> Example: if some tax code says, people who make below $100k must pay $10k in taxes, and people who make above $100k must pay $20k, paying someone $99,999 to avoid extra taxes is a foreseeable consequence and therefore not an unethical loophole.

I know you're just making an example for demonstration, but you happened to choose a scenario that many believe is actually how tax brackets work.

Thus, it's worth reiterating: in the American tax system (and I imagine almost everywhere), we use marginal rates for income tax. The first 100k you earn would get taxed at the lower rate, and every incremental dollar above that would get taxed at the higher rate.

But not capital gains. 0% -> 15% -> 20% are not marginal and require careful maneuvering to stay in the previous bracket. Why the oversight for such a hugely relevant tax?

Capital gains taxes are marginal. You are mistaken. There are no cliffs to maneuver.

For example, play with this calculator: https://smartasset.com/investing/capital-gains-tax-calculato...

I think that calculator shows the opposite of what you're saying. There are different brackets depending on your overall income, but all of your capital gains are taxed at that rate. If the gains were truly taxed in a marginal fashion, some would be taxed at 0%, some at 15%, and the rest at 20%.

I can also confirm this with my own taxes. I only had $10k in long term capital gains last year, but the entire amount was taxed at 23.8% by the federal government.

That's because your other income raised you up to that bracket.

So are they marginal, or based on brackets? Cause it sounds like they're bracket-driven, if the entire gain was taxed at 23.8%.

What part am I not understanding? Is the idea that capital gains tax itself is marginal, but if your other income has already put you in that higher bracket, then you pay that rate?

Edit: playing with the knobs on the calculator seems to indicate that's what it is.

Capital gains is added on top of regular income so if you had $450k regular income then $50k long term capital gains, $38,850 would be taxed at 15% and the remainder at the top rate of 20%

Thanks for explaining it clearly. I hate to ask for more, but it's a rare opportunity that my question about capital gains is not completely off-topic. Can you (or anyone) tell in a similar idea about how Capital gains losses work?

I understand that there is a limit to how much loss you can claim against your gains in the coming year, and that you can claim the loss as a deduction in following years up to a limited number of dollars each year, and limited number of years, but what I don't know is what the losses can be claimed against.

If I have capital losses this year, and I'm getting a refund this year for my income withholdings overpayment... then next year say I owe income taxes from underpayment, but I have that deduction from the previous year, can I cancel them out?

Or do I need to report a capital gain in the next year in order to be able to "use up" the previous year's loss as a deduction? My understanding is I can't use capital losses to pay income taxes, but I am not a CPA.

Perhaps this is a question for my accountant, and this should be a billable conversation, but this is just a question I've had since I started thinking about capital gains, and I've never been able to answer it for myself.

I’m not a CPA or accountant. Investopedia has a few articles on the subject.

I think capital losses can completely cancel any capital gains - kind of obvious if you think about it - if you lose $10 on sales of stock A and gain $10 on sales of stock B you had not income from your activities.

In addition, you can apply $3,000 in losses to reduce ordinary income (not taxes directly) and carry the remainder to following years. So on sale of stock A you lost $5,000, on sale of stock B you gained $1,000. You can eliminate the gain, have $4,000 left, reduce your taxable income of $100,000 to $97,000 using $3,000 more of the loss, then have $1,000 left over for following years. In the next years I think you can use that loss to reduce gains then income in the same way.

Hope I’m right and that is clear.

Thanks for answering. That is clear, and it makes sense.

They are marginal, but the margins depend on your entire income, not just capital gains income. So people with small amounts of capital gains income will tend to just fall into one bracket, and it will not necessarily be the 0% bracket. Here's the worksheet:

https://taxmap.irs.gov/taxmap/instr/i1040gi-015.htm#w24811v1...

You'll see that there are breaks at 0% (Line 8/11), 15% (Line 15/20), and 20% (Line 23). Looking at the lead-up to line 23 is the clearest part.

Line 21 adds the part taxed at 0% (Line 11) and 15% (Line 19). Line 22 then subtracts that from the total gains (Line 12). That final amount is then taxed at 20%.

Honestly, it was probably a compromise many years ago to get some other kind of legislation or tax-code pushed through. Last decade's "compromise" is this decade's "loophole".

Which means close to nothing if you're making a million dollars in income, where most of it will be taxed at the higher/highest rate.

This is why we need more brackets at the super high end! Your second million really ought to be taxed at a higher rate than your first million; same with your second billion, etc.

Only if you think the goal of the tax code should be to get the most money.

That doesn’t logically follow - you could hold that opinion if your goal was to have the highest amount of tax come from those with the highest ability to pay. Or also if your goal was to tax most heavily those who use the most public resources (and high earnings is a fair proxy for controlling a lot of resources and by extension using a lot of public goods, like roads and air)

So, what happens if I assume that Congress is not ethical (I.e. it’s members)? Do I still have to worry about the “spirit” of the law?

If they can vote several times to get rid of Obamacare, and then when the vote actually matters and they don’t pass their vote, what is the “spirit”?

Honestly, I used to feel your way, but when you see both sides pull as much shifty crap over the years, I’m following the letter. Screw the spirit - I prefer to donate to charity than give those guys one more dime.

Courts do judge intent in that way when needed though.

If your tax avoidance can be successfully defended in court it seems completely ethical to me. Change the law if there is a problem with it.

> if the people who wrote the rules, upon learning of what you are doing, would likely have written the rules differently to make illegal what you are doing, it's against the "spirit" of the rules.

Then perhaps the people writing the rules could tell us what they actually want? By writing it down?

We haven't even solved the problem of ensuring that implementations match requirements, or even that requirements are non-conflicting, for purely logical systems such as software. How would you propose to do so for the tax code, beside drastically simplifying it?

So if it can't be perfectly exact, we better not even try?

Tax codes (or other laws) don't need to be executed by a computer. They need to be executed by an accountant/auditor/judge. So you can rely on well-defined but still human concepts like "security", "place of residence", "child care", "employment", "property improvement", "dependent", "exchange of goods", etc.

Just because it can't be fully specified in x86 doesn't having a clearly defined tax code is an absurd idea.

Even simpler test: If I as an individual can't use a double-Irish scheme to eliminate my personal income tax liability why should a corporation be able to?

Because they are different entities with different needs?

Should corporations be able take allowances for their dependents?

Each entity is treated differently because they are different.

having taxes on earnings and not gains multiply taxes on products that have long manufacturing chains, or at least that's the theory.

the result is that you can shift earnings and inflate costs to reduce gains dodging taxes.

people should be able to claim expenses even for luxuries, but then nobody would have savings because those are capital inefficient.

so there are two different drives that make the tax code asymmetrical, even in principle, before those schemes for dodging fair taxation.

> If the people who wrote the rules, upon learning of what you are doing, would likely have written the rules differently to make illegal what you are doing, it's against the "spirit" of the rules.

If those people would find it a problem, then just change the rules AGAIN to close said loophole, and go on with your day. I get tired of people talking about the spirit of the law.

Fact of the matter is, most politicians are incompetents and cannot make proper laws (everything is rushed through and hardly read twice).

Make. proper. laws. and stop complaining. Nearly all tax avoidance is the price of having incompetent politicians.

The remainder is the result of smart people who went ahead and understood the tax code well. They're to be applauded -- the pot of gold is waiting at the end of the rainbow for them, just like in any other profession.

Well then anyone leveraging a 401k is doing something unethical then, because it was never intended for widespread use as a retirement scheme.

401ks fail the razor, because current practice has been widely known for decades, yet policymakers have chosen not to amend tax code to make them illegal. Current use may once have been against the spirit of the law, but is no longer.

(Perhaps the razor would be better worded as "would rewrite" rather than "would have written differently".)

This is why we have case law and precedent. Contrary to the old saying "two wrongs don't make a right", if everyone is doing something, it's reasonable to assume that behavior is acceptable.