2019 Oct 18th

Are Hoboken Condo Owners Really Coupon Clippers?

During the Democratic candidate’s debate Tuesday night, Joe Biden said (empahsis added):

“Demonizing wealth … I talked about how you get things done. The way to get things done is take a look at the tax code right now. The idea, we have to start rewarding work, not just wealth. I would eliminate the capital gains tax,” Biden said, before immediately changing his tune. “I would raise the capital gains tax to the highest rate of 39.5%. I would double it, because, guess what? Why in God’s name should someone who is clipping coupons in the stock market make, in fact, pay a lower tax rate than someone who in fact is, like I said, who is a school teacher and a firefighter?”

His statement is a messy jumble.  But most believe what he was getting at is a proposal to tax capital gains as ordinary income.   Without getting into a debate about how or why to lessen the income gap, let’s just talk about capital gains.  Joe is implying that the very, very rich (the coupon clippers) are the ones enjoying the relatively low tax rate on capital gains.  But that ignores who might be hurt most were the low rate eliminated, i.e., were those gains to be taxed as ordinary income.

Think of the first-time Hoboken condo buyer who outgrew their little 1-bedroom condo when they met their mate.  I know many, many of my past clients – some of them school teachers and firefighters – who worked hard, have good credit, pay their bills and saved money for a down payment, bought their first home.  Some of those same hard-working people may have decided to keep their first condo as an investment and rented it out to have some additional income.  When they needed a bigger place, they had to work hard,  maintain good credit, make timely mortgage payments on the first property, pay for repairs, pay property taxes and still be able to save money for yet another down payment to purchase a larger apartment that would suit the needs of a growing family. Let’s say they later decide to move to the burbs – a common scenario in Hoboken.  Now they purchase a house in Montclair or Morristown after working hard, paying their mortgage, paying property taxes, paying for repairs, maintaining good credit and saving for down payment number three.  These people are not billionaires or coupon clippers.  They are typically middle class wage earners, tax payers and savers who have figured out (or stumbled across) a way to accumulate wealthy by owning real estate.

Now maybe they are relocating far from Hoboken, or perhaps they are approaching retirement age, or simply no longer wish to have the responsibility that comes with being a landlord.  Time to sell the properties which most likely have increased in value after all these years.  Currently, they would pay tax on the profit at the capital gains rate which topped out at 20% in 2018.  The tax on the same profit at the highest ordinary income rate would be 39% under current law.  That’s just Federal.  There are similar state tax implications.  Taxing the gain at the higher rate would have a very significant effect on the bottom line of these property owners.

I have no problem with the ultra-wealthy paying their fair share – and they also benefit from low capital gains rates.  But there are other areas, like the inheritance tax, deferred compensation, off-shore tax havens, the carried-interest loophole etc. etc. that are the domain of the extremely wealthy alone.  The issue I have is with Biden’s proposal is what it would do to the people I have been dealing with for the past few decades, like those in the scenarios I described above.  Why penalize and disincentivize one of the most powerful and effective ways to accumulate wealth for ordinary folks?  Tax law is tricky and changes to it often result in ancillary effects that politicians have not considered.  Hearing talk of doing away with capital gains, regardless of how jumbled Biden’s statement was, jump out at me as a poorly considered solution to a problem that goes way beyond the capital gains tax rate.

  1. Eric

    Don’t forget the basic fact that this is double-dipping, taxing the same money twice.
     Capital gains are on money invested… this is already POST-TAX money.  How many times does Uncle Sam want to dip his fingers into the honeypot?

    Increasing the tax on capital gains will only dis-incentivize investment, entrepreneurship, and could have drastic impact on our economy.  There is a point at which the return on investment no longer justifies the risk or effort. If gov’t increases the tax on capital gains, many people will pull their money out of the market and out of their businesses.

    As Lori said, the biggest impact will be felt by savers and retirements. People that already have a lot of wealth will be fine, and compound interest will continue to grow the super-wealthy. However such a tax will only increase the wealth gap and make it harder for lower and middle income people to grow their wealth.

    I don’t think Democrat politicians understand how money and economies work.  There’s only so much money they can tax… at some point there will be nothing left.

  2. Lori Turoff

    Agreed, Eric. When a dozen people have more wealth than the rest of the country combined, something is out of whack. But treating the middle class wage earner who was smart enough to invest post-tax dollars in the same manner as the .001% is just crazy and fundamentally unfair.

  3. Daniele

    Really Lori, how many “teachers and firefighters” do you know who can afford an apartment in Hoboken (not to mention two, and a house in Montclair! 🙂 )?

    500k un-taxable gain when a couple sells their primary residence. How does that make any sense?

    First paragraph of Eric’s comment just lack elementary logic. (The money invested is not taxed again, only the profit is taxed). The rest is just a classic case of slippery slope fallacy.

  4. Eric

    Daniele, I’m well-aware of how taxes and profits work. The gov’t should balance its budget and reign in spending instead of looking for more and more pockets to shake down.

    Your example of 500k profit on a real estate investment does not happen overnight. It implies either taking a big risk or owning for a very long time.

    Frugal savers and smart investors should be rewarded and not penalized.

    As far as “teachers and firefighters”, my mother was a teacher for 40 years. You’d be surprised how much you can save with a frugal (in our case, immigrant) mindset/lifestyle on a middle class income.

    So yes, in the end it is the “teachers and firefighters” that are punished by such taxes. Because home ownership is probably the most accessible and egalitarian method available of building wealth for lower and middle income people.

  5. Lori

    Exactly, Eric. My family, too, were immigrants and very working class yet lived frugally so as to save up and buy a home. There are programs to help first time home buyers (FHA for example) and it is one of the best ways for the firefighters and teachers to accumulate wealth. I have many teacher friends – all of whom own homes and now collect sizable pensions and have lifetime, paid health insurance. In this area they made well over 6 figures but are hardly the 1% who control all the wealth in this country today.

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