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Inflation is one of the primary justifications for a lower capital gains rate, because getting taxed on inflation is quite the slap in the face.

by zaroth 9y ago

vslira 9y ago
While I agree that being taxed on inflation is unfair, it would not be that hard to discount inflation when assessing taxes. Surely a tax system could accommodate that.
- matte_black 9y ago
  But the fact is, it doesn’t and that’s the world we live in. We need to lower capital gains taxes sometime in these next few years.
  - randomdata 9y ago
    The fact also remains that the world we live in doesn’t have a lower capital gains tax rate. If we’re going to propose tax changes for the future, all proposals are as good as any other.
    - skybrian 9y ago
      I didn't know what part of the world you mean, but in the US the capital gains rate maxes out at 20% for people earning over $425,000 a year and that's pretty darn low. The question to ask is why capital gains tax should be lower than taxes on wages? If encouraging work is the priority, it should be the other way round.
      - hanklazard 9y ago
        Not exactly. Long-term capital gains in the US max out at 20%. Short-term capital gains (those investments held < 1 yr) are taxed at your marginal tax rate, which can be significantly higher than 20%. https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/ https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rate...
      - tensor_rank_0 9y ago
        perhaps the priority is encouraging investment into capital.
  - marvin 9y ago
    Norwegian capital gains tax (no distinction between short and long term) is 30.5% for 2018, with an additional 0.85% of total net worth (mostly minus value of primary residence). I wish lowering capital gains tax was on the radar; if inflation starts increasing then this will be an excellent system for punishing people who have saved money rather than spending it immediately.
  - brandmeyer 9y ago
    Income is income. Why should unearned income get taxed lower than earned income?
    - innagadadavida 9y ago
      I’d go a step further and classify income as: 1. Earned income 2. Investment income 3. Gambling/lottery/short term income Tax rate should increase as you go down that list.
      - matte_black 9y ago
        Why?
    - matte_black 9y ago
      Because unearned income is a lot harder to make. At a 6% return, you need around $800k+ to get the equivalent of a $50k salary before taxes from the interest earned on your savings. When you factor in having to reinvest some of your returns to beat inflation and make up for some years of low or negative returns, you might only draw maybe $20-25k out of that $800k portfolio. Then you get taxed on it at 20% capital gains along with any state taxes, and it all adds up to a lot less money to live off of. Most people who want higher capital gains do not have a portfolio of this size nor have they explored the reality of living off a portfolio of this size. Work to the grave I guess.
      - throwaway2048 9y ago
        I don't see people passively living off their investments (that is taking a rake while contributing nothing productive to the economy) as a thing to be encouraged, beyond perhaps a retirement age (which has tax shelter status for a significant amount). As a thought experiment imagine if everyone did this, or it was everyones goal.
        matte_black 9y ago
        If everyone was doing it, there would be no returns or even negative returns, and thus people wouldn’t invest. The problem fixes itself.
  - curun1r 9y ago
    It's one thing to lower tax on investment income. But the problem with capital gains taxes is that they don't just cover investment income, they also cover lots of earned income. Stock options, IMHO, should never be taxed as capital gains since they were "purchased" largely with an employees time. And they're not the only form of capital gains that derive from selling your work product. If we are to cut capital gains, we also need to restrict capital gains to pure financial investments and ensure that every form of compensation for work is taxed as normal income.
longtermsec 9y ago
Is this accurate? If that was the case then interest from savings accounts and CDs wouldn't be taxed at the marginal tax rate as ordinary income is.
- deleted 9y ago
  [deleted]
- hsitz 9y ago
  Interest from saving accounts and CDs is "ordinary income". "Ordinary income" generally is anything that is not classifiable as a "capital gain". "Capital gain" is gain from the sale or exchange of a capital asset. See https://en.wikipedia.org/wiki/Ordinary_income https://en.wikipedia.org/wiki/Ordinary_income
rdlecler1 9y ago
Doesn’t that mean you just need to take more risk?
gridaphobe 9y ago
Why are you singling out capital gains? Your argument works equally well for labor-based income, but capital gains are already taxed much less than labor.
- jws 9y ago
  There isn’t enough time between labor being performed and it being paid for inflation to have much effect. Long term capital investments have plenty of time for inflation to pile up and distort the naive calculation of “gain”.
  - gridaphobe 9y ago
    I see your point, but it seems to rest on the rest on the way we determine when capital gains are realized. Capital gains accumulate regularly just like other sources of income; in my mind the tax obligation is incurred at the time of the gain, just like the tax obligation on other income. For practical reasons the state does not demand the tax until the accumulated gains have been realized by selling the asset. This makes sense for illiquid assets like stock in your private startup, but I don't think it should change the calculation of when the tax was incurred and how much. For liquid assets like shares in public companies, I think it would actually be perfectly reasonable to demand the tax on unrealized gains.
- lisper 9y ago
  No. If I pay you $1 and you get taxed $0.5 you are still $0.5 better off than you were before. If inflation raises you salary to $2 and you get taxed $1, you are still one (inflated) dollar better off than you were before you were paid. But if you buy a stock for $1 and it goes to $2 as a result of inflation, you get taxed $0.5 on the $1 gain, but your resulting $1.5 has less purchasing power than the $1 you invested.
  - lotsofpulp 9y ago
    Everyone would be in the same boat, so I don’t think you would lose any purchasing power as it is relative.
yuliyp 9y ago
So inflation + capital gains taxes serve as a brake against spiraling wealth growth, and that's a good thing for the economy.

Inflation is one of the primary justifications for a lower capital gains rate, because getting taxed on inflation is quite the slap in the face.

by zaroth 9y ago

Inflation is one of the primary justifications for a lower capital gains rate, because getting taxed on inflation is quite the slap in the face.

vslira 9y ago

While I agree that being taxed on inflation is unfair, it would not be that hard to discount inflation when assessing taxes. Surely a tax system could accommodate that.

matte_black 9y ago
But the fact is, it doesn’t and that’s the world we live in. We need to lower capital gains taxes sometime in these next few years.
- randomdata 9y ago
  The fact also remains that the world we live in doesn’t have a lower capital gains tax rate. If we’re going to propose tax changes for the future, all proposals are as good as any other.
  - skybrian 9y ago
    I didn't know what part of the world you mean, but in the US the capital gains rate maxes out at 20% for people earning over $425,000 a year and that's pretty darn low. The question to ask is why capital gains tax should be lower than taxes on wages? If encouraging work is the priority, it should be the other way round.
    - hanklazard 9y ago
      Not exactly. Long-term capital gains in the US max out at 20%. Short-term capital gains (those investments held < 1 yr) are taxed at your marginal tax rate, which can be significantly higher than 20%. https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/ https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rate...
    - tensor_rank_0 9y ago
      perhaps the priority is encouraging investment into capital.
- marvin 9y ago
  Norwegian capital gains tax (no distinction between short and long term) is 30.5% for 2018, with an additional 0.85% of total net worth (mostly minus value of primary residence). I wish lowering capital gains tax was on the radar; if inflation starts increasing then this will be an excellent system for punishing people who have saved money rather than spending it immediately.
- brandmeyer 9y ago
  Income is income. Why should unearned income get taxed lower than earned income?
  - innagadadavida 9y ago
    I’d go a step further and classify income as: 1. Earned income 2. Investment income 3. Gambling/lottery/short term income Tax rate should increase as you go down that list.
    - matte_black 9y ago
      Why?
  - matte_black 9y ago
    Because unearned income is a lot harder to make. At a 6% return, you need around $800k+ to get the equivalent of a $50k salary before taxes from the interest earned on your savings. When you factor in having to reinvest some of your returns to beat inflation and make up for some years of low or negative returns, you might only draw maybe $20-25k out of that $800k portfolio. Then you get taxed on it at 20% capital gains along with any state taxes, and it all adds up to a lot less money to live off of. Most people who want higher capital gains do not have a portfolio of this size nor have they explored the reality of living off a portfolio of this size. Work to the grave I guess.
    - throwaway2048 9y ago
      I don't see people passively living off their investments (that is taking a rake while contributing nothing productive to the economy) as a thing to be encouraged, beyond perhaps a retirement age (which has tax shelter status for a significant amount). As a thought experiment imagine if everyone did this, or it was everyones goal.
      - matte_black 9y ago
        If everyone was doing it, there would be no returns or even negative returns, and thus people wouldn’t invest. The problem fixes itself.
- curun1r 9y ago
  It's one thing to lower tax on investment income. But the problem with capital gains taxes is that they don't just cover investment income, they also cover lots of earned income. Stock options, IMHO, should never be taxed as capital gains since they were "purchased" largely with an employees time. And they're not the only form of capital gains that derive from selling your work product. If we are to cut capital gains, we also need to restrict capital gains to pure financial investments and ensure that every form of compensation for work is taxed as normal income.

longtermsec 9y ago

Is this accurate? If that was the case then interest from savings accounts and CDs wouldn't be taxed at the marginal tax rate as ordinary income is.

deleted 9y ago
[deleted]
hsitz 9y ago
Interest from saving accounts and CDs is "ordinary income". "Ordinary income" generally is anything that is not classifiable as a "capital gain". "Capital gain" is gain from the sale or exchange of a capital asset. See https://en.wikipedia.org/wiki/Ordinary_income https://en.wikipedia.org/wiki/Ordinary_income

rdlecler1 9y ago

Doesn’t that mean you just need to take more risk?

gridaphobe 9y ago

Why are you singling out capital gains? Your argument works equally well for labor-based income, but capital gains are already taxed much less than labor.

jws 9y ago
There isn’t enough time between labor being performed and it being paid for inflation to have much effect. Long term capital investments have plenty of time for inflation to pile up and distort the naive calculation of “gain”.
- gridaphobe 9y ago
  I see your point, but it seems to rest on the rest on the way we determine when capital gains are realized. Capital gains accumulate regularly just like other sources of income; in my mind the tax obligation is incurred at the time of the gain, just like the tax obligation on other income. For practical reasons the state does not demand the tax until the accumulated gains have been realized by selling the asset. This makes sense for illiquid assets like stock in your private startup, but I don't think it should change the calculation of when the tax was incurred and how much. For liquid assets like shares in public companies, I think it would actually be perfectly reasonable to demand the tax on unrealized gains.
lisper 9y ago
No. If I pay you $1 and you get taxed $0.5 you are still $0.5 better off than you were before. If inflation raises you salary to $2 and you get taxed $1, you are still one (inflated) dollar better off than you were before you were paid. But if you buy a stock for $1 and it goes to $2 as a result of inflation, you get taxed $0.5 on the $1 gain, but your resulting $1.5 has less purchasing power than the $1 you invested.
- lotsofpulp 9y ago
  Everyone would be in the same boat, so I don’t think you would lose any purchasing power as it is relative.

yuliyp 9y ago

So inflation + capital gains taxes serve as a brake against spiraling wealth growth, and that's a good thing for the economy.