Gyroscopic Investing

Watched a little bit of the last debate and learned that his plan includes eliminating all capital gains taxes and taxes on interest and dividends, offsetting the loss in revenue with elimination of deductions.

He's wisely not saying what deductions he wants to eliminate but I suspect the mortgage interest deduction will definitely be on the chopping block.

A few of my own thoughts.

1.) With my investments currently structured to avoid capital gains this could turn out to be a net loss for me in the short term because of the interest deduction but I think for the long term economic effect the idea has merit as the government should not be about taxing profits and encouraging debt.

2.) This would make Roth IRAs pointless except as protection against the capital gains tax being re-instated in the future (which would be a good bet, I think).

3.) I think there is very little chance the deductions get eliminated. They have powerful lobbies.

4.) I think there is very little chance any of this gets enacted.

Middle class families have 5K a year through IRAs,  and 15K a year through 401Ks for tax deferred savings. I am not sure that capital gains tax is an issue for the middle class. I didn't even include 529 plans or HSAs. They have tons of tax free space.

Now, if he does this I am definitely not going to complain. I just hope he doesn't find other items to "offset" it.

Romney has been very vague on his tax plans throughout.  He's definitely of the Reagan mold so far:  "I'm going to balance the budget by raising defense spending and cutting taxes."  Look how well that worked out for Reagan, and he had the benefit of smaller deficits and a strengthening economy.  This is what's making me lean toward Obama - I may not agree with everything he does but he seems to have a better grasp on reality.

Also, Obama has already been trying to do something about deductions (mortgage interest in particular), and he's been completely blocked on that, as I suspect will continue to be the case.  It's a great benefit on the surface, but all it does is artificially increase home prices which ironically reduces the chance for a low income earner to buy a home:

http://www.lvrj.com/business/brookings- ... 30674.html

State/local deductions would be harder to eliminate.  It would be a major hardship on people living in high tax states, and would likely devastate the local economies.  You don't need all that high a salary to benefit from this deduction, at least in NY and CA.  I itemized deductions with my measly residency salary. 

Doesn't it seem that taxes on 401K withdrawals of gains should also be tax-free instead of at regular income rates?

WiseOne wrote: Romney has been very vague on his tax plans throughout.  He's definitely of the Reagan mold so far:  "I'm going to balance the budget by raising defense spending and cutting taxes." 

Absolutely correct about Reagan WiseOne.

But that doesn't leave me leaning towards Obama as it does you. I believe Obama is a committed leftist to say the least and if given a second term with nothing to lose he will stealthily do what he can to advance the leftist agenda to an even greater degree than what we have already seen in his first term. And I think we have seen far more of it than most of us yet realize. I think even the leftists who are now complaining about him will eventually realize that.

I would be ambivalent about the election if leftism had more in common with libertarianism when it comes to foreign policy but Obama has proven to me once and for all that this is not true despite some pretenses on their part.

I intend to go to bed early as I usually do on election night. I can't see any way that I have a horse in this race even though the idea of no tax on capital gains is appealing. But if the cut in capital gains tax means we have more to spend on the military then the hell with it.

Whatever that amount is, say $40,000 in allowable deductions, it would affect the poor and middle class not at all and would limit what the rich would be able to deduct

I've heard the deduction limit was going to be at either $17K or $25K...did he recently change it to $40K?

I'm presuming by "deductions" they mean below-the-line deductions like morttgage interest and charitable contributions and not above-the-line ones like 401K/pension fund contributions. Also, surely wouldn't limit deductions for legitimate business expenses taken by sole propietorships or pass-throughs like LLCs (businesses that pass their gains/losses on to the owners and do not function as separate entities tax-wise as C-Corporations do); $40K of deductions for an LLC or sole propietor is nothing; there are LLCs/LLPs/S-Corps/sole propietorships whose owners might GROSS $750K a year but after paying (currently deductible) expenses like wages to employees, material costs, payments to suppliers and vendors, rent, utilities, franchise fees, etc might only have a taxable NET income of maybe $50K a year. Requring them to pay taxes on the full $710K ($750K minus the $40K hard cap on deductions) would kill many low or moderate-margin small businesses.

Finally, I though Romney was only for eliminating cap gains/dividend/interest taxation on incomes up to $200K a year (Ryan was the one that wanted them totally eliminated for everyone regardless of income); I can only guess that he means that cap gains/dividends/interest will be tax-free up to $200K for everyone and that anyone who makes over that will still have to pay the tax on anything exceeding $200K (although their first $200K of such income would be tax free as well). If he actually means that anyone who makes $200,001 a year will have to pay taxes on their capital income (even that which is below $200K) while someone who makes $199,999.99 a year won't then he has just created (assuming the plan is enacted) a HUGE work disincentive and investment disincentive at the margin for anyone who makes anywhere near $200K and has any significant amount of capital income. If this IS indeed the case, I am very thoroughly surprised that as a Republican he hasn't considered the supply-side effects of such a sharply cut-off capital gains tax cut.