Teen Tax Increase is Counterproductive
Posted in Money by George
I just read that the new Tax Cut that Bush signed has a provision that triples the tax on teen investment income. From this article on the taxes:
According to the law, teens with investment income will no longer enjoy a special tax rate, and will pay the same rate as their parents.
For example, long-term capital gains and dividends that were previously taxed at 5 percent will now be taxed at 15 percent, and interest which enjoyed only a 10 percent tax may owe the Federal government as much as 35 percent.
Are you a teen saving for college on your own? Well, now you have much less money. Are you a teen that is trying to save money for a car? Well, you might as well just keep the money in your pillow instead of investing… sorry. But it’s ok, you’re funding the tax cuts for people with over $1 Million incomes, who receive about 90% of the benefits of this current tax bill.
Teens today already have enough trouble saving their money. The nation as a whole does not learn the values of saving, which should be taught at a young age. And if the incentive to save is dramatically cut, this will only further reduce the saving rate for young people.
I don’t understand how people can fall for this “tax cut” charade. Bush has structured all of his tax cuts to appeal to those with political power and money - the rich. Teens, who have no political power, are getting screwed, and the lower classes who only have their votes which sometimes are not even cast, get little.
May 22nd, 2006 at 9:34 am
According to the law, teens with investment income will no longer enjoy a special tax rate, and will pay the same rate as their parents.
Are you talking about savings or investments?
Just for the record, why do 14-17 year olds need a “special” tax rate?
Are they living in a ramshackle barrio somewhere? I’ve heard from Waco that the current system is very progressive, so what’s wrong with taxing at the rate of the parents? If the parents are poor, the tax on teens will be low or nonexistent, and if the parents are rich, then the teens get to share in the social responsibility.
Hey, someone has to keep black crack hoes in crack entitlements. Might as well be whitebred 14-17 year olds.
May 22nd, 2006 at 10:00 am
Investment income includes interest earned, so if by saving you are referring to leaving your money in a bank, I’m talking about investments (which encompasses using a savings account).
Why do they need a special tax rate? Because teens already don’t save enough money. Teens spend much more than they save, and thus develop bad money habits (notice that the national savings rate is negative) and grow up to have poor adult money habits.
May 22nd, 2006 at 10:29 am
Well your example called out capital gains and dividends.
But if you include savings accounts, my point remains — linking to parental income is a type of means testing. This seems to impact trust fund babies (or gifting) a lot more than Carlos Zaragosa down the street.
I find it curious that this is an issue given the entire tax extension package. I thought the savings mentality might look at long term implications of these types of things.
http://www.nytimes.com/2006/05/16/business/16tax.h...
Under the 10-year period covered by the Congressional Joint Committee on Taxation’s official estimate, the Roth conversions would raise $6.4 billion in taxes in the short run. But because the government will not collect taxes on the future investment gains, the Tax Policy Center estimates that through 2049, the conversions will cost the government $53.3 billion.
The center calculated the value of the taxes and savings as if everything happened today, known to economists as the net present value. The center estimated that those taxpayers who took full advantage of the deal would stand to gain $3,500 for every $1,000 of tax paid, for a net gain of $2,500, costing the government the same amount.
and grow up to have poor adult money habits
You mean like a public policy based on deficit financing or government sponsored usuary rates for credit?
May 22nd, 2006 at 1:36 pm
That roth conversion issue almost entirely benefits the rich. Usually the rich have a decent handle on how to save already - that’s one of the major reasons they’re rich in the first place. On a whole I still hold that the tax package is a joke.
May 22nd, 2006 at 7:20 pm
That roth conversion issue almost entirely benefits the rich.
I realize that. My point is, “Don’t you think that tax ‘cuts’ that are financed by losses down the road are similar to easy consumer credit for white trash? Spend now, worry about the bill later. With some luck and concerted effort we’ll be dead before the bill comes due.” That’s the lesson that the government puts out — consumption is a greater good than savings.
I don’t think that the special tax rate did much for the saving ethic of America’s youth.
May 22nd, 2006 at 7:34 pm
1st paragraph: yes exactly. I agree.
2nd paragraph: maybe it didn’t do much, but the message teens are getting now is that they receive less from investing, and that’s just another reason for teens today to save less. Perhaps it wasn’t the rate in particular that matters, but the fact that teens know their rates are going up is bad news.
May 23rd, 2006 at 4:44 pm
Here’s those pinkos at the LATimes that think the 14-17 tax rate is a dodge for the wealthy. When will the media stop making everything into a class-war issue?
http://www.latimes.com/business/investing/bal-bz.a...
The legislation would raise the age of children affected by what’s known as the “kiddie tax,” in effect enacting a tax increase on teenagers. The bump-up in age means parents would have fewer years to take advantage of a child’s more attractive tax bracket.
Tax experts say the new law could change the way wealthier families save. The types of investments held by children might shift. Or, parents might decide it makes more tax sense to invest in a 529 college savings plan than transfer assets to a child.
The kiddie tax was created nearly 20 years ago. It affects a child’s unearned income - typically interest, dividends and capital gains. It doesn’t apply to money a child earns on a job.
May 24th, 2006 at 8:48 am
I find your (George’s) response to this whole episode hilarious.
This is a tax fix designed to “make the rich pay their fair share”. Exactly the type of thing you (George) have been yammering about on both tax threads.
However, now that you are personally affected by the tax raise you are upset. Paying taxes sucks.
A taxpayer is just someone who works for the government and yet doesn’t have to pass the civil service exam.
May 24th, 2006 at 9:33 am
Um, I’m 21. This tax doesn’t affect me at all.
May 24th, 2006 at 4:49 pm
Ha, fair enough. Still I don’t understand why you are an uproar over this given your other comments regarding tax cuts.
May 24th, 2006 at 7:08 pm
uh…kids don’t invest, most likely kids don’t work unless they need the money. I really don’t know any junior high or high school kids who work just to get “investing” money.
May 24th, 2006 at 7:16 pm
Do children invest?
Yes. Some children have to pay for their own education and the best way for them to do so to minimize loans is to invest the money they earn before college and allow it to grow.
Also, Investing also includes interest income. Raising the taxes they have to pay on interest income provides disincentive for them to save. And so few children save already that this just makes the problem worse.
May 24th, 2006 at 8:24 pm
A taxpayer is just someone who works for the government and yet doesn’t have to pass the civil service exam.
How pithy.
More likely tax is like paying a homeowner association fee for living in a nice, gated community — particularly in the US. Sure, the people by the front gate get most of the benefits of manicured landscapings and security guards, but more-than-less, everyone benefits.
The premise that the “government” is a monolithic black hole that provides little value is misguided.
On the other hand, I strongly support the premise that as of today, every American man, woman and child owes around $35,000 to the current debt obligations. When george thinks that education “savings” will keep him ahead just because he won’t borrow so much, I laugh in his general direction. Even without actually assenting (aside from voting), George Bush has borrowed money in george’s name and is spending it like a wild sailor over in Eye-rack. By the time George Bush makes it safe by winning the war on terror, the bill will be even higher.
But you do get something for that. Security.
May 25th, 2006 at 6:05 am
Come on George, the “kids” investing are not the ones who need to finance their future education. The kids who are investing are the ones whose parents set up a mutual fund, etc in their name to take advantage of the lower tax rate.
No one is disagring that investment is the best way to fund future expenses. The disagreement is about who actually is taking advantage of that investment.
Its highly doubtfull that it is those 14-17 years olds. Especially considering that a 14 year old is not old enough to work in many states.
Secondly its doubtfull that the kids would earn enough money on the investments in the first place to even pay taxes. This is the idea behind a progressive income tax.
The American debt while certainly high in nominal terms is pretty stable in real terms. At a nominal growth rate of 5% a deficit of 3% will keep the debt stable at 60%. This is pretty much the situation we are in.
Should we bring it down, yes. However, arguing that “Eye-rack” is the main cause of our deficit is misguided and shows a remarkable lack of insight into the issue.
My taxpayer comment was paraphrasing Ronald Reagan.
May 25th, 2006 at 8:26 am
Well perhaps just to be safe, there should be a clause that says children investing on their own should still receive the lower tax, where money coming from parents should not be allowed to receive the lower tax.
I think the psychology that children hear that their tax rate for savings and investments has tripled is negative.
May 25th, 2006 at 4:08 pm
how is it going to be “proven” that a child is getting money from a job or from a parent? Parents can funnel the money through their own businesses, make up phoney corporations…
Yes the psychology would be negative if that is what the connotation was. How many kids think about taxes? How many kids who are saving for college think “I am not going to save for college, b/c the gov’t is taking more money from me…” So it is either saving for college or sticking it to the man and buying an ipod. Most kids don’t need an excuse to buy an ipod. Those who are saving aren’t going to changed by a rise in rates on capital gains, interest, and dividends.
Its great to think in terms of incentives, but most kids don’t think like that only people who have taken econ classes do, and even then it is hazy. This isn’t a big enough difference and it certainly isn’t a penalty compared to adult rates.