i’m not holding my breath for tax refund checks.

Everyone’s beating up on the ZOMG EVUL CAPETALISTS for the credit and housing market bubble, and living for years off of inflated and largely imaginary gains.

How come nobody ever mentions the money raked in by the government in capital gains taxes, income taxes, and other assorted tax burdens attached to those inflated gains?  I mean, Madoff for example sent out statements every year that people incorporated into their tax filings, and they dutifully paid applicable taxes on declared income, inheritances, or capital gains that didn’t really exist.

The biggest beneficiary of the whole credit bubble excess isn’t Madoff, or Bear Stearns, or some group of hedge fund managers toasting each other’s perfidy back at the country club.  It’s the government on the federal, state, and even local level.  We’re talking hundreds of billions of dollars in tax money here.  Regardless of the government’s culpability (or lack thereof) in bringing about or encouraging the subprime bubble, it was the biggest beneficiary of it by far.

19 thoughts on “i’m not holding my breath for tax refund checks.

  1. Schmidt says:

    Hmm. Does not make much sense. I mean, if profit is taxed at say 20%, or even thirty percent, the biggest beneficiaries were those trading. Only if taxes attached to buying/selling real estate were over 50% it’d be true.

    Though, I think it was greed all around. Gov’t greedy for taxes, people for unearned money, big money for lots of easy cash via bundling mortgages..

    • Marko Kloos says:

      Well, when you look at how much those profitable portfolios have cratered in the last few years, the biggest beneficiary was the government…because the investors still ended up paying capital gains taxes on the inflated values before their portfolios tanked.

      • Sendarius says:

        Is that really true?

        I have always known that the US tax system is VERY different to that here in Oz, but here you only pay Capital Gains Tax, when you actually MAKE a capital gain – ie when you sell the capital asset.

        It doesn’t matter what somebody thinks it might be worth (cf your “inflated values” comment) – it only applies to what you actually receive for it WHEN YOU SELL IT.

        • Sendarius says:

          Well, I see how this can happen now – I read on through the comments and saw that a lot of the funds have a policy of periodically selling everything and re-investing the proceeds in the same fund.

          Personally, I think this is unconscionable, but surely, for taxation purposes, the capital losses from one “sale” can be offset against the capital gains from another “sale”.

  2. Schmidt says:

    Ah. I didn’t think that.

    Anyway.. it all comes down to failure of the Federal Reserve. I don’t like Krugman much, suspecting him of being part shill, but he wrote in 2002 that the only way Fed can shore up the economy is to manufacture a real estate bubble. Well guess what happened..

    Fail all around, and I’m thankful that the bubble eventually burst. As a young one, I was getting mightily anxious seeing the real estate prices climbing through the roof.

  3. mac says:

    Some years ago, my father-out-law put a small amount of money in a mutual fund for us. It did quite well for a few years, gaining nearly 80%. Then, he decided it wasn’t making enough money and moved it to an aggressive tech and medical growth fund, somewhere around 1999.

    The new fund lost money hand-over-fist every quarter except the first we were in it. I paid capital gains taxes on these funds every year, whether they gained or lost money. I don’t really understand how it was capital gains when we lost money (on paper), but it was. When we finally cashed it out, we were down to a third of the original investment, about a fifth of what it was before changing funds.

    Finally, I thought I could realize the loss and maybe pay less in taxes. Unfortunately, we were living in an apartment and the standard deduction still amounted to more. I paid taxes every year on income I never received, and couldn’t benefit from the money I lost. That’s messed up.

    • perlhaqr says:

      Government: It’s like the Laws of Thermodynamics. Not only can you not win, you can’t even break even.

    • kneil says:

      You can get some of those taxes back by filing amended returns with a “capital loss carry back”. You don’t need to itemize, but you will probably need to pay a tax preparer a couple hundred bucks.

      You can also carry the loss forward if you still have capital gains income.

  4. Kristopher says:

    Marco … that;’s not how investment funds and taxing works.

    You only get hit with capital gains taxes when you cash out.

    My mother is quite rich … but she doesn’t spend a lot, because to do so means she has to sell portions of her portfolio to pay for spending, which then causes capital gains income for that year.

    Her living expenses are also paid by periodic cashouts, which are also taxed at the capital gains tax rate.

    Paper gains aren’t taxed unless you have the foresight to cash out before the company craters, in which case they are now real actual gains.

    • mac says:

      The funds I described had automatic reinvestment (rollover). Most funds I’ve come across in my decidedly amateur investing have some period (quarterly, annually) where the gains are realized. And the setup typically includes automatic rollovers in the same fund or others in your account. The investment companies want to keep your money with them.

      Therefore, you’re taxed on gains annually, even if you don’t withdraw the money. I never understood the method by which I was assessed gains while the fund tanked, but it happened.

      • Kristopher says:

        That depends on the mutual fund.

        I feel capital gain / dividend paying funds are a bad idea … and an excuse to bleed you dry via fees.

        I personally refuse to deal with anything other than non-dividend distribution funds … I don’t need IRS headaches. If a broker is sticking you with one, he’s lining his pockets with your fees.

        Furthermore, if your money is there as an IRA, or as part of a pension fund ( the majority of the money, BTW ), it ain’t getting taxed anyway, regardless of dividend or distribution method.

  5. Kristopher says:

    Now Madoff’s firm may have paid corporate taxes on their reported imaginary gains … but that was already paid for via investor fees that would have been paid by investors regardless.

    • Mike says:

      So you’re OK with the government partaking of dirty money?

      • Kristopher says:

        I would rather the government didn’t take ANY money from us.

        Repeal the 16th amendment, and go back to using tariffs for income.

        Maybe set up a department of Foreign Revenue. Pay us tribute in the form of gold and slaves or we will nuke your sorry asses. I could get behind that …

  6. j t bolt says:

    And those gov’t orgs are the continued beneficiary. My house is now over assessed and it’s nigh impossible to get that corrected to realistic levels.

  7. kneil says:

    For good or ill, the Internal Revenue Code allows capital losses to be carried back and/or forward to offset gains. It ends up being a sort of a stealth tax on the “middle class” since an EA or CPA would be all over this but the person puzzling over his/her 1040 at the kitchen table will probably miss it. I don’t know how TurboTax et al. handle it.

  8. Kristopher says:

    kneil: that is kinda limited, unless you are a trader.

    Day traders ( anyone who makes their living doing at least 50 trades per month or documenting that they watch their stocks at least part time ( 10-20 hr / week ) can fold all profits and losses into one number, or average it over time for a big freaking loss.

    Investors ( people who put money into a portfolio, and sit on it ) can only take the max normal deduction of about $3k.

  9. Tax Guru says:

    I’ve been included in taxations for lengthier then I care to admit, both on the individualized side (all my employed life!!) and from a legal stand since passing the bar and pursuing tax law. I’ve rendered a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes utter sense. Please uphold the good work – the more individuals know the better they’ll be outfitted to comprehend with the tax man, and that’s what it’s all about.

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