3 ms·

Income from investment is taxed less than income from work in order to boost the economy by incentivizing investment, right? (Please tell me if there's another

by cheriot 10y ago

Income from investment is taxed less than income from work in order to boost the economy by incentivizing investment, right? (Please tell me if there's another good reason.) Does our economy still need this? Interest rates are low, long term rates are low, and there's enough money sloshing around hedge and venture funds that people are worried about reckless "yield seeking" behavior. So why do we still incentivize investment more than work? Perhaps we don't need transfer payments to offset wealth inequality, perhaps we just need to stop giving the wealthy so many advantages.

todd8 10y ago
Yes there are other reasons. I'm not sure if they are good reasons, but a logical tax system would need considerable changes in lot's of areas. Here are two of the reasons for a separate capital gains tax rate. First, when you say sell a house or piece of property or really anything, some of the difference in price is due to inflation or deflation. When I bought my first house in 1980 the rate of inflation was around 14%. If I had sold a $100,000 house one year later for $114,000 I would have more dollars but each would be worth less and I would in effect made nothing on the investment. It makes sense to normalize the gain with respect to inflation over the holding period. They don't do that and this has a large impact on investments of all types held for many years. The lower capital gains rate helps, but doesn't erase the fact that you are being taxed on nominal income not real, inflation adjusted income. A second reason is that an investment in a company (by say buying it's stock) goes up and down in value. In theory (at least according to some people) the stocks value should represent the net present value of the future dividend stream from the company issued to the shareholder. Dividends are uncertain and it isn't always clear that a company will ever get around to issuing dividends, but that's the theory. Nevertheless, this is how shares of a stock are tied to the value of the company. The company itself is trying to make revenue. This revenue is split into three parts: (1) salary and benefits to employees, (2) dividends issued to shareholders or (3) retained for future spending, improvements in the company's machines (etc.) and cost reductions (driven by competition) to its products. The profits are taxed at the corporate tax rate, the dividends are taxed, and the salaries to employees are taxed. Thus, there are already taxes holding back the "value" of the company to shareholders. Indirectly, before shareholders see a gain in a stock's price, taxes are already being taken out of company profits somewhere. For these two reasons, it doesn't make sense to tax capital gains at the same rate as ordinary income. I know that this explanation might engender all kinds of fairness arguments, but please, dear reader, understand that I'm not saying this this fair. I'm only trying to point out some of the convoluted reasons that are used to justify our current tax system. I would love to see the tax system completely overhauled.
- cheriot 10y ago
  Thanks, that's a great description. I'd forgotten about the second and never heard of the first.

by cheriot 10y ago

todd8 10y ago

Yes there are other reasons. I'm not sure if they are good reasons, but a logical tax system would need considerable changes in lot's of areas. Here are two of the reasons for a separate capital gains tax rate. First, when you say sell a house or piece of property or really anything, some of the difference in price is due to inflation or deflation. When I bought my first house in 1980 the rate of inflation was around 14%. If I had sold a $100,000 house one year later for $114,000 I would have more dollars but each would be worth less and I would in effect made nothing on the investment. It makes sense to normalize the gain with respect to inflation over the holding period. They don't do that and this has a large impact on investments of all types held for many years. The lower capital gains rate helps, but doesn't erase the fact that you are being taxed on nominal income not real, inflation adjusted income. A second reason is that an investment in a company (by say buying it's stock) goes up and down in value. In theory (at least according to some people) the stocks value should represent the net present value of the future dividend stream from the company issued to the shareholder. Dividends are uncertain and it isn't always clear that a company will ever get around to issuing dividends, but that's the theory. Nevertheless, this is how shares of a stock are tied to the value of the company. The company itself is trying to make revenue. This revenue is split into three parts: (1) salary and benefits to employees, (2) dividends issued to shareholders or (3) retained for future spending, improvements in the company's machines (etc.) and cost reductions (driven by competition) to its products. The profits are taxed at the corporate tax rate, the dividends are taxed, and the salaries to employees are taxed. Thus, there are already taxes holding back the "value" of the company to shareholders. Indirectly, before shareholders see a gain in a stock's price, taxes are already being taken out of company profits somewhere. For these two reasons, it doesn't make sense to tax capital gains at the same rate as ordinary income. I know that this explanation might engender all kinds of fairness arguments, but please, dear reader, understand that I'm not saying this this fair. I'm only trying to point out some of the convoluted reasons that are used to justify our current tax system. I would love to see the tax system completely overhauled.

cheriot 10y ago
Thanks, that's a great description. I'd forgotten about the second and never heard of the first.