I used to think this - but when I talked to a tax lawyer friend and we walked through the steps they take, usually they're just deferring taxation that does end up getting paid by an entity eventually.
replyCapital gains tax is clearly lower than income tax. So why did you change your mind?
replyNot the commenter you replied to, but one thing to note is that capital gains tax (at least in the context of investments in corporate equities) is applied after corporate taxes. Profits and reinvested earnings are taxed as profits, and they're two of the key components to valuing an equity.
replyAs such, when comparing income tax and capital gains, you should add the impact of corporate taxes. Incidentally, corporate taxes are why many small business owners pay themselves wage income, rather than doing stock buybacks or dividends.
> Incidentally, corporate taxes are why many small business owners pay themselves wage income, rather than doing stock buybacks or dividends.
replyYou've been sold some BS. Usually this is because you're required to take a "reasonable" wage for your role in a company. Otherwise I guarantee you every independent contractor out there (among others) would be operating in a way that made 100% of their income business profit, rather than wages, as it has enormous tax advantages. Approximately everybody tries to find out the least they can take as wage income without pissing off the IRS, and sets their "wage" to whatever that is.
Many locales have laws that do not allow remuneration above the 'reasonable wage', to prevent tax circumvention by having employers spread wage payments across multiple family members of employees, but I am not familiar with any jurisdiction with a minimum reasonable wage law or regulation. Could you please link some source for the claim that business owners are required to accept a 'reasonable wage'?
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Yes, that is intended to disallow officers from avoiding taxes by being compensated via ‘loans’ and other means. I can’t find any case where dividends or buybacks were found to be violations of that rule. https://cpataxteam.com/blog/s-corp-owners-are-you-paying-you...
replyDo the math for yourself. Paying corporate taxes on profits, then dividend taxes on what gets paid out is not a savings versus paying income+payroll tax (which comes from money that is treated as an expense at the corporate level).
There are more taxes than federal income and corporate taxes. State taxes and especially the ~15% of wages that go to FICA also matter (the topic was small businesses, so presumably the owner's not making so much more than the FICA limit that this becomes negligible).
replyI've often wondered why we don't abolish corporation tax and instead tax capital gains and dividends like normal income.
replyThis would be my personal preference, as I believe that voters often overlook the impact of corporate taxes, and there are just too many (different) taxes.
replyBecause capital gains taxes really discourage selling which gums up the economy
replyWouldn't prices of assets just rise to compensate? People still need liquidity.
replyFrom what I understand, this lack of liquidity is not an issue in ‘financial markets’, but can be a problem for other assets such as housing.
replyIf the income was earned through dividends, maybe this would be a reasonable argument. Most of the time stock just gets bought and sold by investors rather than the company itself though, so it's not clear why corporate tax would have anything to do with this.
replySure, the stock price should somehow be tied to the actual value of the company, but for a while now it's been mostly indistinguishable from a Ponzi scheme other than a few companies that do sometimes decide to buy back some stock, which makes it slightly less sketchy but if the value is from the company buying it back, it's a lot closer to debt or a bond, which is not at all how anyone treats it.
I agree that in a bull market, many corporations are not purchased and sold at book value. That said, we are on the largest bull-run in history, so we shouldn’t treat this as the norm, and base all our long-term decisions on the current situation.
replySo if I'm understanding correctly, your argument is that it doesn't make sense to make people who make more money pay the same rate of taxes as regular people do because we should ignore the fact that they've been doing it for longer than ever before?
replyI’m saying that we shouldn’t base our tax policy on a bubble. The dot-com bubble was treated like a solution to the federal deficit, and it wasn’t.
replySo if I buy and sell Pokeman cards I shouldn't have to pay any tax because WotC pays corporate taxes?
replyI am not saying that one party paying taxes means that no counter-party should. I am just saying that the impact of different structures should be accounted for.
replyTheir income would be capital gains regardless of whether they use these methods or not.
replyIf they donate the wealth to their own foundation to continue to hold close and control, it doesn't get taxed. If they borrow against the wealth at low interest rates until they die and the basis is stepped up ("buy, borrow, die"), it doesn't get taxed. Certainly, deferment is a component, but there are obvious examples of the very wealthy operating in a manner to avoid taxes entirely when they're able to (realizing the benefit of the wealth without having to realize a taxable event). Trust stacking is a recent fad as well, although I don't have enough data to say whether it is a material concern from a tax revenue perspective.
replySilicon Valley Is Obsessed with 'Trust Stacking,' and the IRS Doesn't Like It - https://news.ycombinator.com/item?id=48727963 - June 2026
The cases you're talking about are all delaying taxation, not eliminating it. Eventually someone has to draw that wealth - the foundation has to spend for public benefit to be eligible for 501(c)3 status, for instance.
replyHow Elon Musk's secretive foundation hands out his billions - https://www.theguardian.com/technology/2019/jan/23/how-elon-... - January 23rd, 2019
reply"Spending for the public benefit" has a lot of latitude.
I also don't think they addressed how borrowing against the wealth doesn't require any immediate taxes (and is often low interest, given how being a billionare means you get more favorable terms). There's nothing stopping someone in that position from just deferring taxes on the money they currently have, borrowing against it, and then investing that to turn into more money with taxes deferred even further so that they can use the proceeds to pay the previous deferred taxes and keep the difference.
replyThat requires their investments to keep going up in value. That doesn't last forever, the assets that people borrow against eventually need to be sold to pay back that loan. When they sell to make payments, those are taxable events.
replyIf investments didn't grow at a faster rate than interest, why would anyone ever invest money at all instead of putting into a savings account? I don't know why it''s hard to imagine that a large loan with a relatively low interest rate might be able to be invested for more than enough profits to pay off the taxes and the loan with some to spare
replyYes, and that's fine. That's still paying taxes…
replyHow does it work if the loan defaults and those assets were used as collateral?
replyI'm not a tax lawyer, but I think if you default on a loan, the collateral changes hands, which is a taxable event for you as if you sold the asset, at whatever value the unpaid portion of the loan was. So you pay tax.
replyIf any significant part of that article is true, I see self dealing that would already be against IRS code. It's just a matter of enforcement. We often already have the laws to solve the problems we identify.
replyWas your ‘friend’ Jeffery Epstein?
replyThis report is only about wages, so even if the ultra-wealthy reported their real sources of income, they wouldn’t shut up as “labor” the way this defines it.
replyCapital gains not being considered earned income is simply sensible use of terminology to categorize different ways of amassing purchasing power. For example, in order to carry out the linked analysis.
replyIt has nothing to do with the IRS or taxes.
Income goes straight to a person, capital gains is a little return from other people generating income. Basically a MLM lol.
replyeven with this scam the top 1% of earners still have more annual income than ~75% of the population
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