If money we make from investments were taxed at the same rate as money we earn from the sweat of our brows, the problem you describe would disappear. Is there a sound economic reason for taxing capital gains at a lower rate than ordinary income? Paul Krugman doesn't think so.
A related issue is that many millionaires and billionaires become wealthier through unrealized capital gains; their investments are worth more and more every year, but this increase in wealth is never taxed because it isn't considered income. Warren Buffett became 3 billion dollars richer in 2010, but his taxable income was "only" $40 million, and he paid less than $7 million in taxes. It's probably not practical to tax unrealized capital gains ever year; how much was privately held In'N'Out burger worth at the end of 2010, for example? But we should bring the estate tax back from the dead.
Thanks for the link. He doesn't address people on a fixed investment income, though, and I would like to see some sort of analysis of that before I'd get behind eliminating the capital gains tax category altogether.
Also, eliminating the capital gains tax entirely would take a whole lot more political effort: my concern about retirees, the comment elsewhere about incentivizing long-term investment, these and other issues would be brought up and pounded home if a proposal was made to eliminate the capital gains tax rate. But I think it would be much harder to argue against a progressive capital gains rate: there's a pretty obvious imbalance present, and making the rate progressive addresses that without bringing up more problems.
It makes perfect sense to me, but I am notoriously ignorant when it comes to economics. (I keep saying that as far as I can tell, the entire economy is based on wishes and pixie dust, so...) ;)
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
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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 anotherI 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
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If money we make from investments were taxed at the same rate as money we earn from the sweat of our brows, the problem you describe would disappear. Is there a sound economic reason for taxing capital gains at a lower rate than ordinary income? Paul Krugman doesn't think so.
A related issue is that many millionaires and billionaires become wealthier through unrealized capital gains; their investments are worth more and more every year, but this increase in wealth is never taxed because it isn't considered income. Warren Buffett became 3 billion dollars richer in 2010, but his taxable income was "only" $40 million, and he paid less than $7 million in taxes. It's probably not practical to tax unrealized capital gains ever year; how much was privately held In'N'Out burger worth at the end of 2010, for example? But we should bring the estate tax back from the dead.
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Also, eliminating the capital gains tax entirely would take a whole lot more political effort: my concern about retirees, the comment elsewhere about incentivizing long-term investment, these and other issues would be brought up and pounded home if a proposal was made to eliminate the capital gains tax rate. But I think it would be much harder to argue against a progressive capital gains rate: there's a pretty obvious imbalance present, and making the rate progressive addresses that without bringing up more problems.
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A fair point. But it speaks more to not counting on that source of income than to not using it at all.
A funding cushion certainly seems like a great idea. It would just need a much more "together" Congress than we've got now.
I'm going to do a little web searching.
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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 anotherI 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 ( ... )
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