well, not all that unusual, but still not particularly interesting.
> It doesn't have to be as complex as you make it out to be.
Its not at all complex: A government action is an ex post facto law if it criminalizes, or increases the criminal sanction for, an event that occurred before the act occurred. Even by your own characterization, the only thing this might criminalize is a refusal to pay the newly-calculated tax after the policy. So, no ex post facto law.
You can argue that it is undesirable for other reasons, but you can rest on the Constitutional prohibition of ex post facto laws to do that when its not an ex post facto law.
> The NYT even called it a retroactive policy change!
Its obviously a retroactive policy change, in that it applies to IRS assessment of taxes for prior tax years.
No act that was committed in those tax years becomes criminal because of the policy change, so its not an action which retroactively criminalizes an act or increases the criminal penalty for an act.
"Retroactive policy change" and "ex post facto law" aren't the same thing.
You can ignore whatever you want, but it doesn't change what the words in the Constitution meant in the context they were written, and have been consistently been interpreted by the courts to mean. Arguing that something is unconstitutional just because you've invented an entirely ahistorical set of definitions of the words used is, well, not all that unusual, but still not particularly interesting.
> It doesn't have to be as complex as you make it out to be.
Its not at all complex: A government action is an ex post facto law if it criminalizes, or increases the criminal sanction for, an event that occurred before the act occurred. Even by your own characterization, the only thing this might criminalize is a refusal to pay the newly-calculated tax after the policy. So, no ex post facto law.
You can argue that it is undesirable for other reasons, but you can rest on the Constitutional prohibition of ex post facto laws to do that when its not an ex post facto law.
> The NYT even called it a retroactive policy change!
Its obviously a retroactive policy change, in that it applies to IRS assessment of taxes for prior tax years.
No act that was committed in those tax years becomes criminal because of the policy change, so its not an action which retroactively criminalizes an act or increases the criminal penalty for an act.
"Retroactive policy change" and "ex post facto law" aren't the same thing.
And then you go to court and ask a judge, who is (in general) a neutral party, to interpret the law based on the situation and ask what the correct course of action was.
I guess people have different definitions of evasion, but I would probably define it as having the intent to evade taxes "from the start". As a citizen (or a corporation), you are free to decide on your own interpretation of the law. Tax authorities (around the globe) aren't always right. Hence you ask a judge, because an interpretation is just that: an interpretation. It's not the law. And the law is the only thing that counts.
I guess people have different definitions of evasion, but I would probably define it as having the intent to evade taxes "from the start". As a citizen (or a corporation), you are free to decide on your own interpretation of the law. Tax authorities (around the globe) aren't always right. Hence you ask a judge, because an interpretation is just that: an interpretation. It's not the law. And the law is the only thing that counts.
> I would probably define it as...
The legal standard for proving tax evasion disagrees with you.
The legal standard for proving tax evasion disagrees with you.
Well, then you just need to make sure your interpretation of the law is more correct than the one of the administration. :-)
Innocent until proven guilty?
Innocent until proven guilty?
> I can now be convicted of tax evasion for refusing to pay
Yes, for refusing to pay. If you concede to the IRS interpretation, you just pay the amount you owe plus interest and fees.
> this arbitrary retroactive tax.
that's not what it is
Yes, for refusing to pay. If you concede to the IRS interpretation, you just pay the amount you owe plus interest and fees.
> this arbitrary retroactive tax.
that's not what it is
but OP's concerns don't matter. The Constitution's concerns matter.
"Battery" is a crime. If the state decides that "smacking someone's back" meets the definition of battery, they can prosecute people who committed that act before the clarification, as long as a judge finds their interpretation to be consistent with the wording of the law.
Law is not computer code that fully specifies a simulation in advance.
"Battery" is a crime. If the state decides that "smacking someone's back" meets the definition of battery, they can prosecute people who committed that act before the clarification, as long as a judge finds their interpretation to be consistent with the wording of the law.
Law is not computer code that fully specifies a simulation in advance.
So rule decider type B (judges) can effectively create retroactive laws/policies. An interpretation that is enforced is as good as a law.
Yes, obviously. How did you think courts worked?
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I would set up the situation more like the state passing a law saying that an agency, call it the Battery Protection Agency (BPA), can decide what constitutes battery. Then the BPA decides in 2015 that verbal abuse and insults constitutes battery, and prosecutors proceed to arrest people for insults going back 5 years before the BPA's 2015 decision.
The parallels to the IRS case should be obvious, and the above hypothetical scenario is very much what the constitution was meant to protect against.
The parallels to the IRS case should be obvious, and the above hypothetical scenario is very much what the constitution was meant to protect against.
> The parallels to the IRS case should be obvious
Please point the specific provision(s) of law parallel to the one in your hypothetical, both as to the unlimited discretion and as to the discretion to decide what constitutes criminal punishment.
Because I don't think the parallels are at all obvious.
Please point the specific provision(s) of law parallel to the one in your hypothetical, both as to the unlimited discretion and as to the discretion to decide what constitutes criminal punishment.
Because I don't think the parallels are at all obvious.
Exactly, my hypothetical would universally not be allowed and is forbidden (esp. by the nondelegation doctrine). The point is that the two situations are very similar in spirit.
I never said the discretion was unlimited; rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution. The words are just semantics.
IRS tax avoidance constitutes criminal punishment.
Thanks for the downvotes, everyone.
I never said the discretion was unlimited; rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution. The words are just semantics.
IRS tax avoidance constitutes criminal punishment.
Thanks for the downvotes, everyone.
> The point is that the two situations are very similar in spirit.
You keep asserting that, but you have failed to even begin to argue that.
> rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution.
You are welcome to think that, however, that's not consistent with the history of the use "ex post facto law", which was a legal term of art already in existence at the time the Constitution was written, and whose scope of meaning in the Constitution since, practically, the ink was still wet on the Constitution.
> IRS tax avoidance constitutes criminal punishment.
No, tax avoidance (which is structuring activities in awareness of the law so as not to incur tax liability) isn't something that is subject to criminal punishment; it is perfectly legal.
Nonpayment of tax isn't legal, but isn't generally criminal either.
Tax evasion is criminal, but involves things like false representation to avoid tax liability being correctly assessed. Following the then-current IRS guidance isn't evasion, and doesn't retroactively become evasion when the guidance changes, even though the change in guidance may change the IRS's computation of tax due.
You keep asserting that, but you have failed to even begin to argue that.
> rather, I think that any retroactive decision in guidance/policy/interpretation is prohibited by the constitution.
You are welcome to think that, however, that's not consistent with the history of the use "ex post facto law", which was a legal term of art already in existence at the time the Constitution was written, and whose scope of meaning in the Constitution since, practically, the ink was still wet on the Constitution.
> IRS tax avoidance constitutes criminal punishment.
No, tax avoidance (which is structuring activities in awareness of the law so as not to incur tax liability) isn't something that is subject to criminal punishment; it is perfectly legal.
Nonpayment of tax isn't legal, but isn't generally criminal either.
Tax evasion is criminal, but involves things like false representation to avoid tax liability being correctly assessed. Following the then-current IRS guidance isn't evasion, and doesn't retroactively become evasion when the guidance changes, even though the change in guidance may change the IRS's computation of tax due.
I believe a reasonable person wills see the situations' similarity. I am not attempting to convince you since you are not interested.
There seems to be no good word for nonpayment of tax; tax evasion you take issue with elsewhere, tax avoidance is not the correct word I agree, but I don't know what word you really would like.
One thing is very clear: the IRS will take what it feels is due ('legally', or retroactively legal) and is willing to use the criminal justice system to do so. I and any freedom-loving American see this as a gross violation of the constitution.
There seems to be no good word for nonpayment of tax; tax evasion you take issue with elsewhere, tax avoidance is not the correct word I agree, but I don't know what word you really would like.
One thing is very clear: the IRS will take what it feels is due ('legally', or retroactively legal) and is willing to use the criminal justice system to do so. I and any freedom-loving American see this as a gross violation of the constitution.
I am a freedom-loving American and I do not consider this a gross violation of the constitution.
I consider the IRS as a necessary and permitted part of governance, as a way to pay for the many benefits I enjoy for living in a (mostly) civilized nation.
I consider the IRS as a necessary and permitted part of governance, as a way to pay for the many benefits I enjoy for living in a (mostly) civilized nation.
Very few people consider the IRS itself to be unconstitutional.
I at least of course do not see the IRS proper as a gross violation of the constitution. Rather, the retroactive judgement of tax owed is a gross violation. That is the context we are having this conversation in, whether the government can retroactively decide that you owe tax to it, in apparent violation of (the spirit, anyway) the constitution.
I at least of course do not see the IRS proper as a gross violation of the constitution. Rather, the retroactive judgement of tax owed is a gross violation. That is the context we are having this conversation in, whether the government can retroactively decide that you owe tax to it, in apparent violation of (the spirit, anyway) the constitution.
My guess would be that because this is "guidance" rather than a law or "bill" then this is not ex post facto application.
In other words, the law is and aways has been that one should pay the appropriate taxes. OTOH, guidance informs the IRS how to interpret market activity in the past and classify it as legal or illegal.
In other words, the law is and aways has been that one should pay the appropriate taxes. OTOH, guidance informs the IRS how to interpret market activity in the past and classify it as legal or illegal.
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The IRS doesn't pass laws, it's just issuing a guideline on how it will interpret existing tax law.
But if those interpretations are authoritative and violation of the current IRS interpretation (but not the previous one) means you get prosecuted in federal court, how is that not effectively the ability to retroactively change laws?
No new law is being passed.
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This made my jaw drop:
"Its Medallion fund, which now manages money for its employees only, was the most prolific user of basket options. The fund has earned an average annual return of more than 35 percent for two decades."
$25 billion is all employees money; Even if we exclude Simon's money ($14 billion) it is a ton. 35% avg annualized returns for 20 years. Simply stunning.
$25 billion is all employees money; Even if we exclude Simon's money ($14 billion) it is a ton. 35% avg annualized returns for 20 years. Simply stunning.
Actually the Medallion fund is only about $6 billion I believe. The rest of the money is managed in funds which are open to non-employees (and those ones don't make anything close to 35% annualised returns).
One other wibble: the 35% isn't the average, but rather the smallest annual return.
"average annual return of more than 35 percent"
I don't think they meant every year was greater than 35%, I interpreted it as the overall average is more than 35%.
I don't think they meant every year was greater than 35%, I interpreted it as the overall average is more than 35%.
Do you know which funds are available to non-employees?
The ones I know of are
RIEF (Renaissance Institutional Equities Fund) RIDA (Renaissance Institutional Diversified Alpha) RIFF (Renaissance Institutional Futures Fund)
Of course there's probably still very large minimum investment thresholds.
RIEF (Renaissance Institutional Equities Fund) RIDA (Renaissance Institutional Diversified Alpha) RIFF (Renaissance Institutional Futures Fund)
Of course there's probably still very large minimum investment thresholds.
> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades.
OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??
OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??
There are several plausible hypotheses.
My personal favorite is, "They trade on non-public information, and use a complex trade algorithm for the purposes of plausible deniability."
Another is, "They got lucky."
Another likely one is "The reporter did not calculate average annual return correctly."
One that I find dubious: "They actually are that good at investing."
For giggles: "They are using hedge funds to launder drug money."
I'm sure there are other ways to explain it, but that return just sounds way too good to be true.
My personal favorite is, "They trade on non-public information, and use a complex trade algorithm for the purposes of plausible deniability."
Another is, "They got lucky."
Another likely one is "The reporter did not calculate average annual return correctly."
One that I find dubious: "They actually are that good at investing."
For giggles: "They are using hedge funds to launder drug money."
I'm sure there are other ways to explain it, but that return just sounds way too good to be true.
Or maybe they move the most successful trades from client's funds into this employee fund, and move the unsuccessful ones out to client's funds?
Oh, I like that one too, but how would they cover their asses in the event of an audit? Retroactive accounting?
If they can move ownership for a year, they'll certainly have no problems moving it for a few hundred milliseconds...
I think they'll probably use a database that's "eventually consistent" ;-) I
I think they'll probably use a database that's "eventually consistent" ;-) I
Nobody really knows how they've done it.
But in order for markets to be efficient there needs to be lots of constant arbitrage, and anyone who pulls off an arbitrage trade makes a profit. So maybe the Medallion fund just does a lot of the arbitrage that makes markets so efficient.
But in order for markets to be efficient there needs to be lots of constant arbitrage, and anyone who pulls off an arbitrage trade makes a profit. So maybe the Medallion fund just does a lot of the arbitrage that makes markets so efficient.
> "you can't beat the market in the long term"
Without cheating that may be true.
Without cheating that may be true.
Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.
That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.
Survivorship bias. The funds that do not have great records are eventually closed leaving only the ones that are successful
You haven't done the math.
Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances.
RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binary model. Survivorship bias does not begin to explain this; there have not been anything resembling 33 million hedge funds over the course of history. I think 30000 hedge funds is a fairly generous estimate.
Exercise: Suppose Medallion's returns are at least a standard deviation above zero, every year. Calculate the odds of this happening.
Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances.
RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binary model. Survivorship bias does not begin to explain this; there have not been anything resembling 33 million hedge funds over the course of history. I think 30000 hedge funds is a fairly generous estimate.
Exercise: Suppose Medallion's returns are at least a standard deviation above zero, every year. Calculate the odds of this happening.
This is still the wrong math. I'm not qualified to come up with a great model here, but given that the S&P 500 has only lost value in 5 of the last 25 years the chances of having no losses in the last 25 years are a lot greater.
I've been investing for almost a decade, was lucky enough to sit out the worst in 2008, and I haven't had a down year in 10 years myself. This outcome was mostly luck on my part.
I've been investing for almost a decade, was lucky enough to sit out the worst in 2008, and I haven't had a down year in 10 years myself. This outcome was mostly luck on my part.
Consider the probability of beating the S&P instead. Same math applies. If that doesn't convince you, look up their monthly returns and do the same calculation.
So presumably, there is a 75% chance that the Medallion fund will lose money (hedge fund = zero sum) for the first time ever, during the next few years. I don't think this interpretation of the maths is correct.
Google Berkshire Hathaway. Today you will learn something new.
As far as I am aware the Medallion fund is not in any way publicly available. I believe it's an exclusive fund to a small number of investors who are involved directly with Renaissance. It would make a lot of sense to it's success as not having to scale past a certain point allows them to avoid a lot of uncertainty when taking models live.
If we didn't use the tax code to create bizarre incentives, we'd arguably have more honest behavior.
I think the most interesting part is not the tax, but this:
The options also were attractive because they limited the risk of loss to the amount paid for each option, Renaissance said. “No other investment structure of which we are aware provides both high leverage and loss protection,” Renaissance said.
The options also were attractive because they limited the risk of loss to the amount paid for each option, Renaissance said. “No other investment structure of which we are aware provides both high leverage and loss protection,” Renaissance said.
Anyone else find this kind of "scammy" sounding?
How can they have a 35% average annual return over the past 25 years and guarantee that you won't take a loss at all?
Reminds me of Madoff.
How can they have a 35% average annual return over the past 25 years and guarantee that you won't take a loss at all?
Reminds me of Madoff.
I think the most likely explanation is that they were just shifting all the tail risk to DB and Barclays, who didn't know any better or thought the portfolios would never experience losses beyond the option premium.
Maybe all cap gains should just be taxed at the same rate. 1 year threshold his so artificial.
In a tax system with progressive marginal rates on annual income, treating income resulting from action over multiple years as earned in the year realized results in a artificial increase in the tax burden on those with that kind of income pattern. So, there's a sense in which treating capital gains earned over multiple years differently than capital gains earned over a single year or less (the latter taxed as general income), given the progressive nature of the tax system.
Of course, irregular income from other sources that isn't simple hourly work often also can result in windfalls from work over a longer period of time, or naturally intermittent so that an a large income one year is the result of a pattern of activity that also resulted in a smaller income other years. A simple way to address this that isn't specific to capital income is to tax all income equally, but allow, within certain bounds, income to be recognized for tax purposes, and associated taxes paid, in advance of realization and, perhaps in certain cases, deferred and recognized over a period of years after realization.
This would mitigate any overtaxing of cashing out events that took many years to "earn" the income, without favoring any particular kind of income or creating gameable thresholds.
Of course, irregular income from other sources that isn't simple hourly work often also can result in windfalls from work over a longer period of time, or naturally intermittent so that an a large income one year is the result of a pattern of activity that also resulted in a smaller income other years. A simple way to address this that isn't specific to capital income is to tax all income equally, but allow, within certain bounds, income to be recognized for tax purposes, and associated taxes paid, in advance of realization and, perhaps in certain cases, deferred and recognized over a period of years after realization.
This would mitigate any overtaxing of cashing out events that took many years to "earn" the income, without favoring any particular kind of income or creating gameable thresholds.
There's a massive difference between the long-term and short-term gains rates. And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing, and cannot afford to pay higher taxes.
> And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing, and cannot afford to pay higher taxes.
Tax-sheltered vehicles such as IRAs and 401Ks already exist specifically for retirement. That's unrelated to the issue of preferential tax treatment for capital gains, which is not limited to retirees and is completely regressive, privileging those who already have access to capital over those who rely on their labor for income.
Tax-sheltered vehicles such as IRAs and 401Ks already exist specifically for retirement. That's unrelated to the issue of preferential tax treatment for capital gains, which is not limited to retirees and is completely regressive, privileging those who already have access to capital over those who rely on their labor for income.
> And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing
Raise them prospectively based on the date of asset purchase, starting some specified time after the date the change is adopted. Problem solved.
Raise them prospectively based on the date of asset purchase, starting some specified time after the date the change is adopted. Problem solved.
That would only solve the problem of not penalizing existing retirees. It would force all people currently saving for retirement to save 10-15% more to pay this new pile of tax. And what, precisely, do they get in return for that added tax burden?
> And what, precisely, do they get in return for that added tax burden?
They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.)
In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to continue going forward.
They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.)
In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to continue going forward.
Alternatively, if the goal here is to stop hedge funds from taking advantage of long-term capital gains, perhaps it would make more sense to cap the amount of gains exempted as long-term and make the rest short-term. Set a cap well above what the vast majority of individuals would hit, and below what any aggregate fund would hit. For instance, "long-term capital gains can only be applied to the first $150k of gains per year; gains above that are always taxed at the short-term rate".
> They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.)
You say that as though an increase in taxes here will be used to decrease taxes elsewhere. That does not match the reality of changes to tax law; tax revenue will simply increase, with no changes to taxes elsewhere.
> In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to continue going forward.
There is no entitlement for government to apply arbitrary taxes and expect people to bear it, either, without providing a commensurate improvement in value.
> They get the relative burden of taxation shifted off the of other sources of income, including the source they are using to get money to pay for retirement. (The specific effect depends on how that relative shift is used.)
You say that as though an increase in taxes here will be used to decrease taxes elsewhere. That does not match the reality of changes to tax law; tax revenue will simply increase, with no changes to taxes elsewhere.
> In any case, if the current favorable treatment of capital is inequitable, there is no entitlement for people to expect it to continue going forward.
There is no entitlement for government to apply arbitrary taxes and expect people to bear it, either, without providing a commensurate improvement in value.
> It would force all people currently saving for retirement to save 10-15% more to pay this new pile of tax.
This will happen regardless, as tax rates have nowhere to go but up in the USA (considering trillions in unfunded liabilities).
> And what, precisely, do they get in return for that added tax burden?
Civilization. That's exactly what taxes pay for.
This will happen regardless, as tax rates have nowhere to go but up in the USA (considering trillions in unfunded liabilities).
> And what, precisely, do they get in return for that added tax burden?
Civilization. That's exactly what taxes pay for.
> This will happen regardless, as tax rates have nowhere to go but up in the USA (considering trillions in unfunded liabilities).
Because when you've run up a giant pile of debt, the response should be "get and spend more money" rather than "spend less"?
> Civilization. That's exactly what taxes pay for.
As long as we're being snarky: product not as advertised, cost inflated well over initial agreement, return policy non-existent and no refund available. Would refuse to do business with again if not for geographic monopoly and coercion.
Because when you've run up a giant pile of debt, the response should be "get and spend more money" rather than "spend less"?
> Civilization. That's exactly what taxes pay for.
As long as we're being snarky: product not as advertised, cost inflated well over initial agreement, return policy non-existent and no refund available. Would refuse to do business with again if not for geographic monopoly and coercion.
So get involved with the political process and work to make it better. It's so easy to get into local and state politics, and that's the stuff that has the biggest influence over your life.
I don't get why more people don't do this!
I don't get why more people don't do this!
Getting involved with politics is a life-consuming activity, especially if you want to actually change anything.
My state, unlike most in the US and unlike the US federal government, at least has a requirement that all tax issues must be voted on by the general public rather than just passed by the legislature and signed by the governor.
The federal government, however, is the largest source of both taxes and onerous regulations, the most challenging and time-consuming to get involved with, and the most resistant to change.
(This is, oddly, a larger-scale version of the same problem Wikipedia has or many other organizations have: whoever has the most time to waste can be the most successful creating and thriving in a bureaucracy, winning by sheer volume rather than by merit. Or, alternatively: anyone who would want the job shouldn't have it, and anyone who should have the job wouldn't want it.)
My state, unlike most in the US and unlike the US federal government, at least has a requirement that all tax issues must be voted on by the general public rather than just passed by the legislature and signed by the governor.
The federal government, however, is the largest source of both taxes and onerous regulations, the most challenging and time-consuming to get involved with, and the most resistant to change.
(This is, oddly, a larger-scale version of the same problem Wikipedia has or many other organizations have: whoever has the most time to waste can be the most successful creating and thriving in a bureaucracy, winning by sheer volume rather than by merit. Or, alternatively: anyone who would want the job shouldn't have it, and anyone who should have the job wouldn't want it.)
Yes, it is life-consuming. Anyone who wants to get into politics is getting into something that'll affect a lot of people's lives. It should take a lot of effort. If it were easy, our world (or the part of it that government touches, which is most of it) would be chaotic.
As for "anyone who would want the job shouldn't have it," that's cute to some, but to me it's a tired thought-terminating cliche. It says "it's ok to be cynical, hur hur, and complain without doing anything about it," but does that get us any further?
As for "anyone who would want the job shouldn't have it," that's cute to some, but to me it's a tired thought-terminating cliche. It says "it's ok to be cynical, hur hur, and complain without doing anything about it," but does that get us any further?
I'm well aware that I'm complaining about something that I'm unwilling to take the time to fix. Given all the time in the world, it's one of the problems on the list; it's just not at the top.
I don't, however, think it ought to take a life-consuming effort to make it stop affecting a lot of people's lives. But unfortunately, it probably will. Not least of which because there are a large number of people who feel entitled to make it affect a lot more of people's lives.
In any case, though, I'm surprised that you say "I don't get why more people don't do this!"; I think it's fairly obvious why more people don't do this. If it were the kind of thing you could spend a few hours doing as a volunteer effort and have an impact, rather than the kind of thing you could spend your life on and possibly accomplish nothing, then more people might do it. On the other hand, if it were that way, then there wouldn't be as much of a problem to deal with in the first place.
I don't, however, think it ought to take a life-consuming effort to make it stop affecting a lot of people's lives. But unfortunately, it probably will. Not least of which because there are a large number of people who feel entitled to make it affect a lot more of people's lives.
In any case, though, I'm surprised that you say "I don't get why more people don't do this!"; I think it's fairly obvious why more people don't do this. If it were the kind of thing you could spend a few hours doing as a volunteer effort and have an impact, rather than the kind of thing you could spend your life on and possibly accomplish nothing, then more people might do it. On the other hand, if it were that way, then there wouldn't be as much of a problem to deal with in the first place.
Raising those rates would have very little impact for retirees as many are in the 15%-25% marginal tax brackets as it is.
If you're in the 15% or 25% marginal tax bracket for income, you're in the 0% or 15% long-term capital gains tax bracket (respectively). That's a 15% or 10% tax hike, which is much more than "very little impact".
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I think this is a fine idea.. Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion, but it'd go a long way toward removing complexity.
> Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion
Well, their accountants and financial advisers might, since their work of structuring things to make sure most gains are long-term and in the right categories would be less valuable. But cutting taxes for all taxpayers -- including the rich -- on short-term games, and for most taxpayers on several categories of long-term games, may not that widely object to by people paying capital gains taxes in the first place.
Well, their accountants and financial advisers might, since their work of structuring things to make sure most gains are long-term and in the right categories would be less valuable. But cutting taxes for all taxpayers -- including the rich -- on short-term games, and for most taxpayers on several categories of long-term games, may not that widely object to by people paying capital gains taxes in the first place.
What about inflation?
I don't see how that is more artificial than taxing cap gains at a different rate than salary, or any number of other examples in the tax codes.
All of these things are done to change the incentives about something, you can't expect them to be consistent without reference to those goals (and even then...)
All of these things are done to change the incentives about something, you can't expect them to be consistent without reference to those goals (and even then...)
really? I'm honestly confused at responding to this with downvoting.
I am confused as well. With that said, there is a comment from 'dragonwriter' further up in the thread that I think touches on this:
"In a tax system with progressive marginal rates on annual income, treating income resulting from action over multiple years as earned in the year realized results in a artificial increase in the tax burden on those with that kind of income pattern. So, there's a sense in which treating capital gains earned over multiple years differently than capital gains earned over a single year or less (the latter taxed as general income), given the progressive nature of the tax system."
"In a tax system with progressive marginal rates on annual income, treating income resulting from action over multiple years as earned in the year realized results in a artificial increase in the tax burden on those with that kind of income pattern. So, there's a sense in which treating capital gains earned over multiple years differently than capital gains earned over a single year or less (the latter taxed as general income), given the progressive nature of the tax system."
Well sure, one can argue with the goals of the policy (or if it is effective, or what the unintended consequences are), but these things are not "arbitrary", and tax codes are full of them.
>The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011.
Regardless of the particulars of any taxation expectations, there's something about retroactive policy changes that seems to defy the spirit of law to me.
Regardless of the particulars of any taxation expectations, there's something about retroactive policy changes that seems to defy the spirit of law to me.
what if a hedge fund bought an at the money call option on the underlying security and sold an in the money put at an arbitrary price such as a dollar in order to convert the short term capital gains to long term capital gains
Hedge funds adding value.
Long-term investments provide stability to the economy and should be encouraged through the tax-code.
Renaissance pursued a strategy of tax avoidance and should be punished.
Renaissance pursued a strategy of tax avoidance and should be punished.
Long-term investments stabilize the economy and should be encouraged through the tax-code.
http://www.bloomberg.com/news/articles/2014-07-21/renaissanc...
Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower.
This obviously creates a situation where people will do their best to make their trading fall into the later category.
What Deutsche did was to sell hedge funds an option on a basket(collection) of stocks that was held longer than a year. Not surprisingly, a year is long enough to qualify for hte lower long term investment tax on capital gains.
The IRS has called shenanigans on this and the below quote is probably the biggest reason why:
> "Illustrating how rapidly the contents of the “baskets” were shuffled, one option reviewed by the committee had more than 129 million underlying trades in a single year, the subcommittee said. Many of Renaissance’s stock investments lasted mere minutes or seconds, it said."