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Taxes on capital gains are harmful and don't make sense. It would be more efficient to tax consumption and have no capital, estate, income, or corporate taxes.

by rvern 9y ago

Taxes on capital gains are harmful and don't make sense. It would be more efficient to tax consumption and have no capital, estate, income, or corporate taxes. Scott Sumner has written many excellent articles about taxes on capital gains: - http://econlog.econlib.org/archives/2017/07/do_you_really_w.html http://econlog.econlib.org/archives/2017/07/do_you_really_w.... - http://econlog.econlib.org/archives/2014/04/theres_only_one.html http://econlog.econlib.org/archives/2014/04/theres_only_one.... - http://econlog.econlib.org/archives/2015/09/our_bizarre_sys.html http://econlog.econlib.org/archives/2015/09/our_bizarre_sys.... - http://www.themoneyillusion.com/?p=26636 http://www.themoneyillusion.com/?p=26636 Unfortunately sensible economic policies aren't politically feasible. This is partly because of the economic illiteracy of most voters and the lack of incentive for politicians to adopt economically sensible policies, but also because economists themselves often misunderstand economic theory.

danmaz74 9y ago
Do you realize that taxing only consumption means taxing the poor a lot, and the wealthy almost nothing?
- rvern 9y ago
  Who ultimately pays a tax burden does not depend on who sends the check to the government; it depends on the relative elasticities of supply and demand. The tax paid by people, wealthy or not, comes either out of consumption or investment. When people consume goods and services, the labor and materials used to produce them cannot be allocated to produce goods and services for other people. The same is not true of investment, which is why you want to tax consumption and not investment. If the government taxed 90% of Warren Buffett's wealth, Warren Buffett wouldn't consume less, he would just have less investments. The government would have more money, but if it spent the money on giving food to the poor, the food would have to come from somewhere, and it wouldn't be from Warren Buffett whose consumption was already modest. If the tax doesn't reduce your consumption, someone else is paying the tax, not you. Taxing 90% of Warren Buffett's wealth and spending it on welfare programs wouldn't make the poor better off, it would mainly make capital markets less efficient (which would make everyone, including the poor, worse off). Capital income does make Warren Buffett richer if he makes wise investment decisions that make markets more efficient, but as long as he doesn't consume the gains it changes nothing, and as soon as he or his heirs consume the gains they would be taxed by a consumption tax. Income taxes have the same issues as wealth taxes, so you want to tax only consumption. And a tax on estate is just an additional tax on future consumption by heirs. It makes no sense to tax future consumption at different rates than current consumption, so it's better to just increase the consumption tax than to add an estate tax.
  - danmaz74 9y ago
    Unfortunately I don't have time for a full response, but: * I don't want to tax wealth at 90%, that's a straw-man, but let's use it as an example anyway * In your extreme scenario, there would be an increased demand for food. Greater demand would increase prices. This would move the allocation of resources to food production from, say, Ferrari production. You would have more food production and poor people would eat better. * The outcomes of taxation and other economic levers are never represented by monotonic functions. The optimal options are always somewhere "in between" the extremes, so saying "taxing at 100% doesn't work, so we should tax at 0%" is a fallacy.
    - rvern 9y ago
      > I don't want to tax wealth at 90%, that's a straw-man, but let's use it as an example anyway My intent was only to use it as an example. You can change the percentage to anything you want, as long as it is low enough not to have an effect on Warren Buffett's consumption. And if it has an effect on Warren Buffett's consumption, then you could do the same thing with a consumption tax so that wouldn't be an argument for taxing wealth over taxing consumption. > In your extreme scenario, there would be an increased demand for food. Greater demand would increase prices. This would move the allocation of resources to food production from, say, Ferrari production. You would have more food production and poor people would eat better. Indeed. But this is just as true if the spending on food is funded by a consumption tax. This is an argument for taxes, not an argument for income or wealth taxes over consumption taxes. I also believe taxes are harmful in general, but that's a separate point from whether a consumption tax should be preferred over an income or wealth tax. > The outcomes of taxation and other economic levers are never represented by monotonic functions. The optimal options are always somewhere "in between" the extremes, I don't see why this ought to be true and you did not provide any evidence to support these claims. > so saying "taxing at 100% doesn't work, so we should tax at 0%" is a fallacy. It is, but not for the reason you stated. Saying "taxing at 2% doesn't work, so we should tax at 0%" would also be a fallacy if the optimal tax rate happened to be 1%. This has nothing to do with extremes.
      - danmaz74 9y ago

by rvern 9y ago

danmaz74 9y ago

Do you realize that taxing only consumption means taxing the poor a lot, and the wealthy almost nothing?

rvern 9y ago
Who ultimately pays a tax burden does not depend on who sends the check to the government; it depends on the relative elasticities of supply and demand. The tax paid by people, wealthy or not, comes either out of consumption or investment. When people consume goods and services, the labor and materials used to produce them cannot be allocated to produce goods and services for other people. The same is not true of investment, which is why you want to tax consumption and not investment. If the government taxed 90% of Warren Buffett's wealth, Warren Buffett wouldn't consume less, he would just have less investments. The government would have more money, but if it spent the money on giving food to the poor, the food would have to come from somewhere, and it wouldn't be from Warren Buffett whose consumption was already modest. If the tax doesn't reduce your consumption, someone else is paying the tax, not you. Taxing 90% of Warren Buffett's wealth and spending it on welfare programs wouldn't make the poor better off, it would mainly make capital markets less efficient (which would make everyone, including the poor, worse off). Capital income does make Warren Buffett richer if he makes wise investment decisions that make markets more efficient, but as long as he doesn't consume the gains it changes nothing, and as soon as he or his heirs consume the gains they would be taxed by a consumption tax. Income taxes have the same issues as wealth taxes, so you want to tax only consumption. And a tax on estate is just an additional tax on future consumption by heirs. It makes no sense to tax future consumption at different rates than current consumption, so it's better to just increase the consumption tax than to add an estate tax.
- danmaz74 9y ago
  Unfortunately I don't have time for a full response, but: * I don't want to tax wealth at 90%, that's a straw-man, but let's use it as an example anyway * In your extreme scenario, there would be an increased demand for food. Greater demand would increase prices. This would move the allocation of resources to food production from, say, Ferrari production. You would have more food production and poor people would eat better. * The outcomes of taxation and other economic levers are never represented by monotonic functions. The optimal options are always somewhere "in between" the extremes, so saying "taxing at 100% doesn't work, so we should tax at 0%" is a fallacy.
  - rvern 9y ago
    > I don't want to tax wealth at 90%, that's a straw-man, but let's use it as an example anyway My intent was only to use it as an example. You can change the percentage to anything you want, as long as it is low enough not to have an effect on Warren Buffett's consumption. And if it has an effect on Warren Buffett's consumption, then you could do the same thing with a consumption tax so that wouldn't be an argument for taxing wealth over taxing consumption. > In your extreme scenario, there would be an increased demand for food. Greater demand would increase prices. This would move the allocation of resources to food production from, say, Ferrari production. You would have more food production and poor people would eat better. Indeed. But this is just as true if the spending on food is funded by a consumption tax. This is an argument for taxes, not an argument for income or wealth taxes over consumption taxes. I also believe taxes are harmful in general, but that's a separate point from whether a consumption tax should be preferred over an income or wealth tax. > The outcomes of taxation and other economic levers are never represented by monotonic functions. The optimal options are always somewhere "in between" the extremes, I don't see why this ought to be true and you did not provide any evidence to support these claims. > so saying "taxing at 100% doesn't work, so we should tax at 0%" is a fallacy. It is, but not for the reason you stated. Saying "taxing at 2% doesn't work, so we should tax at 0%" would also be a fallacy if the optimal tax rate happened to be 1%. This has nothing to do with extremes.
    - danmaz74 9y ago