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[foolsguinea.livejournal.com]

Comments

[thebigbadbutch.livejournal.com]

Oh! Tom the Dancing Bug is good times.

[tigron-x.livejournal.com]

I'm glad he got that right.

[saint-monkey.livejournal.com]

In before "this cartoon doesn't understand how this type of taxation actually works..."

[merig00.livejournal.com]

Somehow part E mysteriously avoids the issue of the stockholder being taxed first as an owner of the company.

If the company decides to pay out dividends, the earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders. The first taxation occurs at the company's year-end when it must pay taxes on its earnings. The second taxation occurs when the shareholders receive the dividends, which come from the company's after-tax earnings. The shareholders pay taxes first as owners of a company that brings in earnings and then again as individuals, who must pay income taxes on their own personal dividend earnings.
http://www.investopedia.com/ask/answers/03/102203.asp

[thebigbadbutch.livejournal.com]

It's like you didn't even read the comic.

[merig00.livejournal.com]

Yes I missed that the author splits D and E into two different parts even though it's the same person

[bikinisquad3000.livejournal.com]

It's not all that mysterious; that's part D.

[merig00.livejournal.com]

Well it's the same person in D and E. That's where the author makes mistake and that's why I missed it.

[rabidsamfan.livejournal.com]

Except it isn't the same person. At "D" the corporation or bank has choices about what to do with the money it receives. It can spend that money on labor, or products, or research. Making dividend payments to shareholders is not automatic, nor do the shareholders have direct access to the funds from the moment they arrive. "E" is a separate transaction, made not to the corporation, but to individuals (usually) and it should be taxed separately.

[merig00.livejournal.com]

And if at "D" it is a small local bank - a private limited corporation with lets say 50 shareholders? What if at "D" you have your friendly Ben&Jerry ice-cream company and not the "evul 1% fat cat with a monocle and a top hat"?

You created a business and asked a bunch of your friends to get into business with you. They don't have to be employed at this corporation but they own it just as much as you do. Or maybe they do work at it. Would you like to be taxed twice?

[rabidsamfan.livejournal.com]

Sorry -- you haven't made your case. Just convinced me that I'm right, because after all, it's the big shareholders who benefit the most by treating E differently than the rest.

Even if D is a small business, with only a few shareholders, it is still an entity which has options on how it pays out the money it receives. If the owners are also employees, they could decide to split the entire revenue into their paychecks, but we'd still tax those paychecks as the money goes from being in control of the business to being in control of the individuals. So the same thing applies to dividends on shares. The control of the money changes hands -- instead of the business being able to use it for office supplies it now becomes the asset of an individual who is able to use it to purchase things without any interference from any other shareholder.

(Don't forget that the shareholder can also be another business or corporation, like a capital investment firm, and not just an individual.)

It's that change of control that makes E a taxable transaction, the same as wages and purchases in other parts of the money change.

[merig00.livejournal.com]

Control of the money doesn't change hands. Owners instead of putting all the earnings into the growth of the company decide to pocket some of them. What if you have a store and you hired a manager to run it. It is a sole proprietorship - the manager hands you over the earned cash at the end of the day and you pay your taxes on it. By your logic - the owner should pay taxes twice for some reason. Once when his store earned the money and then when the manager gave him the earnings.

Let me try it from the other side.

Sole Proprietorship - owner pays personal income taxes on whatever the company earns. Can pocket whatever they want after the taxes are paid.

Partnership - owners pay personal income taxes on whatever the company earns. Taxes are split between partners depending on their investment into the company. Can pocket whatever they want after the taxes are paid.

Corporations - owners pay corporate income tax. And after that they have to pay an additional tax in case they want to pocket the earnings.

Why is it fair for owners to pay taxes twice?

[rabidsamfan.livejournal.com]

I'm all in favor of a business paying taxes, and then the owner paying on what they skim from the profits even if it is a sole owner. There are two entities there. It creates incentive for the owner to plow money back into the business (and employees) because the business deductions are of a different nature than the kinds of deductions individuals take. And since a business can be sold mid-year, treating it as a separate entity for tax purposes clarifies responsibility for those taxes. Just because someone self-identifies with a business doesn't mean that they are that business. It can continue without them, or fail and vanish without them vanishing too. Separate entities, separate taxes.

On the other hand, I don't think that changes in stock prices should affect income taxes unless someone actually sells their stock. Even if they turn around and buy more stock a nanosecond later, the income from the sale of stock should be income. An increase in the value of stock without any transactions is not. And neither is a decrease in the market value of a stock a loss. Paper is paper. (Nor should property owners be able to take a tax break for keeping a building empty by asking for a high rent, but that's really changing the topic...)

[merig00.livejournal.com]

Hold up... are you saying that everyone who is working but not employed part/full-time by someone else should pay double the taxes? Why on earth would you think that?

I don't remember from the top of my head and don't have time to check right now but the worth of the commercial paper you own does not actually influences your tax rate. Only when you buy or sell them that's when you are taxed. If to follow your logic, since cash is also paper so the loss of that paper shouldn't influence your tax rate :D

I'm all for simplifying the tax code, closing loopholes and even better getting on some sort of flat tax with limited deductions.

[rabidsamfan.livejournal.com]

Okay, let's distinguish between "sole owner" and "person who is the entire business". Mitt Romney was the sole owner of Bain, and also drew a salary from the company, so presumably he was the one raking in the dividends if any were paid. But the company itself had a board of directors, multiple employees, etc. In that instance, yeah, the company should pay taxes and then when it turns over money to Mitt, Mitt should pay taxes on what gets turned over to him, because the board has nominal control over his salary. If he weren't effectively a separate entity from the company, he wouldn't need to be paid a salary by the company or receive benefits from it.

My brother in law, on the other hand is a person who is the entire business. He is a cabinetmaker, and he works on commissions. His income is always controlled by him, the way an artist or actors income is always controlled by that artist or actor. He alone decides whether to blow the entire income from a commission on popcorn, or put it in the bank for his retirement, etc. There's no illusion of paying himself a salary from the business, and there are no other people (except my sister) to consult. Even if it were a family business, where a single household is receiving the income, the control of the money is never transferred.

There also isn't any element of gambling. When you buy stock in a company, you're making a bet that that company won't go under. (Well, unless you're someone who is going to write the contract so you get paid whether it fails or not. Leveraged buyouts are bad because they don't prioritize the oldest debts for payment first if the company goes bankrupt -- including promised pensions!) Dividends are payments on a bet you've won -- and like lottery payments, they should be taxed.

And yes, if your stocks lose value you can take a "loss" on your income tax, so the reverse is true AFAIK. And if investors had to pay taxes on trades every time they traded stock there wouldn't be as much of the micro/flash trading going on. They have to pay a little on the UK stock exchange, I believe, but not on the NYSE.