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tony

Hannity Comments On Obama

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My father in law a few weaks ago said he could not support Obama because he was going to tax capital gains within his 401k. That made no sense to me becuase aren't 401K monies taxed as income within a retirement account? Aren't capital gains within a tax deferred plan irrelevant?

 

 

Last night Shawn Hannity ( who personally is way too partisan for my tastes) said "Obama will have a devastating effect on 401K plans with his proposed capital gains taxes.

 

 

Is Shawn full of crap on this? I can't find anything anywhere that Obama is even considering this.

 

 

Is this a scare tactic or is Shawn just out too lunch?

 

 

 

Tony

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Hi Tony,

If Shawn Hannity is a TV personality, I don't know anything about him as I don't watch television. I think it is fair to say taxes are going to go up some way in the future no matter who is president. We have to pay our bills at some point. I believe the current capital gains law in ending in 2010. If it is not renewed, then capital gains will probably go up. I plan to sell my one taxable fund before then to take advantage of the current law. As far as my IRA, it will be taxed as I make withdrawals. I don't see any possibility of it being taxed before I withdraw. As far as scare tactics go, did you know that Obama is a Muslim. At least that is what I read on the far right literature. :>))

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My father in law a few weaks ago said he could not support Obama because he was going to tax capital gains within his 401k. That made no sense to me becuase aren't 401K monies taxed as income within a retirement account? Aren't capital gains within a tax deferred plan irrelevant?

 

 

Last night Shawn Hannity ( who personally is way too partisan for my tastes) said "Obama will have a devastating effect on 401K plans with his proposed capital gains taxes.

 

 

Is Shawn full of crap on this? I can't find anything anywhere that Obama is even considering this.

 

 

Is this a scare tactic or is Shawn just out too lunch?

 

 

 

Tony

 

 

While most pre tax contributions are taxed as ordinary income when paid, employer stock held in a 401k is eligible for the 15% capital gains rate. If the employee is in the 15% bracket the captial gains tax is 0%.

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Is Shawn full of crap on this? I can't find anything anywhere that Obama is even considering this.

 

Is this a scare tactic or is Shawn just out too lunch?

 

Tony

 

 

Hi Tony,

The answers are in your questions.

;-)

Steve

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Is the money in employer stock?

If not, I would rather pay the capital gains rate in my 403b than a regular income rate. Ask the father-in-law which rate he prefers to pay, regular income tax or capital gains.

 

Actually he is going to vote for McCain anyway. How do I know? because he's already shown his hand. He listens to crap and believes it. Many of our citizens are easily seduced by fear: "they'll take away our guns", we'll be taxed to death, Obama is a Muslim, there are weapons of mass destruction.

 

What was it that made us a great country? Were we not a great country when FDR was in office? or Kennedy? or was it when government became the enemy? Speaking of foreign oil dependance, which president took the solar panels off the White House?

 

Your father in law is a jerk.

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Is the money in employer stock?

If not, I would rather pay the capital gains rate in my 403b than a regular income rate. Ask the father-in-law which rate he prefers to pay, regular income tax or capital gains.

 

Actually he is going to vote for McCain anyway. How do I know? because he's already shown his hand. He listens to crap and believes it. Many of our citizens are easily seduced by fear: "they'll take away our guns", we'll be taxed to death, Obama is a Muslim, there are weapons of mass destruction.

 

What was it that made us a great country? Were we not a great country when FDR was in office? or Kennedy? or was it when government became the enemy? Speaking of foreign oil dependance, which president took the solar panels off the White House?

 

Your father in law is a jerk.

 

 

TONY, You can go to Obama's website and find his positions on practically everything; hopefully this will allay your FIL's worries. Then perhaps he can properly enlighten his friends and family.

JudyS

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If you increase the tax on stocks - even those just outside of 401(k)'s it will reduce the value of the stocks - regardless of where they are held.

 

ScottyD

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If you increase the tax on stocks - even those just outside of 401(k)'s it will reduce the value of the stocks - regardless of where they are held.

 

ScottyD

 

 

Why does increasing taxation of stocks reduce the value of stock held in a Q plan/IRA/403b where there is no tax upon the sale or dividends but only upon distributions? The value of a stock is based upon the present value of future earnings, not taxation rates. Many investors such as pension plans and tax exempt organizatons do not pay tax which allows the gains/dividends to compound tax free. Under your logic if tax rates for T Bills and the S & P 500 were the same retirement plans should hold T bills even if the rate of return for the S & P 500 is 2x the return of T bills.

 

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You misunderstood me.

 

If you raise taxes on capital gains it reduces your expected return. If I'm going to buy a stock and there is no capital gains tax I will have an expectation of total after tax return - say 10%, but if I know that I'm going to pay say 30% in capital gains, that reduces my return to say 7% after taxes (for simplicities sake). I'm less likely to buy stock the higher the rate of taxation - this reduces the overall demand for stocks and holding everything else constant (an economists fantasy) the price of stocks (lower demand). The Net Present Value of an investment after-tax drives the desire to purchase stocks - as taxes rise, demand should fall, thus everyone suffers.

 

In addition, if people believe capital gains taxes are going to be higher, they are likely (those in taxable accounts) to sell stocks to lock in the lower tax rate - this causes a drop in stock prices for everyone. Whether they get back in or not depends on how they view how the increased capital gains tax will affect their investments long term.

 

 

 

ScottyD

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You misunderstood me.

 

If you raise taxes on capital gains it reduces your expected return. If I'm going to buy a stock and there is no capital gains tax I will have an expectation of total after tax return - say 10%, but if I know that I'm going to pay say 30% in capital gains, that reduces my return to say 7% after taxes (for simplicities sake). I'm less likely to buy stock the higher the rate of taxation - this reduces the overall demand for stocks and holding everything else constant (an economists fantasy) the price of stocks (lower demand). The Net Present Value of an investment after-tax drives the desire to purchase stocks - as taxes rise, demand should fall, thus everyone suffers.

 

In addition, if people believe capital gains taxes are going to be higher, they are likely (those in taxable accounts) to sell stocks to lock in the lower tax rate - this causes a drop in stock prices for everyone. Whether they get back in or not depends on how they view how the increased capital gains tax will affect their investments long term.

 

ScottyD

 

 

Your claim that the net present value of an investment after tax drives the desire to purchase stocks is contradicted by history.

 

The increase in the LT CG tax rate from 20% to 28% on 1/1/87 had no effect on the S &P 500 which rose about 17% from 12/31/86 to Oct 18, 1987 before it declined by 21% the next day (due to program trading) because investors who sold stocks on 12/31/86 to reap the lower CG rates purchased the stocks back at the beginning of 1987. The Dow declined by 22% on 10/19 and returned to its Oct 18, 1987 level 16 months later.

 

The fact that capital gains rates will increase will not drive investors away from stocks as long as the risk premium for stocks is attractive. Most stock trading is facilitated by institutions, e.g. mutual funds, who base purchase and sale decisions on mathematical formulas. For many investors with growing market share such as retirement plans, IRAs, endowment funds, tax exempt organizations, foundations, off shore investments, etc, taxation is irrelevant.

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You didn't read my post. I said holding all things equal, just because stocks went up after a capital gains rate increase doesn't mean that they wouldn't have gone up more had the rate not increased. There are a variety of reasons why stocks go up and they can still go up even with an increase, but that doesn't mean the increase made them go up or that there is even a correlation.

 

There is no evidence that raising the capital gains tax rate is good for stocks.

 

ScottyD

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You didn't read my post. I said holding all things equal, just because stocks went up after a capital gains rate increase doesn't mean that they wouldn't have gone up more had the rate not increased. There are a variety of reasons why stocks go up and they can still go up even with an increase, but that doesn't mean the increase made them go up or that there is even a correlation.

 

There is no evidence that raising the capital gains tax rate is good for stocks.

 

ScottyD

 

 

On one hand you say that increasing capital gains tax will drive the price of stocks down. On the other hand you say that this can only happen if all other things affecting stocks are held equal which cannot happen in the real world. You cant have it both ways. As you so eloquently stated there is no correlation between an increase in stock prices and an increase in tax rates. (The S &P 500 increase of about 17% during the first 9+ months in 1987 was greater than the 15% increase for all of 1986 when capital gains rates were 28% less.)

 

Its not that raising capital gains rates are not good for stocks is just that a change in capital gains rates is unimportant because most investors are institutions: mutual funds, pension plans, tax exempt organizations, college endowments, foundations, who do not pay taxes.

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Intruder,

 

I've got better things to do than to parse words on simple economics.

 

I'll just go back to my first example and try to make it real easy for you.

 

Let's say the after-tax return of treasuries is 5%.

 

Let's say the expected rate of return on stocks is 10% - no capital gains tax.

 

There is an incentive to buy stocks as you have the ability to capture the expected risk premium.

 

Now, lets say you raise the capital gains tax to 50%. You're expected return is now about 5% (actually slightly higher depending on the holding period and compounding, but we'll use 5% for our example).

 

Why would anyone invest in stocks? Now, this would make an incentive to invest inside retirement accounts and variable annuities, but taxable money would never choose stocks.

 

Yes, this is an extreme example, but as you move the pieces along the curve people make the same decisions - higher taxes on stock does not lead to greater ownership of stock.

 

ScottyD

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Intruder,

 

I've got better things to do than to parse words on simple economics.

 

I'll just go back to my first example and try to make it real easy for you.

 

Let's say the after-tax return of treasuries is 5%.

 

Let's say the expected rate of return on stocks is 10% - no capital gains tax.

 

There is an incentive to buy stocks as you have the ability to capture the expected risk premium.

 

Now, lets say you raise the capital gains tax to 50%. You're expected return is now about 5% (actually slightly higher depending on the holding period and compounding, but we'll use 5% for our example).

 

Why would anyone invest in stocks? Now, this would make an incentive to invest inside retirement accounts and variable annuities, but taxable money would never choose stocks.

 

Yes, this is an extreme example, but as you move the pieces along the curve people make the same decisions - higher taxes on stock does not lead to greater ownership of stock.

 

ScottyD

 

 

You dont seem able to differentiate between a theory taught in financial planning 101 and reality which is that 80-90% of trading in equities is by institutional investors and retirement plans who are not affected by tax rate changes. You have already admitted that there is a lack of correlation between tax rate changes and stock prices:"There are a variety of reasons why stocks go up and they can still go up even with an increase, but that doesnt mean that the increase made them go up or that there is even a correlation."

 

If there is no correlation between stock prices and tax increases what is the value of your theory that stock prices are affected by changes in tax rates? About as much as a credit default swap guaranteed by Lehman brothers.

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You're right Intruder - taxes don't affect stocks prices....hmmm, if your theory holds true than the correct capital gains rate is not zero, but as close to 100% as possible. Same goes for dividends, lower taxes couldn't mean more ownership.....guess the correct rate of tax on that is closer to 100% than 0%....why do we have a deficit when we could just tax stocks and they'll go up anyway. I think you've solved our deficit problem....who knew - just tax the hell out of stocks and we'll all live happily ever after!

 

ScottyD

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