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In the U.S., your $120,000 of capital gains/dividends isn't taxed at a high rate to you, but is taxed at a high rate. First the company has to earn a profit, an

In the U.S., your $120,000 of capital gains/dividends isn't taxed at a high rate to you, but is taxed at a high rate. First the company has to earn a profit, and out of that profit pay state and federal income taxes (35% + state). Then it pays whats left to you, where you pay your 15-20%, making the total tax rate usually over 50%. Given that taxes on corporate income is a direct tax in investment, it's counterproductive, it reduces investment, and productivity gains that increase both wages and wealth. It would be far better to have a zero tax rate on corporate income, and tax capital gains* and dividends at personal rates. That restores not just investment incentives, but also progressively of our tax system, so that the person with $1M in dividends and capital gains is paying a higher rate than someone with $20,000 in income. And this would probably raise more tax revenue in the long run. Corporate income taxes are a relatively small part of overall tax revenues, increasing dividend/capital gains rates offsets most of their loss if they are eliminated, and over time more investment will drive higher wages/income and increase tax receipts. * If capital gains are taxed at ordinary income rates, they also need to be indexed to protect from inflation. If they aren't, we risk taxing phantom gains, i.e. if an investment is sold for 20% more than it's purchase price, but inflation was 25% during it's holding period, it was actually a loss, because it lost purchasing power. This is one of the reasons capital gains has special rates, but that's not a good protection. In the 1970s high inflation hurt investments because historical equity returns were money losers adjusted for inflation. Investors preferred high interest bonds to protect their principle.

volgo 9y ago
That argument doesn’t make sense because when you receive a salary, the same taxation is passed through the company as well. Companies have to pay corporate taxes before they pay you too. The only difference is the “last mile” tax of when you receive the money from the company. For capital gains it’s 15% federal, for salary it’s 28%
- valuearb 9y ago
  Nope, they don't. Employees pay is an expense to the company, and always deducted pre-tax.
existencebox 9y ago
I'm going to pick at one particular part of your statement; since while I generally agree with your thrust of "normalize cap gains and income taxes", this stood out: "Given that taxes on corporate income is a direct tax in investment, it's counterproductive, it reduces investment, and productivity gains that increase both wages and wealth" I've seen this stated in a few prior debates I've had on this topic, but I'd ask the rebuttal: Why can't you make that EXACT statement but s/corporate income/personal income/? I never understood why capital investment was more a focus than consumer demand, especially given well understood properties of both marginal spend for low vs high worth individuals (low income salary workers will spend more by % on goods and services than wealthy investors) and the assertion that we are "swimming in investor money" right now. (I see the long bull market, P/E ratios, VCs over the last decade/ICOs/wealth gap as datapoints) I'm 100% sure someone in the finance world has already thought this through but I don't know the words to search for, and my own intuition suggests that supporting demand-side consumption is going to be a far better driver for true efficient allocations of funds and market growth to support a virtuous cycle of consumerism and employment than investor money will.
- valuearb 9y ago
  I think discussions like this often devolve into religious wars, but I'll take a shot at it. If you have a village of a hundred of starving artisans and workers, but no crops because they have no seed corn, you have high demand, but no capital, and so no one gets fed. Consumer demand isn't enough. To address demand, someone must invest in production. Lets assume that the entire village has earned seed corn by selling their pottery but has no farming land. The villagers can eat the seed corn, so they do. But one day farmer walks into town and offers to give anyone 10x their seed corn in return for it, if they can just wait one growing season. So now consumption is converted into investment. The farmer must get investment to have production. If the villagers tell him to just farm his land and they'll pay him in pottery when his crops are ready for sale, it won't work. Now if the farmer has lots of seed corn, but the villagers died of starvation waiting, he's got no customers. He needs demand to make his investment valuable, otherwise it can only feed him, and he'll never get pottery or any other goods from it. Consumption is the benefit of investment, and it helps drive more investment, but it's not the direct creator of it. Now lets assume the village and the farmer reach equilibrium. He plants enough crops every year to feed all of them, and they make enough goods that it's worthwhile to him to do it. Everyone's standard of living can rise as the farmer more of his excess seed corn every year an reinvests it to farm bigger crops, and the well fed villagers compete to make better goods to earn more food. Now the King decides to tax farming output at 99%. The farmer can plant enough to feed himself and keep all of it, or plant enough to feed everyone, and only keep the same amount. Obviously he's not going to work 100x as hard for the same benefits as he can working just for himself. So we have demand, and capital, but we've broken the incentive for investing. So the farmer just plants enough for himself, and in the mean-time he sells all that extra seed corn to villagers for goods, akin to a rich son spending his inheritance. By next year the farmer is surviving, but no longer wealthy and the village is starving. Keynes-iasts always want to focus on the benefits of demand, but it's only part of the story. Friedman-ists want to focus on investment, but again it's only part of the story. Laffer gave incentives a bad name, he was the Elon Musk of economic overpromising, but he was essentially right about their importance. Our economy functions ok right now even though our corporate tax system is among the worst in the world and makes for substantial impediments to investments. The Republican bill lowers the rate significantly and allows for one time repatriation, but still leaves significant disincentives (and doesn't address progressivity at all). Our economy would likely function better, productivity and incomes would increase faster, if we eliminated corporate income taxes. But our entire tax system would become less progressive if we didn't also address dividend/capital gains rates when we eliminated them.

volgo 9y ago

That argument doesn’t make sense because when you receive a salary, the same taxation is passed through the company as well. Companies have to pay corporate taxes before they pay you too. The only difference is the “last mile” tax of when you receive the money from the company. For capital gains it’s 15% federal, for salary it’s 28%

valuearb 9y ago
Nope, they don't. Employees pay is an expense to the company, and always deducted pre-tax.

existencebox 9y ago

I'm going to pick at one particular part of your statement; since while I generally agree with your thrust of "normalize cap gains and income taxes", this stood out: "Given that taxes on corporate income is a direct tax in investment, it's counterproductive, it reduces investment, and productivity gains that increase both wages and wealth" I've seen this stated in a few prior debates I've had on this topic, but I'd ask the rebuttal: Why can't you make that EXACT statement but s/corporate income/personal income/? I never understood why capital investment was more a focus than consumer demand, especially given well understood properties of both marginal spend for low vs high worth individuals (low income salary workers will spend more by % on goods and services than wealthy investors) and the assertion that we are "swimming in investor money" right now. (I see the long bull market, P/E ratios, VCs over the last decade/ICOs/wealth gap as datapoints) I'm 100% sure someone in the finance world has already thought this through but I don't know the words to search for, and my own intuition suggests that supporting demand-side consumption is going to be a far better driver for true efficient allocations of funds and market growth to support a virtuous cycle of consumerism and employment than investor money will.

valuearb 9y ago
I think discussions like this often devolve into religious wars, but I'll take a shot at it. If you have a village of a hundred of starving artisans and workers, but no crops because they have no seed corn, you have high demand, but no capital, and so no one gets fed. Consumer demand isn't enough. To address demand, someone must invest in production. Lets assume that the entire village has earned seed corn by selling their pottery but has no farming land. The villagers can eat the seed corn, so they do. But one day farmer walks into town and offers to give anyone 10x their seed corn in return for it, if they can just wait one growing season. So now consumption is converted into investment. The farmer must get investment to have production. If the villagers tell him to just farm his land and they'll pay him in pottery when his crops are ready for sale, it won't work. Now if the farmer has lots of seed corn, but the villagers died of starvation waiting, he's got no customers. He needs demand to make his investment valuable, otherwise it can only feed him, and he'll never get pottery or any other goods from it. Consumption is the benefit of investment, and it helps drive more investment, but it's not the direct creator of it. Now lets assume the village and the farmer reach equilibrium. He plants enough crops every year to feed all of them, and they make enough goods that it's worthwhile to him to do it. Everyone's standard of living can rise as the farmer more of his excess seed corn every year an reinvests it to farm bigger crops, and the well fed villagers compete to make better goods to earn more food. Now the King decides to tax farming output at 99%. The farmer can plant enough to feed himself and keep all of it, or plant enough to feed everyone, and only keep the same amount. Obviously he's not going to work 100x as hard for the same benefits as he can working just for himself. So we have demand, and capital, but we've broken the incentive for investing. So the farmer just plants enough for himself, and in the mean-time he sells all that extra seed corn to villagers for goods, akin to a rich son spending his inheritance. By next year the farmer is surviving, but no longer wealthy and the village is starving. Keynes-iasts always want to focus on the benefits of demand, but it's only part of the story. Friedman-ists want to focus on investment, but again it's only part of the story. Laffer gave incentives a bad name, he was the Elon Musk of economic overpromising, but he was essentially right about their importance. Our economy functions ok right now even though our corporate tax system is among the worst in the world and makes for substantial impediments to investments. The Republican bill lowers the rate significantly and allows for one time repatriation, but still leaves significant disincentives (and doesn't address progressivity at all). Our economy would likely function better, productivity and incomes would increase faster, if we eliminated corporate income taxes. But our entire tax system would become less progressive if we didn't also address dividend/capital gains rates when we eliminated them.