Only about one-quarter of corporate stock is owned by taxable shareholders

Only about one-quarter of U.S. corporate stock is held in taxable accounts, far less than most researchers and policymakers thought. The share has declined sharply from more than four-fifths in 1965.  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.

That is Steven M. Rosenthal, here is further information.

Comments

What you subsidize you get more of. What you tax you get less of. Why is this a surprise?

I would be interested to know what Bernie will say when 90% of the stock market is owned by non-profits or charities or pension funds. Capitalists seem a dying breed.

"when 90% of the stock market is owned by non-profits or charities or pension funds. Capitalists seem a dying breed."

Nothing in the article indicates this is a likely scenario. It notes that 26% of equities are owned by foreign investors and that this does not include foreign direct investment. Non-profits and charities are a small and fairly constant share of the total and appear to hold about the same share as insurance companies. So the real story is not the decline of capitalists but rather the rise of retirement savings along with capitalists and investors outside America's borders.

Are we reading the same report? The first page says that the percentage of the market owned by the taxable has fallen from 86% or so to 24%. How is that not a decline in capitalist ownership of the market?

Why is it odd to say that on current trends the taxable may fall to 10%?

"Taxable" is not equivalent to "Shares owned by capitalists," which is clear if you actually read the report. Additionally, there are many ways for capitalists to invest in the economy aside from buying publicly-traded shares of stock.

Well that depends on what is meant by "capitalist". Most of the non-tax institutions don't pay tax because it is assumed they are not engaged in money grubbing. These are things the state wants to encourage - saving for retirement in particular.

Let us agree it is a replacement of the individual with the organization man. Instead of individuals buying shares, they are moving their money to larger institutions which buy shares. Which still leaves the Sanders' dilemma untouched - if 90% of the market is owned by retirement funds held by ordinary workers, is that socialism or does it need to be redressed by state action?

"Well that depends on what is meant by “capitalist”"

Again, as I already pointed out, the "taxable" category in this report excludes foreign investors even though, as pointed out by other commenters, foreign investors are subject to dividend withholding taxes. To put this in concrete terms, billionaire Hong Kong tycoon Li Ka-shing owns about a $100 million stake in Facebook. Yet for arbitrary reasons, you are implying he isn't a "capitalist" since he is not American and is therefore excluded from the "taxable" category as are many other investors who now own about one-fourth of all U.S. stocks.

Ricardo- not sure what point you are trying to make. The key point raised is that if a significant portion of shares are held in tax-deferred retirement and education accounts and other non-taxable entities like pensions and charities, the revenue claims of those like Elizabeth Warren and Bernie Sanders that will come from very high tax rates on investment are likely way off. Any increases they want to make end up targeting the kinds of benefits they claim they want to support. Of course, like government defined healthcare plans, breaking the private systems to force everyone into government controlled redistribution, where they can enforce their morality on the rest of us may end up being consistent with their goals anyway.

Well, we kinda knew that, didn't we? Herr Drucker wrote a book about "Pension Fund Socialism" and all.

A capitalist can use a non-taxable account. Pensions, for example, as Ricardo already said.

Moreover, it is not at all clear that the stock market is or ever was the favored investment instrument for the wealthiest individuals. This report does not measure real estate, fixed-income, private equity or untraded ownership stakes of various sorts, and the non-equity investments made by hedge funds. Indeed, the purpose of the authors was not to make a point about how much total investment by Americans is taxable so that's not a criticism of them. Rather, one cannot draw any sweeping conclusions about the decline of "capitalists" based on the numbers presented.

Remember that capitalist Mitt managed to get a lot into both nontaxable and offshore accounts.

But the overall trend of tax rates since 1965 has been down, the capital gains tax rate.

*especially the capital gains tax rate.

Also, IRAs didn't even exist in 1965.

Of course, this is consistent with the decline in the number of public companies, the number of shares outstanding of public companies, as companies consolidate, redeem their shares, go private in leveraged acquisitions, move overseas to avoid U.S. taxation, coupled with the near collapse of the IPO market. I suspect it is also consistent with the U.S role as the world's banker, with the emphasis on debt rather than equity. Does it matter that many companies have replaced outstanding equity with outstanding debt, that the ownership of companies is reflected more in debt instruments than equity? The move to debt began with Michael Milken and has continued since. With interest rates near zero, why would companies expand with additional equity and share in the companies' growth?

Why not for profits? It would be expected with much higher concentrations of wealth, as wealthy individuals are more likely to be philanthropic and well-advised in ways to avoid taxes. Of course, as our tax base erodes at the top, the middle and bottom can expect to bear a greater burden (or experience a decline in public goods). Not for profits (many in name only) have also shifted to equity from traditional (for not for profits) debt in search of higher returns.

"wealthy individuals are more likely to be philanthropic " You sure about that? I've heard otherwise.

What's surprising to me is that tax free accounts can hold that much stock.

If their capacity is that large, then it makes sense given the tax treatment

IRAs have very limited contribution caps, but typically are setup to receive structured investments with uneconomic rates of return. For example, you have your company create special preferred shares with astronomical dividend rates that you buy at par. It's subsidized by the non tax-advantaged common stock. But it's a free lunch, since you're just moving taxed income to non-taxed income.

The solution, as you say, is pretty simple. Simply cap the total size that any one person can have in a tax-advantaged retirement plan. 2 million should be more than sufficient for middle-class retirees.

Wouldn't it be much simpler to just crack down on the relatively narrow universe of people who are in a position to create structured investments like that, rather than to put in a ceiling on everyone's retirement account?

I don't understand why foreigners are grouped in the non-taxable basket, as they are subject to 30% withholding tax on US-source dividends unless reduced by treaty.

Because the attention-craver who wrote this article really, really wants you to think that the stock market isn't being taxed.

It's a stretch to call IRAs "non-taxable" as well. The author will learn that when he tries to spend the money in his.

Well I guess this mutes the double-taxation problem...

+1 And if you are a corporation which doesn't pay taxes, it eliminates the supposed effect of corporate taxes altogether.

We should be growing like hell.

Look at the author's chart on ownership.

You will see that his chart includes IRA's.

Last time I checked, traditional IRA's are taxed upon distribution.

The author is confusing deferral with no taxation.

The same goes for deferred compensation.

This is true, but IRAs still have a massive tax advantage because of the power of compounding. Assume a 25% income and capital gains tax rate. Also average investment returns of 10% a year. Let's say you earn $100 and sock it away for 30 years. In a traditional investment account you'll end up with $700. With an IRA you'll end up with $1396.

By deferring paying taxes until the end, the IRS is essentially lending you money interest and penalty free.

Capital gains are deferred as well since you will only pay tax on price gains when you sell the stock. If you buy some shares and hold them 30 years you only worry about the tax after that appreciation.

You're assuming your 10% a year returns are either dividends or realized capital gains, right? That's the only way taxes matter in this situation. If the taxable event (i.e. capital gains) happens right before distribution time, and the tax rate is the same at contribution and distribution time, then you get a complete wash.

But also, it's worse, because typically capital gains tax rates are in fact lower than income tax rates (unlike your assumption of equality). But you pay the income tax rate on capital gains inside an IRA, in the end. So for an investment that you don't expect to pay dividends and plan to just buy-and-hold, an IRA is a _worse_ deal unless your tax rate at distribution is enough lower than your tax rate now to overcome this effect. Which it probably is not.

All of which is to say that if you plan to put money into both IRAs and non-IRAs, you want the IRA money in the things that generate more dividends and capital gains on a regular basis and the non-IRA money in long-term buy-and-hold investments.

There's presumably a correlation between the decline in direct, taxable ownership of shares, and the ever-expanding pay packets of CEOs. I wouldn't be surprised if there's a cause-and-effect relationship too.

As a retired person with an IRA and a 401k I want to remind you that they are indeed a taxable account. I pay about 28% in federal and state taxes when I take money from these accounts. The real question is why foreign investors and "non-profits" are totally exempt from taxes?

They aren't. Foreign investors are subject to dividend withholding tax (anywhere from 5-30%, though usually 15 or 30%), and even domestic non-profits often invest through taxable offshore blockers and pay withholding tax on their dividends, even though they wouldn't have to if they invested directly. There's also FIRPTA and other tax regimes specifically targeting foreigners.

The things you list are applied unequally and in a very spotty fashion. The laws should not exempt anyone or they should exempt everyone.

“The superior man does what is proper to the station in which he is; he does not desire to go beyond this. In a position of wealth and honor, he does what is proper to a position of wealth and honor. In a poor and low position, he does what is proper to a poor and low position.” — Confucius

“Wealth consists not in having great possessions, but in having few wants.” — Epictetus

The underlying theme of both these sages is: KNOW YOUR PLACE. Do you, non-1%-er, know your place, or do you strive vainly with 'keeping up with the Joneses' which are outside your proper station? Be happy as what you are, a peon, a wage slave, a suburban commuter. Don't try and ape me.

PS--I just got richer, a lot richer; rich get richer.

Good Lord! Who could write that paragraph while not pointing out that regular IRAs and 401Ks are tax-deferred accounts, not untaxed accounts? Even foreign holdings aren't tax exempt, though it might not be the US government collecting most of it. I don't want to read the entire paper, but I suspect there is an agenda being pushed by this nonsense.

"Retirement accounts are effectively nontaxable, including both (i) Roth and traditional IRAs and (ii) defined-contribution and defined-benefit retirement plans. In general, investment returns in these retirement accounts are tax-free in two different manners: either (1) contributions to Roth IRAs and Roth 401(k) plans are nondeductible and earnings are nontaxable; or (2) contributions to traditional IRAs or 401(k) plans are deductible and earnings are taxable upon withdrawal. If account owners face the same tax rate when they contribute to or withdraw from their accounts, the two forms of retirement savings are economically equivalent; the benefit of a Roth plan’s full tax exclusion for withdrawals equals the benefit of a deductible plan’s tax deduction for contributions."

Rather than "investment returns in these retirement accounts are tax-free in two different manners" aren't they really demonstrating only that, "investment returns in these retirement accounts are *taxable* in two different manners"? The statement "Retirement accounts are effectively nontaxable" seems to be just plain wrong and significantly misleading.

Investment earnings in 401(k) / IRA plans are not taxed, in the following sense. For simplicity, assume constant tax rates over time.

First, consider a Roth IRA. After-tax dollars go in it. At retirement, you can withdraw whatever you want, tax free, regardless of the amount of investment earnings (i.e. there is no dividend tax or capital gains tax). Thus, Roth IRA investment earnings are "not taxed."

Second, note that (with constant tax rates over time) a Roth IRA and a Traditional IRA are essentially equivalent. Suppose that the tax rate is 1/3 and you are willing to forego $100 in consumption (i.e. after tax earnings) today. Thus, you could either contribute $100 to a Roth IRA or $150 to a traditional IRA (the $150 contribution yields a $50 tax savings immediately).

Suppose the each dollar in the account earns a gross return of R between contribution and retirement. So, the Roth IRA has 100*R dollars at retirement. And you withdraw all of that tax free, leaving you still with 100*R. The Traditional IRA has 150*R dollars in the account. You pay a 1/3 tax on that amount when you withdraw, leaving you with 100*R dollars. Same as if you invested in the Roth IRA.

So, in sum: Roth IRA obviously fits into the untaxed category. And the Traditional IRA is (under these assumptions) identical to the Roth IRA. Thus, the Traditional IRA is also untaxed.

An excellent argument for tax reform (or for a presidential candidate that you hope will burn down the whole Washington establishment).

Suppose that the tax rate is 1/3 and you are willing to forego $150 in consumption (i.e. pre tax earnings) today. Thus, you could either pay the tax on the $150 and contribute $100 to a Roth IRA or $150 to a traditional IRA (the $150 contribution yields a $50 tax savings immediately).

Suppose that each dollar in the account earns a gross return of R between contribution and retirement. So, the Roth IRA has 100*R dollars at retirement. And you withdraw all of that tax free, leaving you still with 100*R. The Traditional IRA has 150*R dollars in the account. You pay a 1/3 tax on that amount when you withdraw, leaving you with 100*R dollars. Same as if you invested in the Roth IRA.

So, in sum: Roth IRA was taxed on the front end and the Traditional IRA is taxed on the back end. Thus, both the Roth and the Traditional IRA are taxed.

No, the Roth IRA and the traditional IRA don't work out equal (unless you have a flat tax with a $0 starting threshold).

This year if I earn e.g. $200,000, I'll pay tax at 33% on the top bracket. If I defer some of the pre-tax income until retirement, I'll "earn" just $50,000 a year, paying only 25% on the top bracket. Hence it's much better to invest pre-tax income than post-tax income.

The only exception is if my IRA invests spectacularly well, such that I actually earn more in retirement than when I was working. Or if I am diagnosed with an incurable disease, and I decide to withdraw all the money at once.

I didn't say the two types of IRAs "work out equal"...I said they are both taxable. The TPC report, quoted above, said they are both non-taxable.

Yes, the original labor earnings are taxed at some point --- either at the front end or at the end. The point is that for Roth IRAs and IRAs, the *investment earnings* (capital gains, dividends, etc) are not taxable. This is literally true for Roth IRAs. It's a harder case to make for Traditional IRAs, but to the extent that tax rates are reasonably flat over time, it's approximately true.

So, the statement in the TPC report ("Retirement accounts are effectively nontaxable, including both (i) Roth and traditional IRAs and (ii) defined-contribution and defined-benefit retirement plans.") is only "approximately" true under a narrow set of assumptions. My original point was that that statement is significantly misleading...and, unstated, that the whole report is useful only for pundits to bludgeon their political opponents in the mass media (e.g., "A new study shows...").

What is most impressive to me is the foreigners' share. As tax-advantaged retirement accounts were introduced and then steadily contributed to, it's expected that their share grows. The foreigners' share has increased five-fold. I'll speculate that two things are happening. (1) American investors are now allocating more to foreign stock markets, and (2) American investors are now a smaller percentage of global stock market ownership.

This isn't even about IRAs. I would think the amount of equity in 401k accounts and group pension accounts dwarfs that of IRAs.

I don't think so. Most 401(k) money winds up in IRAs after a relatively short period of time, when people switch jobs or retire.

You completely ignored the 'and pensions' part. But you may be right about IRA rollovers, but then again 401ks haven't been around that long, many folks with balances are still working.

Comments for this post are closed