3 ms·

https://en.wikipedia.org/wiki/Optimal_capital_income_taxation https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is a good place to start. Right up

by harryh 8y ago

https://en.wikipedia.org/wiki/Optimal_capital_income_taxation https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is a good place to start. Right up top is a nice summary: "Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Consequently, a capital income tax results in the distortion of individuals' saving and consumption behavior as individuals substitute the more heavily taxed future consumption with current consumption." Here is a simplified explanation of the above: http://www.thebigquestions.com/2010/01/27/a-quick-economics-lesson/ http://www.thebigquestions.com/2010/01/27/a-quick-economics-...

millstone 8y ago
These arguments use a simplified model where capital income occurs as the consequence of investing wage income. They don't address the modern reality that capital income replaces wage income, through accelerated depreciation, inheritance, carried interest, etc. And yes, of course taxing capital is distorionary; but so is taxing labor, and exponentially so when capital income may be substituted for labor.
- harryh 8y ago
  You asked a question. I gave you an answer. I agree that it is a complex question with many competing arguments on both sides.
  - millstone 8y ago
    Agreed; not attacking you, I just feel like the pro-differential-taxation arguments are too theoretical and ignore political and economic realities.
    - harryh 8y ago
      My personal view is that the pro-differential-taxation theory mostly argues for zero taxes on cap gains. But you're right that this ignores political and economic realities. In particular, I find the discussion about the difficulty of distinguishing between capital and wage income (the topic of Fred's blog post!) particularly compelling. So a compromise is in order: lower taxes on cap gains but not all the way to zero. This is, not coincidentally, the status quo in the US and most other western/developed nations.
- closeparen 8y ago
  35% of all financial assets in the US are precisely the consequence of investing wage income: retirement savings. [0] https://www.ici.org/research/stats/retirement/ret_17_q4 https://www.ici.org/research/stats/retirement/ret_17_q4
crdoconnor 8y ago
That argument would work in an economic environment with high inflation, high interest rates, low overall rates of investment and a high capital gains tax. The fact that we are currently operating under an environment with low inflation, low interest rates, too much capital floating around and a low capital gains tax rather suggests that it should actually be raised, and quite a lot at that. If raising capital gain actually did bring forward consumption then that would actually act as a form of economic stimulus (on top of filling up depleted state/city coffers), none of which would be unwelcome. Unless you're extremely wealthy.

by harryh 8y ago

millstone 8y ago

These arguments use a simplified model where capital income occurs as the consequence of investing wage income. They don't address the modern reality that capital income replaces wage income, through accelerated depreciation, inheritance, carried interest, etc. And yes, of course taxing capital is distorionary; but so is taxing labor, and exponentially so when capital income may be substituted for labor.

harryh 8y ago
You asked a question. I gave you an answer. I agree that it is a complex question with many competing arguments on both sides.
- millstone 8y ago
  Agreed; not attacking you, I just feel like the pro-differential-taxation arguments are too theoretical and ignore political and economic realities.
  - harryh 8y ago
    My personal view is that the pro-differential-taxation theory mostly argues for zero taxes on cap gains. But you're right that this ignores political and economic realities. In particular, I find the discussion about the difficulty of distinguishing between capital and wage income (the topic of Fred's blog post!) particularly compelling. So a compromise is in order: lower taxes on cap gains but not all the way to zero. This is, not coincidentally, the status quo in the US and most other western/developed nations.
closeparen 8y ago
35% of all financial assets in the US are precisely the consequence of investing wage income: retirement savings. [0] https://www.ici.org/research/stats/retirement/ret_17_q4 https://www.ici.org/research/stats/retirement/ret_17_q4

crdoconnor 8y ago

That argument would work in an economic environment with high inflation, high interest rates, low overall rates of investment and a high capital gains tax. The fact that we are currently operating under an environment with low inflation, low interest rates, too much capital floating around and a low capital gains tax rather suggests that it should actually be raised, and quite a lot at that. If raising capital gain actually did bring forward consumption then that would actually act as a form of economic stimulus (on top of filling up depleted state/city coffers), none of which would be unwelcome. Unless you're extremely wealthy.