The reason for a capital gains rate is to encourage investment for longer term than day-trader or other schemes that rely on market volatility for profits. Remember that to qualify for a capital gain rate, the base assets must be held for a certain period of time, which is a good thing when it comes to having pools of money for people to use for loans for buying houses, starting businesses, going to college, etc.
The only reason I can think of against a progressive Capital Gains rate is complexity. At a time when our tax system is a bit ridiculous, adding complexity only makes it easier to hide loopholes.
I also think people need to bear in mind that most measures of wealth are paper only, meaning they estimate how much something is worth without it actually being sold or really tested against the market. Anyone who saw their property assessments remain at ridiculous levels while housing prices dropped like a stone can understand that estimating an intangible value for tax purposes is not as simple as it might seem. I think it is perfectly appropriate to tax based on REALIZED value - taxing on PERCEIVED value is both problematic and is more oriented toward redistributing wealth than it is toward governmental income. While that seems to be the idea in the minds of many, I am still too conservative to believe that people who earn money should be punished by having it taken away simply because they earned money - paying one's fair share is one thing, having one's wealth reduced simply because one is wealthy is quite another.
There's also the problem that capital gains aren't indexed to inflation. Salary income is usually received on a timely basis relative to when the work is performed so inflation isn't a problem -- barring hyperinflation. Capital gains income is only recognized when the asset is sold. If the asset is rising in value at a rate of 5% per year, but inflation over that period has been 10%, you end up being taxed on a "gain" when the value of your asset is actually less that it was in real dollars when you started.
But as compared to what? Put the money in your mattress, and you'll lose ALL of the inflation cost. Invest it, and you gain something against inflation and pay the government a small slice of that. And it's certainly possible to invest it well enough to stay ahead of inflation.
Besides which, it seems to me that stock prices are affected by inflation, or at least tend to inflate in their own way. (If I buy stock in a company today, and that company is still around in 10 years, I'd expect the stock to be worth more then than it is now.) Which would say that there is some automated inflation indexing happening to your investment anyway.
The reason for a capital gains rate is to encourage investment for longer term than day-trader or other schemes that rely on market volatility for profits.
I think you are saying that reduced tax rates on long-term capital gains encourage long-term investment, which benefits the economy. I have heard that argument before, and for a long time I have wondered if it is correct. If a company issues new shares of stock and I buy some, then I am encouraging investment that may benefit the economy. If I buy existing shares of Microsoft, I'm just giving money to the guy who sold me the stock.
most measures of wealth are paper only
Agreed.
paying one's fair share is one thing, having one's wealth reduced simply because one is wealthy is quite another
I think there are two questions here, and both are fascinating. What tax policy benefits the economy the most? This is an economic question. What tax policy is fair and just? This is an ethical question.
I think the first question is much easier. The economic reason that some people should make more money than other people is that when people have financial incentives, they are more productive. The main economic reason that financial incentives should be limited is that when people have more wealth, they have less incentive to be productive. From this point of view, the wealthy are grossly undertaxed. The 400 Americans with more than $345 million in annual income earn vastly more than what is necessary to give them an incentive to work hard.
The ethical question is unanswerable because different people have different ideas about what is fair.
Thanks, Bill. The lower capital gains rate as incentive to invest longer term makes some sense.
If complexity is the only reason not to put it on a progressive scale, then I'd consider that no reason at all. The majority of loopholes are in determining what is income and what's not, and in deductions. I don't think changing the taxation rate is going to change any of that. And calculations-wise, it'd just be one table look-up, instead of a fixed number (and only of concern to those who do their own taxes by hand, at that). Put that complexity up against fairness alone (not even mentioning all the economic and societal good that could be done with the money), and it looks like a no-brainer to me.
I think it is perfectly appropriate to tax based on REALIZED value - taxing on PERCEIVED value is both problematic and is more oriented toward redistributing wealth than it is toward governmental income.
I'm with you. I don't think I suggested any taxing based on perceived value.
The only reason I can think of against a progressive Capital Gains rate is complexity. At a time when our tax system is a bit ridiculous, adding complexity only makes it easier to hide loopholes.
I also think people need to bear in mind that most measures of wealth are paper only, meaning they estimate how much something is worth without it actually being sold or really tested against the market. Anyone who saw their property assessments remain at ridiculous levels while housing prices dropped like a stone can understand that estimating an intangible value for tax purposes is not as simple as it might seem. I think it is perfectly appropriate to tax based on REALIZED value - taxing on PERCEIVED value is both problematic and is more oriented toward redistributing wealth than it is toward governmental income. While that seems to be the idea in the minds of many, I am still too conservative to believe that people who earn money should be punished by having it taken away simply because they earned money - paying one's fair share is one thing, having one's wealth reduced simply because one is wealthy is quite another.
Reply
Reply
Besides which, it seems to me that stock prices are affected by inflation, or at least tend to inflate in their own way. (If I buy stock in a company today, and that company is still around in 10 years, I'd expect the stock to be worth more then than it is now.) Which would say that there is some automated inflation indexing happening to your investment anyway.
Reply
I think you are saying that reduced tax rates on long-term capital gains encourage long-term investment, which benefits the economy. I have heard that argument before, and for a long time I have wondered if it is correct. If a company issues new shares of stock and I buy some, then I am encouraging investment that may benefit the economy. If I buy existing shares of Microsoft, I'm just giving money to the guy who sold me the stock.
most measures of wealth are paper only
Agreed.
paying one's fair share is one thing, having one's wealth reduced simply because one is wealthy is quite another
I think there are two questions here, and both are fascinating. What tax policy benefits the economy the most? This is an economic question. What tax policy is fair and just? This is an ethical question.
I think the first question is much easier. The economic reason that some people should make more money than other people is that when people have financial incentives, they are more productive. The main economic reason that financial incentives should be limited is that when people have more wealth, they have less incentive to be productive. From this point of view, the wealthy are grossly undertaxed. The 400 Americans with more than $345 million in annual income earn vastly more than what is necessary to give them an incentive to work hard.
The ethical question is unanswerable because different people have different ideas about what is fair.
Reply
If complexity is the only reason not to put it on a progressive scale, then I'd consider that no reason at all. The majority of loopholes are in determining what is income and what's not, and in deductions. I don't think changing the taxation rate is going to change any of that. And calculations-wise, it'd just be one table look-up, instead of a fixed number (and only of concern to those who do their own taxes by hand, at that). Put that complexity up against fairness alone (not even mentioning all the economic and societal good that could be done with the money), and it looks like a no-brainer to me.
I think it is perfectly appropriate to tax based on REALIZED value - taxing on PERCEIVED value is both problematic and is more oriented toward redistributing wealth than it is toward governmental income.
I'm with you. I don't think I suggested any taxing based on perceived value.
Reply
Leave a comment