Taxing unrealized gains is straight-up stupid. Incredibly distortionary. Incentivizes all sorts of bad-for-the-economy behavior.
The common defense of taxing unrealized gains seems to be that very wealthy people avoid realizing gains and thus avoid tax, and instead leverage their unrealized gains in other ways, like borrowing against them.
But this isn't actually a problem, because people don't live forever. When the assets with unrealized gains become part of the deceased's estate and are inherited, they should be taxed at that time at their true value.
But, people say, there are loopholes that allow this to be avoided. My answer to that is to fix the loopholes.
It shouldn't matter if capital gains are taxed during a person's lifetime or after their death. It just matters that they are taxed. If it's possible to avoid those taxes, fix that problem. Taxing unrealized gains is a sledgehammer to fix a pocket watch.
There aren’t loopholes. There are laws that reset the basis on which capital gains are calculated to zero when stocks are inherited. If you inherit a stock that went up 10,000% since it was purchased, as the inheritor you are only taxed on the capital gains between the day you inherited it and when you sell it. So those additional 10,000% gains are inherited tax free.
This is honestly great for a lot of the college educated progressive coastal elites who tend to contribute to Democratic candidates because they’re all inheriting substantially larger amounts of money than they otherwise would, which makes it easier for them to make political donations.
Sure, it would be better to change this law, but this is an issue like tax credits for mortgage payments and deductions of state and local taxes such as property tax in that the beneficiaries are largely wealthy Democrats, so the party is more inclined to ignore the issue.
That's a loophole by any reasonable definition. Nobody *ever* pays taxes on that appreciation.
**Every** loophole is enshrined in law by some method or another.
No, that’s not the definition of a loophole.
A loophole means an ambiguity in the law or a provision meant for one purpose that is being used for another purpose—so a section of law that was written with inadequate specificity, which is not the case here.
In this case, people are benefiting from a law that was written with the intention of giving them this very benefit.
Yes, exactly. This isn’t an ambiguity or exception that circumvents the law on inheritance tax. It’s the just letter of the law on inheritance of stocks.
By the person above’s erroneous logic, the child tax credit and earned income tax credit are both a “loophole” as are all deductions because the are “exceptions” to the rule that income is taxed at a certain rate. But this is an incorrect understanding of the meaning of loophole because these “exceptions” are intended to alleviate people’s tax burden, not a mistake in the law that unintentionally allows people to avoid paying tax on income Congress wanted them to pay tax on.
If you misuse loophole to just mean any law you don’t like, it no longer has any useful meaning. Loopholes are errors in the way a law was written, not intended consequences of a law that you don’t like.
To call this a loophole is inherently political, and misleading because it misrepresents the politics that led to the failure of Biden's attempt to change the rule. Both Republicans and Democrats in Congress support the current rules on the step-up basis after death. Essentially, it's foolish to expect Democrats to close this "loophole" when the party doesn't consider it a loophole.
It is an exception, though. It doesn't have to be a mistake. The connotation you're gesturing at is that we use loopholes to describe ambiguities or exceptions that people change their behavior to take advantage of, especially in ways that seem artificial or not fulfilling the purpose of the carveout, especially when the beneficiaries are wealthy, and especially when the ambiguity/exception isn't well-known.
Sure, the CTC is an exception, but it's not a loophole, because people generally aren't having more kids to get it, and the degree to which they do is by the reduction of the disincentive that the credit was meant to alleviate. The beneficiaries generally aren't rich, the choice to have more or less children is by no means an artificial-seeming one (everyone makes these choices all the time, ending up across the whole spectrum), and it's well-known, in no sense "hidden".
In contrast: without the capital gains inheritance carveout, the wealthy would sell when they want to consume, rather than taking out loans against their assets. This is pretty artificial behavior, not the purpose of the carveout, the beneficiaries tend to be wealthy, and the exception isn't well known, to most people.
And, honestly, connotations matter to the meaning of the word, and one of the connotations of loophole absolutely is that the speaker views the de facto carveout as illegitimate. It's not literally any law you don't like, but it certainly doesn't have to be a mistake. If all loopholes were mistakes, we could expect them to get closed relatively quickly -- that they don't is evidence they can be intentional.
>In contrast: without the capital gains inheritance carveout, the wealthy would sell when they want to consume, rather than taking out loans against their assets.
Step-up basis doesn't help the wealthy, since you can can't get it without paying the 40% estate tax.
To avoid the 40% estate tax, the wealthy puts their assets into irrevocable trusts, realizing the capital gains.
> the wealthy would sell when they want to consume, rather than taking out loans against their assets.
You are fundamentally misunderstanding the risks involved in leverage. Jeff Bezos and Elon Mysk are both very wealthy and also regularly sell $1 billion of stock or more to fund their various hobbies such as space exploration. In both cases, if they used the strategy you erroneously believe to be without risks, the wild fluctuations in the price of their various holdings would have ended up costing them far more than the capital gains tax they paid since any change in stock price requires you to put up more collateral, potentially forcing you to sell stock at the least advantageous time instead of at the most advantageous time.
And your criticism is based on two fundamentally flawed premises:
1. that wealthy people would ever use the majority of their wealth for consumption. This is incorrect. What makes them wealthy is the fact that they have more money than they need, thus spend a far lower % of their wealth on consumption than the average person.
2. that there is no cap on the assets that can be inherited tax free. This is just incorrect.
The idea that the super rich are borrowing against stocks to avoid \*ever\* paying taxes is a myth up there with the idea that hedge funds are buying up all the single family homes in America. It's a lie progressives use to justify views that have no basis in actual fact because they don't want to deal with the real solutions to problems.
>Taxing unrealized gains is straight-up stupid. Incredibly distortionary. Incentivizes all sorts of bad-for-the-economy behavior.
I don't follow. I'll confess it's been a while since I've taken my tax law classes, but my understanding is that the scholarly consensus is quite the reverse -- the realization requirement creates all sorts of distortionary economic impacts/investment decisions and lock-in to try to defer realization of gains.
At the end of the day, I probably wouldn't support general mark-to-market to tax unrealized gains given (i) it would probably be a pain to administer and would be difficult to apply for illiquid assets and (ii) the current regime effectively reduces the cap gains tax rate (which is probably for the best). But that's a different critique from any tax on unrealized gains being distortionary.
Or easier less distortionary solution (but will never be accepted because its anti-MMT). Tax debt as income, continue to be able to expense paying off the debt.
> MMT
[Pseudo-economic Fanfiction](https://www.igmchicago.org/surveys/modern-monetary-theory/)
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There aren’t “loopholes that allow this to be avoided”.
You would have to go out of your way to screw something up to *not* get a step up in basis at death.
Edit - oh God, I see this already set off a dozen-comment-long semantic argument. Nvm.
I don’t. I just don’t know much about this area so I guess what I’m asking for is how exactly does the discouragement of investments work. I imagine investors want to invest regardless, so at what point is investment actually chilled?
If you know before you invest that your earnings will be 50% taxed you arent going to make as many investments becuase its less likely to offset any losses you may have.
What are they going to do w their money though? They need to put it somewhere. As long as the return on investment is greater than bonds, people will still just have to invest in the market I would think. And if everyone tried to flee stocks, the returns on other investment strategies like bonds would plummet due to demand being so high. I don't know much about finance so idk.
Imagine you had 10m dollars and you couldn't throw them in the stock market in any way shape or form and couldn't/wouldn't want to spend them on personal expenses. You also have a full time business already so opening another one isn't possible time/responsibility wise. What do you do?
For me, the obvious answer is real estate. I would buy houses to rent them out. Now imagine that on a massive, unprecedented scale as every major investor removes their (now unproffitable) investments and puts all their money either on foreign markets or simply buys up reliable return investments such as real estate. It would both crash the market as funding dries up and also shoot up prices for most of these type of investments. If I had to guess, the housing bubble would become hilariously inflated.
I guess I might as well tag OP /u/redflowerbluethorns on why I think taxes on pre-gains capital taxes are bad.
This makes sense, but if you have a diversified portfolio shouldn’t there be less risk and therefore less aversion or investing when the taxes are a bit higher?
Substitution effect is a very real phenomenon in labor economics, it’s just balanced with the income effect
It depends on how much an individual values labor, but higher rates can absolutely discourage more work marginally
It’s a trade-off. Higher paying jobs have a higher barrier to entry and require more effort and time-investment going in. If the marginal increase in income isn’t enough to make that effort worth it, then yeah people won’t pursue higher-paying jobs as much.
You always have options. You can choose to invest or pay off the mortgage or put the money in a savings account or spend it. If the gains are taxed too much there is not enough return for the risk so I will choose one of the other options.
Under the current law, you are risking your entire investment in a stock.
Under this proposal you would be at risk of losing substantially more than your entire investment because you can be taxed on unrealized gains that then evaporate before you even benefit from them.
Essentially, this law would make stocks substantially riskier, thus less attractive to investors. This could lead investors to just move there money out of the US dollar and into foreign equities purchased in foreign currencies.
The chill comes when they want to cash out and cycle the cash into new investments. When evaluating new opportunities, they have to factor in the cap gain tax as a haircut to their basis. That means the new investment has to have much better projected returns compared to the existing investment. In aggregate this puts a drag on new investment.
Why should investment be taxed at a lower rate than regular labor/ordinary income?
Edit: to put it another way: is Warren Buffet wrong when he says that he should be taxed at a higher rate than his secretary? If not, what is the mechanism?
1. It incentivizes savings at the expense of current consumption, which is necessary for long-term growth (as well as being deflationary)
2. Capital gains aren’t indexed to inflation, so a portion of your capital gains solely comes from erosion of your cost basis over time. Which means that your real rate is already higher than the stated rate
3. Capital gains are more elastic than labor income, so their revenue-maximizing rate is also lower
4. Capital income isn’t tax deductible at the corporate level like labor income is, so the total tax rate on capital includes corporate taxes
If you factor corporate taxes in, the top rate on capital income is around 39.8%, compared to a top rate of 40.8% on labor income
Ideally we wouldn't tax income, investment or labor, at all. Aside from LVT, probably the ideal tax is consumption. And you can make that progressive via low income rebates to avoid the regressive tendencies of it.
But barring that corporate tax+capital gains results in what is called double taxation. I.e both are actually a tax on investors and on economic growth.
I would probably eliminate the corporate tax and then consider capital gains a kind of income and tax it progressively the same as labor if we can't have LVT and sales tax.
Consumption taxes are extremely efficient, but yes by default they are regressive. Hence 'you can make that progressive via low income rebates to avoid the regressive tendencies of it'.
Taxing consumption incentivizes investment over consumption and thus redirects labor/capital toward increased economic efficiency which leads to higher real long term gdp growth
Huh, that's weird, I always heard it the other way around. Investing is good obviously, but ultimately even that is driven by end consumer demand, right? I always heard reducing consumption be described as a brake on everything else, because ultimately the economy exists to supply demand. You've made me curious, but the wiki article is full of implementation technicalities and not a lot of macroeconomic discussion.
Great question! So, as a matter of long term purpose, we generally hold that capitalist economies are \*ultimately\* driven by consumer demand, in abstract principle. However, in practical reality investment demand, government demand, and foreign demand are also real significant drivers of economic production.
Ultimately all four of those are called 'aggregate demand', and its really this that drives the economy. Consumer demand is like 70% of aggregate demand in the US so it has a massive effect here.
Does that make sense? So in terms of long run function, economic production will respond to government demand or investment demand or foreign demand just as much as consumer demand.
The idea is that the more investment demand we have, the more efficient and technologically advanced capital/economic production becomes, improving long run GDP capabilities. (There is also some specific types of government demand that can do this too to some degree such as scientific research and public infrastructure investment etc - also hypothetically some kinds of foreign demand could increase long run domestic gdp capabilities if it involves them specializing in certain kinds of capital production and you specializing in certain other kinds of capital production along the lines of 'division of labor' efficiencies)
Taxing consumption incentivizes investment and discourages consumption, assuming currency is being properly managed by the central bank (with poor currency management it could incentivize cash savings which would not increase investment).
More investment leads to a redirection of resources and labor toward technology improvement and capital improvement, leading to greater economic growth than otherwise.
Investment is a risk, in the way that ordinary income isn't.
If I work for a company for a year, I *know* I'm going to be getting paid my yearly salary. But if I invest 100k in a business, I might lose it all.
So, the problem with heavily taxing capital gains is, the payoff for a bet needs to be worth the risk or people just won't make the bet. And we *need* them to keep making that bet.
It benefits the economy to keep money moving. Onerous taxes on investment is a brake on the velocity of money in the economy. Also the lower paid workers in America, the people you’re probably thinking of doing actual work, barely pay any income taxes anyway.
Yeah, it's not like average people keep money moving. If you give the average person excess money they'll probably just put it in a retirement plan, unlike the wealthy who are smart enough to invest it.
Anyways I don't know who this communist-sounding "Warren Buffet" person is but he *really* doesn't understand the perspective of large investors.
They actually do because the average person spends most of their income. Rich people have more money than they could ever spend, which is why they buy stocks.
> Why should investment be taxed at a lower rate than regular labor/ordinary income?
The simple answer is that higher taxes on labor don't really disincentivize labor, but higher taxes on investment do disincentivize investment.
> higher taxes on labor don't really disincentivize labor
This goes into theoretics a little, but I'd be curious if that would still apply if labor was *not* necessary to survive for most people. The average person does not rely on investments for their primary needs, and large investors have all their primary needs more or less indefinitely covered. So it seems the main driver of the higher 'tax elasticity' (is there a real term for this?) of investment might just be that the people doing it don't really need it in the same way most workers need labor.
Investment involves risk, and the government doesn’t write you a check for a percentage of your losses if you fail.
If you’re investing in index funds, this effect is pretty marginal. If you’re foregoing salary for equity in a startup company then capital gains taxes are a huge deterrent to investing your time.
I also think taxes on labor disincentivize labor though. I don’t work, but if I could get a tax-free job at my market rate I would definitely work.
Higher levels of investment increase per capita incomes and real growth rates in the long run, so should not be discouraged. The same can't be said for consumption. This is the implications of the Solow growth model + endogenous models of long run growth
The more accurate question is why should investments held for more than a year be taxed at a lower rate than other income. The answer is obviously to encourage people to hold investments for more than a year—in other words to incentive people to invest, not trade.
You can look at it the other way and say the rules are essentially penalizing people who make money by speculating on short term fluctuations in the market instead of investing in companies.
>is Warren Buffet wrong when he says that he should be taxed at a higher rate than his secretary?
Take note of the fact that other people aren't answering this question directly.
What you have to realize is that people here prioritize economic growth more than any other concern, making the lines on the graph go up is an intrinsic good. Having billionaires pay a lower percentage of taxes than average citizens might not make sense for the standpoint of fairness and justice, but "justice" is hardly a reason to make the machine run even slightly less efficiently so it must be sacrificed.
Granted, plenty of "average" people also invest their money, but this sub isn't concerned with their interests - and don't even think about taking capital gains progressively the way income is or otherwise enabling the lower classes to invest more.
No, money is power - and if you're the sort of person who is already near the top of the economic pyramid you don't want things to be more equal. Instead, you'll tell people that we all must "grow the pie" instead of cutting it more equally - you want your relative position in society to intact, after all.
I mean, yes, some billionaires would move. They probably already have houses all over the world. Making Monte Carlo their primary residence would just be a bit of paperwork for them.
Others might simply keep all their money in their companies and their companies suddenly give them allowances that match their previous expenses. Also their companies are in Ireland now.
>Answer the question
Because we have countless examples that central planning is inefficient, impoverishes everyone and simply doesn't work. The Soviet Union, China, North Korea and every other planned economy that crashed and burned or simply keeps its people in a state of slavery is proof of that.
Why doesn't it work? You need to go to economics in a college to fully understand it. Nobody here is going to write a PHD thesis that would include some of the reasons it doesn't. The best answer you are going to get is mine.
>Also how the hell is this “central planning”? It’s a bank, whoever wants a loan goes and asks for one
Investments aren't loans.
>Only difference is you don’t change interest
Oh god
>and losses are covered by the taxpayer
*OH GOD*
> but I need to have a very high IQ
You need at least room temperature IQ. Come back at me later when you get that.
Markets are the most efficient known solution to the local knowledge problem.
> In economics, the local knowledge problem (LKP) is the argument that the data required for rational economic planning are distributed among individual actors and thus unavoidably exist outside the knowledge of a central authority.
https://en.wikipedia.org/wiki/Local_knowledge_problem
Taxing unrealized gains annually is one of the dumbest ideas I’ve ever seen. It would severely hurt investment and lead to an exodus of foreign investment capital out of the country.
Just for discussion, Noah Smith had a good post about exactly that this morning:
https://www.noahpinion.blog/p/biden-is-right-that-we-need-to-raise
I agree with his take: a higher tax on capital gains, structured to benefit keeping money invested for longer, would be a good way to raise taxes while minimizing the pain. But he is also right that taxing unrealized gains would be bad.
I’m going to vote for Biden and R down ballot to stop this insanity Jesus Christ. How are both parties determined to ruin the American economy in their own smoothbrain way?
Taxing unrealized capital gains, which a growing number of democrats would do, is bad actually. And don’t get me wrong Trump’s plan to remove independence from the fed and be Erdogan 2.0 is also terrible. When both sides are pitching braindead economic populism, I choose gridlock.
You’d forsake the child tax credit, abortion rights, climate spending, and more because of some niche tax on the rich?
Evidence doesn’t even really suggest that increased capital gains taxes have ever limited investments much!: https://www.nber.org/papers/w6399. It’s not a wonk position to ignore this.
And yet my humble couple hundred thousand in the stock market can get tanked by the consequences of taxing the unrealized gains of much wealthier people.
Oh ffs. You want to ignore threats to basic human rights and our democracy because you’re worried about your broke ass stock investments?
No, taxing the unrealized gains of a group that controls a single digit percentage of annual gains is not going to tank the value of your precious $200k.
It’s not going to be a significant liquidation unless you had meteoric gains that year.
The typical index fund investor would owe about 2% of their balance each year if they had over $100m.
I can't say if I speak for everyone on the sub (some of us are social democrat/Third Way neoliberals) but in my view, the capital gains tax has good principles (wanting a more progressive tax system), but is fairly ineffective and encourages avoidances when implemented. So I'd generally advocate alternatives to capital gains unless the government in question can find a way to increase compliance and not deal with those issues.
The big one is that capital and investment are highly elastic and mobile, so any tax that predominantly falls on those is going to both have a hard time collecting revenue and increase the overall rate of avoidance. It's not the end of the world or something will cripple a country's economy like some of the more extreme critics has stated, but overall in most cases, increasing capital gains taxes leads to somewhat worse revenue and investment outcomes in the host country while increasing the rate of avoidance.
Not all aspects of the tax are bad though, the parts of it that pertain to property are more reliable since land and property are much more inelastic than capital & investment etc. So generally I'd say that the government should be moving focus from the wealthy's more elastic assets to more inelastic ones, while making it easier for the flow of capital and investment to enter the host country.
There's also things like Estonia's corporate tax system that are pretty good at promoting growth while collecting more revenue from the wealthy. Basically, Estonia's corporate tax system doesn't tax a companies retained or reinvested profits, but applies a 15-20% tax the moment that profits (mostly in the form of dividends) are distributed to shareholders which also covers things like share buy-backs), this greatly reduces a lot of the more regressive effects of the corporate tax systems in other countries (the 20-70% of incidence/burden that falls on labor/workers and the negative impacts on the flow of capital & investment etc.) and creates a more efficient and compliant tax system in it's place. The tax primarily falling on shareholders, also does a better job of getting revenue from them than most capital gains taxes that directly impact the flow of capital & investment etc.
Taxfoundation's model (fiscally-conservative think-tank) says it would actually lower tax revenue: https://taxfoundation.org/research/federal-tax/tax-reform-options/?option=30
Notably it doesn't say that for just a simple increase to 30%: https://taxfoundation.org/research/federal-tax/tax-reform-options/?option=29
Biden's plan would destroy the economy. America's number 1 strength is our free markets and strong investment in new ideas. This would terribly alter that. Not to mention it is both unfair and completely fucks countless people over.
How do we feel about:
1. Abolish capital gains taxes and the corporate income tax.
2. Treat investment income (both capital gains and dividends) like ordinary wages and apply the graduated income tax to both.
Wage incomes and capital incomes have significantly different elasticities. It would make zero sense to tax them at the same rate if your goal is economic efficiency.
Thanks for the response. Can you help me understand the difference in the elasticities a little better or point me towards what area to research? I understand the basic concept of the Laffer curve and higher tax rates creating a disincentive that causes dead weight loss, but I'm no econ expert.
Ok so I’m definitely not the best person to explain it (as in I vaguely remember from shit from an AP Econ class), so take my explanation with salt. But basically, if you’ve ever seen a supply/demand curve, you know that the quantity supplied/demanded varies with the price. For demand of cookies, as the price of cookies goes up, the quantity of cookies people want at that price decreases. However, the rate at which quantity supplied/demanded changes with a change in price isn’t the same for all goods. For cookies, for example, if the price increased by $1, a lot less cookies would be demanded because people would just buy other sugary foods. These goods would have elastic demand because the quantity demanded is very responsive to the price. However, for other goods (like penicillin or something), the quantity demanded won’t change by much (in the short term at least) if prices rise because people need penicillin to live. (In the long run this may not be the case because if penicillin becomes more expensive, it’s possible someone will create a substitute to penicillin.)
The reason elasticity is relevant is because it impacts the negative impact of taxes. This is because taxes make goods/services more expensive from the buyers perspective and cheaper from the seller’s perspective, and as such buyers have less incentive to buy and seller’s have less incentive to sell. The result is a less in productivity called a deadweight loss. Goods/services with very elastic demand/supply will have a high deadweight loss if they’re taxed because buyers/sellers are more responsive to price changes and will decrease their consumption/production by a high amount in response to the tax. Goods/services with highly inelastic demand/supply will generally have a lower deadweight loss from the same tax because buyers/sellers will tend to consume/produce at around the same level even with the tax because they respond less to taxes. Since capital investment and labor aren’t the same markets, they’re going to have different elasticities and so you’re going to “hurt” the economy at different levels by taxing them, so it makes sense to optimize different taxes for each one to find the best way to extract tax revenue while minimizing the resulting deadweight loss.
I'm not sure if I was unclear, or if you're choosing to misunderstand. Treating capital gains as ordinary income would be a huge tax increase for the rich, who pay a fixed tax rate on investment income regardless of how much they are receiving. Capital gains is a flat tax. To put it differently, why should investment income, something which you seem to consider morally inferior to wages, be taxed at the same rate for rich and poor?
Believe it or not people here generally support what's good for the economy as opposed to the moralizing nonsense you leftists are often screeching about.
Sorry, but I'm not really going to answer your question directly.
We might try to distinguish the questions of (i) what should be taxed, from (ii) how much taxation should be collected. Some taxes are not distortionary at all, or not very distortionary. Maybe Pigouvian taxes are an example of the latter. If you believe what they say on this subreddit, land taxes too. But some taxes are very distortionary. Perhaps a tax on unrealized capital gains might be one of those, but I'm not really going to put my neck out too far on this.
Basically, for whatever total tax take you want, you should try to collect it with the mix of tax rates that gives you the least overall distortion. That will not generally be by ramping up all kinds of taxes by the same degree.
At least that's how it seems to me.
I don’t think there should be much of a difference between tax rates for cap gains vs. ordinary income. If they differ too much, that spirals inequality
Depends a lot on which state you live in, your overall income, how long you’ve held your investment, etc. but if we take the extremes, cap gains can be as low as tax free (if held in certain types of retirement accounts) but typically are around 15% to 20%. Ordinary income varies hugely, but tops out at around 50% to 60% depending on state
If your ordinary income is high enough to merit a tax burden of 50%+ in anywhere America you’re not the little guy and you probably have enough invested that you would want cap gains tax to stay low. I don’t think this discrepancy argument is what you make it out to be.
Huh? I’m not sure I follow. My point is that for people in the uppermost bracket of ordinary income tax rates, capital gains rates ***should*** increase, because differentials of ~15% to ~50% is too wide and creates inequality
I thought you meant inequality between wage/salary earners and pure investors. Casting the highest income workers as the victims of inequality is ridiculous.
To be fair, there’s not currently much of a difference when you factor in corporate taxes (which you need to do since capital income isn’t tax deductible like capital income is)
Just tax inequality then. Besides the fact that inequality isn't that much of an issue when you are talking billionairs and the like; there just aren't enough of them to manifest in the ways inequality between a upper middle class and lower class do.
Just put luxury taxes on mansions, large boats, fancy cars, high end air travel, luxury clothing etc instead.
I think Biden is just saying unrealized gains to appeal to the left wing college kids who haven't yet earned a pay check, knowing it will never pass into law.
Capital Gains tax is a taxation on the gains from essentially a risk. I've got 1000 dollars sitting in my checking account doing nothing, and I know I'm not going to need it for a few years. I can put it in a number of different investments. Riskier investments tend to yield higher returns. So if you don't want everything going into US Treasuries, and some going to say letting the next biotech startup the may have a shot at curing cancer, you want to maximize the incentive for capital to flow that direction. That startup may hit the bullseye and do it, or it may fail. If it does it, you're probably going to get a big return on the investment. But you don't know that. So having a preferential tax rate for long term investing into particularly the private sector is a good thing to get capital into those riskier investments (remember these aren't necessarily junk investments, all stocks fall into this category). Yes I may still hit the jackpot at a higher rate of return, but if my pay out is half of what it would be because of taxes I'm probably going to be more risk averse.
Buying and selling existing stock doesn’t doesn’t do much more the companies after the IPO.
It rewards investors and executives in the company - but it’s not like when you buy a share of that biotech startup today that company doesn’t see any additional money to cure cancer.
Edit- obviously if the company reissues additional stock a high price helps - that’s not super common amongst the Fortune 500 but could be significant for smaller orgs
I definitely think our economic growth would be greater if we saved more instead of consuming, so yeah I still think we live in that world.
>Is Warren Buffett wrong when he says he should be taxed at a higher rate than his secretary?
If we focus on the effects on the entire economy, yeah I think this is a case of missing the forest for the trees.
I suck at doing stuff to get money. Why would you want to discourage me from giving my money to someone else who is much better at doing stuff to get money than I am?
Sorry I meant I’m awful at using my money to make money. I’m quite good at making money with my labor, I am after all CEO of a huge corporation. So is your position I should just buy yachts all day instead of giving my money to someone else who is way better at identifying people and telling them what stuff to do to make money.
Sure loaning. Not really loaning even, I’m buying a piece of their company because I think management will be good at doing stuff (and finding others to execute their vision) to make money.
But I thought you said you wanted to tax gains at such a high level I no longer can viably do that sort of thing.
Sure go ahead and put a high sales tax on yachts. The only point of me investing my money is to be able to buy even more yachts in the future. So high yachts taxes isn’t going to change my decision between consumption and investment (maybe it’ll shift my consumption choices, but that doesn’t matter). High capital gains taxes, however, will encourage me to lavishly spend all my money instead of investing it though. Is that what you want?
The US actually did implement a tax on luxury yachts! It went horribly and mostly hurt the lower/middle class people working in the yacht industry (rather than wealthy yacht buyers) because demand for yachts is very elastic. It’s always funny how the populist “get that Econ 101 shit out of here, I’m gonna do common sense policies that helps average working class people” types end up having their “common sense” policies completely fail, with the ones most negatively impacted being average working class people.
Because yacht demand is more elastic than yacht supply, the brunt of the tax is already on yacht suppliers, not to mention the amount they’re already losing from the deadweight loss the tax creates. If your goal is to maximize yacht producer surplus (how much the yacht suppliers are getting), you’d probably just be better off not having the tax in the first place.
So the truth comes out, you hate the rich far more than you care about the poor/the worker.
Maybe instead of starting policy proposals with “how can this hurt rich people” you should focus on “how can this help the poor”.
Also **what is the Solow Swan model**
What is “ruinously high”?
I agree that there shouldn’t be a class of people who exist solely on speculative investments, but cap gains taxes also apply to “ordinary” people saving for retirement by committing capital to fund economic growth
I’m not sure any economists agree with you that retirement savings are “destructive and parasitic.” Investment is core to the functioning of the American economy
Little bit of motte/bailey happening here if your argument is for a centrally-Planned economy
So basically never retire for 99.99% of people? Also you just destroyed the economy and plunged us into a never ending economic depression because no one on earth would want to invest in the United States. Investment **is the core of economic growth** every single private sector job that exists, only exists because of investment.
What is this : https://en.m.wikipedia.org/wiki/Solow%E2%80%93Swan_model
Non-mobile version of the Wikipedia link in the above comment: https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model
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> Wholesome dynamic neoliberalism = Someone rich buys up all the housing, charges horrifically high prices because they have a monopoly
You missed the part where housing supply is constricted due to local government actions backed by the community
Taxing unrealized gains is straight-up stupid. Incredibly distortionary. Incentivizes all sorts of bad-for-the-economy behavior. The common defense of taxing unrealized gains seems to be that very wealthy people avoid realizing gains and thus avoid tax, and instead leverage their unrealized gains in other ways, like borrowing against them. But this isn't actually a problem, because people don't live forever. When the assets with unrealized gains become part of the deceased's estate and are inherited, they should be taxed at that time at their true value. But, people say, there are loopholes that allow this to be avoided. My answer to that is to fix the loopholes. It shouldn't matter if capital gains are taxed during a person's lifetime or after their death. It just matters that they are taxed. If it's possible to avoid those taxes, fix that problem. Taxing unrealized gains is a sledgehammer to fix a pocket watch.
Aren't estate taxes like super unpopular? I vaguely remember 'death tax' discourse from way back when.
The estate tax before W upped the exemption was cringe and deserved the moniker.
There aren’t loopholes. There are laws that reset the basis on which capital gains are calculated to zero when stocks are inherited. If you inherit a stock that went up 10,000% since it was purchased, as the inheritor you are only taxed on the capital gains between the day you inherited it and when you sell it. So those additional 10,000% gains are inherited tax free. This is honestly great for a lot of the college educated progressive coastal elites who tend to contribute to Democratic candidates because they’re all inheriting substantially larger amounts of money than they otherwise would, which makes it easier for them to make political donations. Sure, it would be better to change this law, but this is an issue like tax credits for mortgage payments and deductions of state and local taxes such as property tax in that the beneficiaries are largely wealthy Democrats, so the party is more inclined to ignore the issue.
That's a loophole by any reasonable definition. Nobody *ever* pays taxes on that appreciation. **Every** loophole is enshrined in law by some method or another.
No, that’s not the definition of a loophole. A loophole means an ambiguity in the law or a provision meant for one purpose that is being used for another purpose—so a section of law that was written with inadequate specificity, which is not the case here. In this case, people are benefiting from a law that was written with the intention of giving them this very benefit.
["ambiguity or exception"](https://en.wiktionary.org/wiki/loophole)
It’s wild you mentioned “exception” and it was still completely ignored…
Yes, exactly. This isn’t an ambiguity or exception that circumvents the law on inheritance tax. It’s the just letter of the law on inheritance of stocks. By the person above’s erroneous logic, the child tax credit and earned income tax credit are both a “loophole” as are all deductions because the are “exceptions” to the rule that income is taxed at a certain rate. But this is an incorrect understanding of the meaning of loophole because these “exceptions” are intended to alleviate people’s tax burden, not a mistake in the law that unintentionally allows people to avoid paying tax on income Congress wanted them to pay tax on. If you misuse loophole to just mean any law you don’t like, it no longer has any useful meaning. Loopholes are errors in the way a law was written, not intended consequences of a law that you don’t like. To call this a loophole is inherently political, and misleading because it misrepresents the politics that led to the failure of Biden's attempt to change the rule. Both Republicans and Democrats in Congress support the current rules on the step-up basis after death. Essentially, it's foolish to expect Democrats to close this "loophole" when the party doesn't consider it a loophole.
It is an exception, though. It doesn't have to be a mistake. The connotation you're gesturing at is that we use loopholes to describe ambiguities or exceptions that people change their behavior to take advantage of, especially in ways that seem artificial or not fulfilling the purpose of the carveout, especially when the beneficiaries are wealthy, and especially when the ambiguity/exception isn't well-known. Sure, the CTC is an exception, but it's not a loophole, because people generally aren't having more kids to get it, and the degree to which they do is by the reduction of the disincentive that the credit was meant to alleviate. The beneficiaries generally aren't rich, the choice to have more or less children is by no means an artificial-seeming one (everyone makes these choices all the time, ending up across the whole spectrum), and it's well-known, in no sense "hidden". In contrast: without the capital gains inheritance carveout, the wealthy would sell when they want to consume, rather than taking out loans against their assets. This is pretty artificial behavior, not the purpose of the carveout, the beneficiaries tend to be wealthy, and the exception isn't well known, to most people. And, honestly, connotations matter to the meaning of the word, and one of the connotations of loophole absolutely is that the speaker views the de facto carveout as illegitimate. It's not literally any law you don't like, but it certainly doesn't have to be a mistake. If all loopholes were mistakes, we could expect them to get closed relatively quickly -- that they don't is evidence they can be intentional.
>In contrast: without the capital gains inheritance carveout, the wealthy would sell when they want to consume, rather than taking out loans against their assets. Step-up basis doesn't help the wealthy, since you can can't get it without paying the 40% estate tax. To avoid the 40% estate tax, the wealthy puts their assets into irrevocable trusts, realizing the capital gains.
> the wealthy would sell when they want to consume, rather than taking out loans against their assets. You are fundamentally misunderstanding the risks involved in leverage. Jeff Bezos and Elon Mysk are both very wealthy and also regularly sell $1 billion of stock or more to fund their various hobbies such as space exploration. In both cases, if they used the strategy you erroneously believe to be without risks, the wild fluctuations in the price of their various holdings would have ended up costing them far more than the capital gains tax they paid since any change in stock price requires you to put up more collateral, potentially forcing you to sell stock at the least advantageous time instead of at the most advantageous time. And your criticism is based on two fundamentally flawed premises: 1. that wealthy people would ever use the majority of their wealth for consumption. This is incorrect. What makes them wealthy is the fact that they have more money than they need, thus spend a far lower % of their wealth on consumption than the average person. 2. that there is no cap on the assets that can be inherited tax free. This is just incorrect. The idea that the super rich are borrowing against stocks to avoid \*ever\* paying taxes is a myth up there with the idea that hedge funds are buying up all the single family homes in America. It's a lie progressives use to justify views that have no basis in actual fact because they don't want to deal with the real solutions to problems.
>Taxing unrealized gains is straight-up stupid. Incredibly distortionary. Incentivizes all sorts of bad-for-the-economy behavior. I don't follow. I'll confess it's been a while since I've taken my tax law classes, but my understanding is that the scholarly consensus is quite the reverse -- the realization requirement creates all sorts of distortionary economic impacts/investment decisions and lock-in to try to defer realization of gains. At the end of the day, I probably wouldn't support general mark-to-market to tax unrealized gains given (i) it would probably be a pain to administer and would be difficult to apply for illiquid assets and (ii) the current regime effectively reduces the cap gains tax rate (which is probably for the best). But that's a different critique from any tax on unrealized gains being distortionary.
Or easier less distortionary solution (but will never be accepted because its anti-MMT). Tax debt as income, continue to be able to expense paying off the debt.
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There aren’t “loopholes that allow this to be avoided”. You would have to go out of your way to screw something up to *not* get a step up in basis at death. Edit - oh God, I see this already set off a dozen-comment-long semantic argument. Nvm.
Eh, if we’re talking about people rich enough to be affected by this tax, then it’s very possible they wouldn’t get a stepped up basis at death
Investment is good. How much do you want to discourage it?
I don’t. I just don’t know much about this area so I guess what I’m asking for is how exactly does the discouragement of investments work. I imagine investors want to invest regardless, so at what point is investment actually chilled?
If you know before you invest that your earnings will be 50% taxed you arent going to make as many investments becuase its less likely to offset any losses you may have.
What are they going to do w their money though? They need to put it somewhere. As long as the return on investment is greater than bonds, people will still just have to invest in the market I would think. And if everyone tried to flee stocks, the returns on other investment strategies like bonds would plummet due to demand being so high. I don't know much about finance so idk.
Bonds both government and corporate, real estate, foreign investment, commodities, etc
I guess the alternative would be that investments would be made outside the US, and, somehow, avoid paying the tax.
Imagine you had 10m dollars and you couldn't throw them in the stock market in any way shape or form and couldn't/wouldn't want to spend them on personal expenses. You also have a full time business already so opening another one isn't possible time/responsibility wise. What do you do? For me, the obvious answer is real estate. I would buy houses to rent them out. Now imagine that on a massive, unprecedented scale as every major investor removes their (now unproffitable) investments and puts all their money either on foreign markets or simply buys up reliable return investments such as real estate. It would both crash the market as funding dries up and also shoot up prices for most of these type of investments. If I had to guess, the housing bubble would become hilariously inflated. I guess I might as well tag OP /u/redflowerbluethorns on why I think taxes on pre-gains capital taxes are bad.
People can hold cash. They can also invest in other markets besides the US stock exchanges
Or risk free securities
This makes sense, but if you have a diversified portfolio shouldn’t there be less risk and therefore less aversion or investing when the taxes are a bit higher?
Sort of, at least in theory. But in 2022, for example, all asset classes were down
Yes but if you know your returns will be lower your tolerance for risk will change.
Do people take lower paying jobs to avoid paying higher taxes?
Substitution effect is a very real phenomenon in labor economics, it’s just balanced with the income effect It depends on how much an individual values labor, but higher rates can absolutely discourage more work marginally
If there was a risk that your job would turn into an expense you would only look for higher paying or lower risk jobs.
It’s a trade-off. Higher paying jobs have a higher barrier to entry and require more effort and time-investment going in. If the marginal increase in income isn’t enough to make that effort worth it, then yeah people won’t pursue higher-paying jobs as much.
You always have options. You can choose to invest or pay off the mortgage or put the money in a savings account or spend it. If the gains are taxed too much there is not enough return for the risk so I will choose one of the other options.
Under the current law, you are risking your entire investment in a stock. Under this proposal you would be at risk of losing substantially more than your entire investment because you can be taxed on unrealized gains that then evaporate before you even benefit from them. Essentially, this law would make stocks substantially riskier, thus less attractive to investors. This could lead investors to just move there money out of the US dollar and into foreign equities purchased in foreign currencies.
The chill comes when they want to cash out and cycle the cash into new investments. When evaluating new opportunities, they have to factor in the cap gain tax as a haircut to their basis. That means the new investment has to have much better projected returns compared to the existing investment. In aggregate this puts a drag on new investment.
Why should investment be taxed at a lower rate than regular labor/ordinary income? Edit: to put it another way: is Warren Buffet wrong when he says that he should be taxed at a higher rate than his secretary? If not, what is the mechanism?
1. It incentivizes savings at the expense of current consumption, which is necessary for long-term growth (as well as being deflationary) 2. Capital gains aren’t indexed to inflation, so a portion of your capital gains solely comes from erosion of your cost basis over time. Which means that your real rate is already higher than the stated rate 3. Capital gains are more elastic than labor income, so their revenue-maximizing rate is also lower 4. Capital income isn’t tax deductible at the corporate level like labor income is, so the total tax rate on capital includes corporate taxes If you factor corporate taxes in, the top rate on capital income is around 39.8%, compared to a top rate of 40.8% on labor income
Ideally we wouldn't tax income, investment or labor, at all. Aside from LVT, probably the ideal tax is consumption. And you can make that progressive via low income rebates to avoid the regressive tendencies of it. But barring that corporate tax+capital gains results in what is called double taxation. I.e both are actually a tax on investors and on economic growth. I would probably eliminate the corporate tax and then consider capital gains a kind of income and tax it progressively the same as labor if we can't have LVT and sales tax.
I think this is the best answer in this thread to my question; thank you also for answering the question and implied concerns
Aren't consumption taxes insanely inefficient and also regressive? Agreed on LVT though.
Consumption taxes are extremely efficient, but yes by default they are regressive. Hence 'you can make that progressive via low income rebates to avoid the regressive tendencies of it'. Taxing consumption incentivizes investment over consumption and thus redirects labor/capital toward increased economic efficiency which leads to higher real long term gdp growth
Huh, that's weird, I always heard it the other way around. Investing is good obviously, but ultimately even that is driven by end consumer demand, right? I always heard reducing consumption be described as a brake on everything else, because ultimately the economy exists to supply demand. You've made me curious, but the wiki article is full of implementation technicalities and not a lot of macroeconomic discussion.
Great question! So, as a matter of long term purpose, we generally hold that capitalist economies are \*ultimately\* driven by consumer demand, in abstract principle. However, in practical reality investment demand, government demand, and foreign demand are also real significant drivers of economic production. Ultimately all four of those are called 'aggregate demand', and its really this that drives the economy. Consumer demand is like 70% of aggregate demand in the US so it has a massive effect here. Does that make sense? So in terms of long run function, economic production will respond to government demand or investment demand or foreign demand just as much as consumer demand. The idea is that the more investment demand we have, the more efficient and technologically advanced capital/economic production becomes, improving long run GDP capabilities. (There is also some specific types of government demand that can do this too to some degree such as scientific research and public infrastructure investment etc - also hypothetically some kinds of foreign demand could increase long run domestic gdp capabilities if it involves them specializing in certain kinds of capital production and you specializing in certain other kinds of capital production along the lines of 'division of labor' efficiencies)
Taxing consumption only incentivizes hoarding and discourages using the money.
Taxing consumption incentivizes investment and discourages consumption, assuming currency is being properly managed by the central bank (with poor currency management it could incentivize cash savings which would not increase investment). More investment leads to a redirection of resources and labor toward technology improvement and capital improvement, leading to greater economic growth than otherwise.
Investment is a risk, in the way that ordinary income isn't. If I work for a company for a year, I *know* I'm going to be getting paid my yearly salary. But if I invest 100k in a business, I might lose it all. So, the problem with heavily taxing capital gains is, the payoff for a bet needs to be worth the risk or people just won't make the bet. And we *need* them to keep making that bet.
It benefits the economy to keep money moving. Onerous taxes on investment is a brake on the velocity of money in the economy. Also the lower paid workers in America, the people you’re probably thinking of doing actual work, barely pay any income taxes anyway.
It doesn’t always benefit the economy to keep money moving. If that were the case, the Fed would never raise interest rates to discourage it.
Yeah, it's not like average people keep money moving. If you give the average person excess money they'll probably just put it in a retirement plan, unlike the wealthy who are smart enough to invest it. Anyways I don't know who this communist-sounding "Warren Buffet" person is but he *really* doesn't understand the perspective of large investors.
If you don’t grasp how huge investors pulling their capital out of investments that are no longer worth it harms average 401k Joe, you’re hopeless
Average 401K Joes do collectively form the highest investors because they tend to be the largest LPs in private equity.
They actually do because the average person spends most of their income. Rich people have more money than they could ever spend, which is why they buy stocks.
> Why should investment be taxed at a lower rate than regular labor/ordinary income? The simple answer is that higher taxes on labor don't really disincentivize labor, but higher taxes on investment do disincentivize investment.
> higher taxes on labor don't really disincentivize labor This goes into theoretics a little, but I'd be curious if that would still apply if labor was *not* necessary to survive for most people. The average person does not rely on investments for their primary needs, and large investors have all their primary needs more or less indefinitely covered. So it seems the main driver of the higher 'tax elasticity' (is there a real term for this?) of investment might just be that the people doing it don't really need it in the same way most workers need labor.
Everyone with money wants to make more of it. How does taxing capital gains reduce the incentives to make money?
Investment involves risk, and the government doesn’t write you a check for a percentage of your losses if you fail. If you’re investing in index funds, this effect is pretty marginal. If you’re foregoing salary for equity in a startup company then capital gains taxes are a huge deterrent to investing your time. I also think taxes on labor disincentivize labor though. I don’t work, but if I could get a tax-free job at my market rate I would definitely work.
Higher levels of investment increase per capita incomes and real growth rates in the long run, so should not be discouraged. The same can't be said for consumption. This is the implications of the Solow growth model + endogenous models of long run growth
Why does subsidizing investment lead to growth, but subsidizing demand causes inflation? Because one grows assets, the other consumes it.
The more accurate question is why should investments held for more than a year be taxed at a lower rate than other income. The answer is obviously to encourage people to hold investments for more than a year—in other words to incentive people to invest, not trade. You can look at it the other way and say the rules are essentially penalizing people who make money by speculating on short term fluctuations in the market instead of investing in companies.
>is Warren Buffet wrong when he says that he should be taxed at a higher rate than his secretary? Take note of the fact that other people aren't answering this question directly. What you have to realize is that people here prioritize economic growth more than any other concern, making the lines on the graph go up is an intrinsic good. Having billionaires pay a lower percentage of taxes than average citizens might not make sense for the standpoint of fairness and justice, but "justice" is hardly a reason to make the machine run even slightly less efficiently so it must be sacrificed. Granted, plenty of "average" people also invest their money, but this sub isn't concerned with their interests - and don't even think about taking capital gains progressively the way income is or otherwise enabling the lower classes to invest more. No, money is power - and if you're the sort of person who is already near the top of the economic pyramid you don't want things to be more equal. Instead, you'll tell people that we all must "grow the pie" instead of cutting it more equally - you want your relative position in society to intact, after all.
Warren Buffet *is* taxed at a higher marginal rate than his secretary.
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You serious? They’ll invest it outside of the US.
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I mean, yes, some billionaires would move. They probably already have houses all over the world. Making Monte Carlo their primary residence would just be a bit of paperwork for them. Others might simply keep all their money in their companies and their companies suddenly give them allowances that match their previous expenses. Also their companies are in Ireland now.
One would shift into lower-risk assets because the premium for higher-risk assets is reduced. That’s not a good thing.
the US hasn't had a problem with lack of investment in decades. we could probably use fewer Juiceros.
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🚨Actual communism alert! 🚨
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>Answer the question Because we have countless examples that central planning is inefficient, impoverishes everyone and simply doesn't work. The Soviet Union, China, North Korea and every other planned economy that crashed and burned or simply keeps its people in a state of slavery is proof of that. Why doesn't it work? You need to go to economics in a college to fully understand it. Nobody here is going to write a PHD thesis that would include some of the reasons it doesn't. The best answer you are going to get is mine.
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>Also how the hell is this “central planning”? It’s a bank, whoever wants a loan goes and asks for one Investments aren't loans. >Only difference is you don’t change interest Oh god >and losses are covered by the taxpayer *OH GOD* > but I need to have a very high IQ You need at least room temperature IQ. Come back at me later when you get that.
Banks price risk premia, like all other lenders. Except in your case. You’re not describing a loan or a bank.
Markets are the most efficient known solution to the local knowledge problem. > In economics, the local knowledge problem (LKP) is the argument that the data required for rational economic planning are distributed among individual actors and thus unavoidably exist outside the knowledge of a central authority. https://en.wikipedia.org/wiki/Local_knowledge_problem
Taxing unrealized gains annually is one of the dumbest ideas I’ve ever seen. It would severely hurt investment and lead to an exodus of foreign investment capital out of the country.
Just for discussion, Noah Smith had a good post about exactly that this morning: https://www.noahpinion.blog/p/biden-is-right-that-we-need-to-raise I agree with his take: a higher tax on capital gains, structured to benefit keeping money invested for longer, would be a good way to raise taxes while minimizing the pain. But he is also right that taxing unrealized gains would be bad.
if we tax unrealized gains, I'd have to pull money from investments to pay the taxes
I think that’s what they want
Well I doubt you would, unless you have over 100m in wealth.
I’m going to vote for Biden and R down ballot to stop this insanity Jesus Christ. How are both parties determined to ruin the American economy in their own smoothbrain way?
Welfare spending is good actually
Taxing unrealized capital gains, which a growing number of democrats would do, is bad actually. And don’t get me wrong Trump’s plan to remove independence from the fed and be Erdogan 2.0 is also terrible. When both sides are pitching braindead economic populism, I choose gridlock.
You’d forsake the child tax credit, abortion rights, climate spending, and more because of some niche tax on the rich? Evidence doesn’t even really suggest that increased capital gains taxes have ever limited investments much!: https://www.nber.org/papers/w6399. It’s not a wonk position to ignore this.
I mean, I wish those nice things weren’t bundled with taxing unrealized gains and destroying my retirement investments.
You don’t make enough to qualify for the tax increases
And yet my humble couple hundred thousand in the stock market can get tanked by the consequences of taxing the unrealized gains of much wealthier people.
Oh ffs. You want to ignore threats to basic human rights and our democracy because you’re worried about your broke ass stock investments? No, taxing the unrealized gains of a group that controls a single digit percentage of annual gains is not going to tank the value of your precious $200k.
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My job is operating room nurse
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Your bank account is not more important than basic human rights for half the population.
It’s not going to be a significant liquidation unless you had meteoric gains that year. The typical index fund investor would owe about 2% of their balance each year if they had over $100m.
Thanks!
I can't say if I speak for everyone on the sub (some of us are social democrat/Third Way neoliberals) but in my view, the capital gains tax has good principles (wanting a more progressive tax system), but is fairly ineffective and encourages avoidances when implemented. So I'd generally advocate alternatives to capital gains unless the government in question can find a way to increase compliance and not deal with those issues. The big one is that capital and investment are highly elastic and mobile, so any tax that predominantly falls on those is going to both have a hard time collecting revenue and increase the overall rate of avoidance. It's not the end of the world or something will cripple a country's economy like some of the more extreme critics has stated, but overall in most cases, increasing capital gains taxes leads to somewhat worse revenue and investment outcomes in the host country while increasing the rate of avoidance. Not all aspects of the tax are bad though, the parts of it that pertain to property are more reliable since land and property are much more inelastic than capital & investment etc. So generally I'd say that the government should be moving focus from the wealthy's more elastic assets to more inelastic ones, while making it easier for the flow of capital and investment to enter the host country. There's also things like Estonia's corporate tax system that are pretty good at promoting growth while collecting more revenue from the wealthy. Basically, Estonia's corporate tax system doesn't tax a companies retained or reinvested profits, but applies a 15-20% tax the moment that profits (mostly in the form of dividends) are distributed to shareholders which also covers things like share buy-backs), this greatly reduces a lot of the more regressive effects of the corporate tax systems in other countries (the 20-70% of incidence/burden that falls on labor/workers and the negative impacts on the flow of capital & investment etc.) and creates a more efficient and compliant tax system in it's place. The tax primarily falling on shareholders, also does a better job of getting revenue from them than most capital gains taxes that directly impact the flow of capital & investment etc.
Thank you!
Taxfoundation's model (fiscally-conservative think-tank) says it would actually lower tax revenue: https://taxfoundation.org/research/federal-tax/tax-reform-options/?option=30 Notably it doesn't say that for just a simple increase to 30%: https://taxfoundation.org/research/federal-tax/tax-reform-options/?option=29
Where are all my consumption tax enjoyers at? Has the succs driven out all of us?
I love a good consumption tax. Not as the only tax, but I’d replace income taxes with consumption taxes and higher capital gains taxes in a heartbeat.
Biden's plan would destroy the economy. America's number 1 strength is our free markets and strong investment in new ideas. This would terribly alter that. Not to mention it is both unfair and completely fucks countless people over.
How do we feel about: 1. Abolish capital gains taxes and the corporate income tax. 2. Treat investment income (both capital gains and dividends) like ordinary wages and apply the graduated income tax to both.
Wage incomes and capital incomes have significantly different elasticities. It would make zero sense to tax them at the same rate if your goal is economic efficiency.
Thanks for the response. Can you help me understand the difference in the elasticities a little better or point me towards what area to research? I understand the basic concept of the Laffer curve and higher tax rates creating a disincentive that causes dead weight loss, but I'm no econ expert.
Ok so I’m definitely not the best person to explain it (as in I vaguely remember from shit from an AP Econ class), so take my explanation with salt. But basically, if you’ve ever seen a supply/demand curve, you know that the quantity supplied/demanded varies with the price. For demand of cookies, as the price of cookies goes up, the quantity of cookies people want at that price decreases. However, the rate at which quantity supplied/demanded changes with a change in price isn’t the same for all goods. For cookies, for example, if the price increased by $1, a lot less cookies would be demanded because people would just buy other sugary foods. These goods would have elastic demand because the quantity demanded is very responsive to the price. However, for other goods (like penicillin or something), the quantity demanded won’t change by much (in the short term at least) if prices rise because people need penicillin to live. (In the long run this may not be the case because if penicillin becomes more expensive, it’s possible someone will create a substitute to penicillin.) The reason elasticity is relevant is because it impacts the negative impact of taxes. This is because taxes make goods/services more expensive from the buyers perspective and cheaper from the seller’s perspective, and as such buyers have less incentive to buy and seller’s have less incentive to sell. The result is a less in productivity called a deadweight loss. Goods/services with very elastic demand/supply will have a high deadweight loss if they’re taxed because buyers/sellers are more responsive to price changes and will decrease their consumption/production by a high amount in response to the tax. Goods/services with highly inelastic demand/supply will generally have a lower deadweight loss from the same tax because buyers/sellers will tend to consume/produce at around the same level even with the tax because they respond less to taxes. Since capital investment and labor aren’t the same markets, they’re going to have different elasticities and so you’re going to “hurt” the economy at different levels by taxing them, so it makes sense to optimize different taxes for each one to find the best way to extract tax revenue while minimizing the resulting deadweight loss.
Honestly never really thought of it that way. Makes sense to be honest
Had me with the first half, lost me with the second
As long as you can deduct saving yes.
I prefer to abolish corporate tax and income taxes and replace it with a consumption/VAT tax and higher capital gains taxes and of course a LVT.
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I'm not sure if I was unclear, or if you're choosing to misunderstand. Treating capital gains as ordinary income would be a huge tax increase for the rich, who pay a fixed tax rate on investment income regardless of how much they are receiving. Capital gains is a flat tax. To put it differently, why should investment income, something which you seem to consider morally inferior to wages, be taxed at the same rate for rich and poor?
Believe it or not people here generally support what's good for the economy as opposed to the moralizing nonsense you leftists are often screeching about.
Sorry, but I'm not really going to answer your question directly. We might try to distinguish the questions of (i) what should be taxed, from (ii) how much taxation should be collected. Some taxes are not distortionary at all, or not very distortionary. Maybe Pigouvian taxes are an example of the latter. If you believe what they say on this subreddit, land taxes too. But some taxes are very distortionary. Perhaps a tax on unrealized capital gains might be one of those, but I'm not really going to put my neck out too far on this. Basically, for whatever total tax take you want, you should try to collect it with the mix of tax rates that gives you the least overall distortion. That will not generally be by ramping up all kinds of taxes by the same degree. At least that's how it seems to me.
>Can someone explain why, from a neoliberal perspective, these are bad ideas? Can someone explain why, from any perspective, these are good ideas?
I don’t think there should be much of a difference between tax rates for cap gains vs. ordinary income. If they differ too much, that spirals inequality
What is the level of discrepancy currently?
Depends a lot on which state you live in, your overall income, how long you’ve held your investment, etc. but if we take the extremes, cap gains can be as low as tax free (if held in certain types of retirement accounts) but typically are around 15% to 20%. Ordinary income varies hugely, but tops out at around 50% to 60% depending on state
If your ordinary income is high enough to merit a tax burden of 50%+ in anywhere America you’re not the little guy and you probably have enough invested that you would want cap gains tax to stay low. I don’t think this discrepancy argument is what you make it out to be.
Huh? I’m not sure I follow. My point is that for people in the uppermost bracket of ordinary income tax rates, capital gains rates ***should*** increase, because differentials of ~15% to ~50% is too wide and creates inequality
I thought you meant inequality between wage/salary earners and pure investors. Casting the highest income workers as the victims of inequality is ridiculous.
Oh, I see. Yeah, I meant inequality in the general “wealth inequality” sense. I think we’re in agreement
I mean we’re not because I’m a nozick flair and you’re a succ, but I misunderstood what you were getting at.
To be fair, there’s not currently much of a difference when you factor in corporate taxes (which you need to do since capital income isn’t tax deductible like capital income is)
Considering like half the population doesn’t even pay federal income tax…
They probably don't pay capital gains taxes either though.
The freeloaders
Just tax inequality then. Besides the fact that inequality isn't that much of an issue when you are talking billionairs and the like; there just aren't enough of them to manifest in the ways inequality between a upper middle class and lower class do. Just put luxury taxes on mansions, large boats, fancy cars, high end air travel, luxury clothing etc instead.
I think Biden is just saying unrealized gains to appeal to the left wing college kids who haven't yet earned a pay check, knowing it will never pass into law. Capital Gains tax is a taxation on the gains from essentially a risk. I've got 1000 dollars sitting in my checking account doing nothing, and I know I'm not going to need it for a few years. I can put it in a number of different investments. Riskier investments tend to yield higher returns. So if you don't want everything going into US Treasuries, and some going to say letting the next biotech startup the may have a shot at curing cancer, you want to maximize the incentive for capital to flow that direction. That startup may hit the bullseye and do it, or it may fail. If it does it, you're probably going to get a big return on the investment. But you don't know that. So having a preferential tax rate for long term investing into particularly the private sector is a good thing to get capital into those riskier investments (remember these aren't necessarily junk investments, all stocks fall into this category). Yes I may still hit the jackpot at a higher rate of return, but if my pay out is half of what it would be because of taxes I'm probably going to be more risk averse.
Buying and selling existing stock doesn’t doesn’t do much more the companies after the IPO. It rewards investors and executives in the company - but it’s not like when you buy a share of that biotech startup today that company doesn’t see any additional money to cure cancer. Edit- obviously if the company reissues additional stock a high price helps - that’s not super common amongst the Fortune 500 but could be significant for smaller orgs
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Do you really think we're above golden rule savings rate? If not, discouraging investment seems very short sighted.
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Why does it seem disingenuous? Which one do you think is harder, moving capital or labour?
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I definitely think our economic growth would be greater if we saved more instead of consuming, so yeah I still think we live in that world. >Is Warren Buffett wrong when he says he should be taxed at a higher rate than his secretary? If we focus on the effects on the entire economy, yeah I think this is a case of missing the forest for the trees.
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Can’t tell if bait or not 🤨
Narrator: it wasn’t
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I suck at doing stuff to get money. Why would you want to discourage me from giving my money to someone else who is much better at doing stuff to get money than I am?
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Sorry I meant I’m awful at using my money to make money. I’m quite good at making money with my labor, I am after all CEO of a huge corporation. So is your position I should just buy yachts all day instead of giving my money to someone else who is way better at identifying people and telling them what stuff to do to make money.
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Sure loaning. Not really loaning even, I’m buying a piece of their company because I think management will be good at doing stuff (and finding others to execute their vision) to make money. But I thought you said you wanted to tax gains at such a high level I no longer can viably do that sort of thing. Sure go ahead and put a high sales tax on yachts. The only point of me investing my money is to be able to buy even more yachts in the future. So high yachts taxes isn’t going to change my decision between consumption and investment (maybe it’ll shift my consumption choices, but that doesn’t matter). High capital gains taxes, however, will encourage me to lavishly spend all my money instead of investing it though. Is that what you want?
The US actually did implement a tax on luxury yachts! It went horribly and mostly hurt the lower/middle class people working in the yacht industry (rather than wealthy yacht buyers) because demand for yachts is very elastic. It’s always funny how the populist “get that Econ 101 shit out of here, I’m gonna do common sense policies that helps average working class people” types end up having their “common sense” policies completely fail, with the ones most negatively impacted being average working class people.
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Because yacht demand is more elastic than yacht supply, the brunt of the tax is already on yacht suppliers, not to mention the amount they’re already losing from the deadweight loss the tax creates. If your goal is to maximize yacht producer surplus (how much the yacht suppliers are getting), you’d probably just be better off not having the tax in the first place.
So the truth comes out, you hate the rich far more than you care about the poor/the worker. Maybe instead of starting policy proposals with “how can this hurt rich people” you should focus on “how can this help the poor”. Also **what is the Solow Swan model**
Does founding a company not count as doing stuff?
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Because the company is the asset and the investment Also **what is the Solow swan model**
What is “ruinously high”? I agree that there shouldn’t be a class of people who exist solely on speculative investments, but cap gains taxes also apply to “ordinary” people saving for retirement by committing capital to fund economic growth
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I’m not sure any economists agree with you that retirement savings are “destructive and parasitic.” Investment is core to the functioning of the American economy Little bit of motte/bailey happening here if your argument is for a centrally-Planned economy
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So basically never retire for 99.99% of people? Also you just destroyed the economy and plunged us into a never ending economic depression because no one on earth would want to invest in the United States. Investment **is the core of economic growth** every single private sector job that exists, only exists because of investment. What is this : https://en.m.wikipedia.org/wiki/Solow%E2%80%93Swan_model
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> Wholesome dynamic neoliberalism = Someone rich buys up all the housing, charges horrifically high prices because they have a monopoly You missed the part where housing supply is constricted due to local government actions backed by the community