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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 capit
by 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 agoYou 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 agoAgreed; not attacking you, I just feel like the pro-differential-taxation arguments are too theoretical and ignore political and economic realities.
- harryh 8y agoMy 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 ago35% 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