The Glade 4.0

Like the thread title says - what are the arguments for keeping cap gains tax rates lower than the top income (i.e. wage) tax rates?

This thread is a false dilemma for those who don't believe in taxing sources of income or investment.

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They probably shouldn't. Why not tax it at 50% and ignore any real loss because of inflation? We don't need anyone investing in the future, after all.

The way things are going, there won't be one for investors anyway.

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In time, this too shall pass.

Capital Gains Taxes shouldn't exist in the first place. In essence, they're designed to prevent you from making any reasonable investment with your money. In some cases, Capital Gains Taxes can exceed the real value of the gain, since they don't adjust for inflation or devaluation of the dollar. Indeed, over the long term, CGTs generally become a net deterrent to real investing, especially once returns exceed the principal in absolute dollars.

A better question is why should the government be entitled to 40% of the money I earned free and clear? Why should the government have the power to continually divest me of economic ability?

The best 20 year investment known to man was the Cisco IPO. $1000 1981 Dollars in Cisco returned $10.2 2001 Dollars, assuming dividend reinvestment. 39.6% of those 2001 dollars would have been $4 million. Does that seem reasonable to you? The person who made the investment is literally paying 4,000 times the initial principal in taxes. And Cisco was abnormally awesome during that period.

On the flip side, short term investments are already taxed at the highest marginal and you don't really know about it because that affects your mutual funds, your IRA, your 401(k) and 403(b) if they're managed. You don't see it. But that's where the real world problems actually enter into the CGT. My IRA would have made 14.7% last year, had it not been for the fact that Uncle Sam was grifting 40% off the top of every short term transaction. Two of my mutual funds would have bested 12%. Instead, I was lucky to get 9.4% and ~7.7%, neither of which beat real inflation for the calendar year.

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What Khross said. Monetary policy that relies on inflation, and then taxing profits that have to beat inflation, is punitive and assinine.

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"Aaaah! Emotions are weird!" - Amdee
"... Mirrorshades prevent the forces of normalcy from realizing that one is crazed and possibly dangerous. They are the symbol of the sun-staring visionary, the biker, the rocker, the policeman, and similar outlaws." - Bruce Sterling, preface to Mirrorshades

I dont have much to offer in the way of constructive argument. I did want to say I've come to really loathe capital gains taxes since my company stock plan.

The entire tax system truly seems to be set up to beat you down, brutally, with any positive step forward.

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“Strong people are harder to kill than weak people, and more useful in general”. - Mark Rippetoe

I see no reason any one tax rate should necessarily be higher or lower than any other, disregarding whether any given tax should or shouldn't exist.

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"Hysterical children shrieking about right-wing anything need to go sit in the corner and be quiet while the adults are talking."

Because the top income is too high?

Because we want to encourage investment?

Because most people who make captial gains also have some kind of income as well (double dipping)?

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I prefer to think of them as "Fighting evil in another dimension"

The entire point of capital gains in an inflationary economy is to beat you down, brutally, for daring to stand still.

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"Aaaah! Emotions are weird!" - Amdee
"... Mirrorshades prevent the forces of normalcy from realizing that one is crazed and possibly dangerous. They are the symbol of the sun-staring visionary, the biker, the rocker, the policeman, and similar outlaws." - Bruce Sterling, preface to Mirrorshades

Correct me if I am wrong but capital gains indicate a true creation of wealth, no? Why the hell would you tax that?

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RD, is that question really something you were struggling with?

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The Dude abides.

Why would capital gains be any more of a true creation of wealth than labor output is? I mean heck, plenty of people made significant capital gains by speculating during the housing bubble and the dot com bubble, but most of the "wealth" those bubbles produced turned out to be illusory.

That aside, though, the basic arguments I see for taxing cap gains at the same rate as wage income are (i) fairness and (ii) avoiding economic distortions. The fairness argument is based on the idea that, from the perspective of the individual taxpayer, income is income regardless of the source. If two people each make $100k/year, they can each support a $100k/year standard of living, regardless of whether the income is from wages or capital gains, so it would be unfair to tax one person more heavily than the other. In terms of economic distortions, taxing one type of economic activity more heavily than another will distort the market by pushing it towards the activity with the lower tax burden. If you tax cap gains lower than wages, more people will turn to investments than labor, companies will compensate employees with stock rather than wages, etc. That's basically exactly what happened with employer-provided healthcare, the housing bubble, and executive compensation changes.

Yeah, it's an honest question. In my response to Hopwin just now, I laid out some arguments for why they should be taxed equally, but I know that many economists think cap gains should be taxed at a lower rate. I've never been clear on why though. Still not sure I understand the arguments being made in this thread so far, actually.

How many times does an investment dollar get taxed from the pocket of the investor back to return compared to the taxes on a dollar earned via labor?

Do you think interested earned by leaving the money is a bank account should be taxed at the same rate as normal income?

Again, this is precisely why CGTs shouldn't exist in the first place. The reality of any investment generated wealth is circumspect until capitalization. Once capitalized it becomes currency. The value of that currency depends on a lot of things, including the aggregate value of inflation over the period of investment. So, tell me why the government should be able to take money, in absolute dollars, that may or may not be money in real dollars?There is no parity in our taxation system as it stands. Any arguments for fairness are an appeal to emotion and an appeal to popularity that have no real economic validity. They are feel-good offerings that distort policy and stem from the misguided notion that you can manage the economy from the top down.The current system already favors the guy making wages, since CGTs claimed as sole-source income are subject to the AMT at highest applicable marginal only, regardless of investment duration. You should really get a tax attorney to explain this to you. Consequently, it's highly likely that despite your protestations in this thread, the individual in question is already paying 39.6% across the board as income tax. Incidentally, that defeats the "fairness" argument pretty squarely.It doesn't actually work that way in practice. First, employee compensation packages that include stock and stock options must declare the initial value as in year income, taxed as all other income gained in that year. And, just for the record, it's been that way since the late 70s. It seems to me that you're getting misinformation from someone who doesn't actually make their money from investments. And don't go bringing employer-provided healthcare insurance into the discussion, because that just further dilutes the conversation you're not really trying to have.

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At least twice in excess of the wage dollar, assuming a best case scenario. Since almost all investments are held in managed funds at this point, it's once a year for the duration of fund deposit.It pretty much already is. Anything exceeding the ridiculously low $400 interest income minimum increases your Adjusted Gross Income at a 1:1 ratio.

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Thanks for the responses. To clarify, though, I'm not really talking about the confusing muddle that is our current tax system. Perhaps in the current system, the AMT and other rules result in higher than advertised taxes on cap gains, but ignore all that for a minute and assume a simple, straightforward system in which wages are subject to a flat % tax of X and capital gains are subject to a flat % tax of Y. What are the reasons for setting Y at a lower level than X?

*Oh, for additional clarification, I mean taxing capital gains at the time the gains are realized - e.g. when you actually sell the house and collect your profit, not each year that the value is rising while you continue to own it.

Because you've already taxed the principal. Is the notion of double taxation no longer anathema to you?
This is particularly destructive, because gains will rarely outstrip inflation assuming nothing else changes in that scenario. And, more to the point, gains on your mutual funds are probably capitalized multiple times in a year. Hence, despite proper investment focus, your fund always lags behind industry or holding specific gains over a given period of time.

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Inflation seems to be key to your view of the matter, Khross, and I kind of get where you're coming from on that, though I'm not entirely persuaded by it. Wages aren't indexed to inflation, so why should capital gains be shielded in a way wages aren't?

Wages are indexed to inflation, or companies suffer from retention problems. Now, whether they're indexed to real inflation, or not, is a different matter entirely. At least according to BLS numbers, household earnings remain relatively flat if recursively adjust everything to 1950 dollars over the last 60 years.

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So, would you be ok with taxing cap gains at the same rate as wages if the amount of cap gains being taxed were first discounted for inflation over the period that the investment was held?

It would be preferable to your alternative, but you have to remember I oppose both income and capital gains taxation.

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Ah, right. You favor a consumption tax, right? If so, at what point in the consumption chain would it be applied? (I know I'm veering off topic, but just curious.)

Excise taxes work better and would generate more revenue. For the most part, pretty much everything would be taxed minus a few staples: clothing under X amount per item, housing, most non-prepared food, and the first vehicle in a household under Y amount. There would also be no taxes on insurance, but I would amazingly make insurance a non-profit industry.

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If I work a job that pays $100,000 a year, I'm going to make $100,000 a year gross. If I invest $1,000,000 a year and make $100,000, I'm not guaranteed to make that same amount of money the next year. As a matter of fact, I may end up with less than what I started. Unless you're willing to suggest the investor be reimbursed for bad years (and I'm certainly not suggesting that should be the case), your "fairness" argument is ridiculous.

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