In a report published today in the journal Tax Notes, my Tax Policy Center colleague Lydia Austin and I found the other three-quarters of shares now are held in tax-exempt accounts such as IRAs or defined benefit/contribution plans, or by foreigners, nonprofits or others.
Pointer from Tyler Cowen. Other things equal, this should lead corporations to pay higher dividends. What other implications are there?
Timothy Taylor has thoughts.
Calling IRAs ‘untaxed’ seems a bit misleading to me. They aren’t truly ‘fully exempt’ and the money is taxed either before going in (Roth) or when coming out (traditional).
These subsidies are nudges to encourage people to save more for themselves, or save at all, and it’s probably impossible to forecast what the fiscal impact would be of some reform which eliminated these deductions, if it also means more political pressure for more government support of the low-asset elderly.
Right. And the really neat thing is that those retirement accounts convert tax-advantaged dividends and LTCG’s into ordinary income. Deferral is not a free lunch.
Roth IRA’s, I can see classifying as untaxed. Traditional ones, not so much.
If your tax rate is the same on the way in and the way out, then Roth and conventional IRAs are the same. Do the math for yourself and see.
(Exception: the contribution limits may bind in a different way.)
The tax rate on Roths and traditional IRA’s is never the same with respect to appreciation of investments after the contribution is made. Appreciation of assets is taxed at ordinary rates on distribution from a traditional IRA and they are untaxed with respect to distributions from Roths. The math is simple and you managed to get it wrong by making an improper assumption.
What is not simple math is whether the time value of the upfront tax on contributions exceeds the value of the tax-exemption on subsequent distributions from the Roth. This depends on the length of the deferral and the amount of the appreciation on the assets and the tax rate prevailing on the date of contribution and the date or distribution (not always the same due to law changes, changes in personal income, etc). If you want to show me the math on that, I would be very interested.
3rdMoment- You’re 100% right, but you’d might as well talk to a brick wall. People (even on an econ blog) don’t understand this simple math, and worse, they don’t want to.
I stand corrected.
When the authors write “tax-exempt”, you can be sure they are pushing an agenda. Retirement accounts are taxed differently, though I will point out that if you buy, let’s say Google or Berkshire Hathaway, you can pay “no tax” for 30 years by just holding the stock until you retire (the horrors!!!!).
Also suggests that a lot of securities are held by federal, state, and local entities and are passively. The feds, for example, have $250 billion in passively managed funds:
https://www.tsp.gov/PDF/formspubs/financial-stmt.pdf Pulls the rug out from under the efficient capital markets hypothesis. On the other hand, might not be bad to have government workers with some skin in the economic game.
It makes capital tax policy much less important and income tax policy more important.
Greater price volatility? A lot of those tax-advantaged approaches end up buying and holding for the long term. That means a smaller pool of shares being actively traded, so a smaller number of shares being sold will change prices more.
Less justification for corporate share buy-backs? If 75% of your holders are indifferent between a buy-back (resulting in a capital gain) and a dividend (resulting in ordinary income), maybe there is less pressure on the board to adopt a buy-back program. But the executive option-holders won’t be indifferent!