6 ms·

It seems strange to me that so much focus of tax is on labor (directly taking a chunk of what people 'earn' by actually working), vs tax on capital gains and pr

It seems strange to me that so much focus of tax is on labor (directly taking a chunk of what people 'earn' by actually working), vs tax on capital gains and profits (what some people 'earn' simply by doing nothing). I use the term 'earn' loosely, because IMHO, the amount of money people manage to direct their way is a result of a complex 'business model', and many other factors - I think it's way too simplistic to say that someone's gross income is 'theirs', and that taxes are taking 'their' money.

davidivadavid 8y ago
What's more surprising is that so little is on consumption.
- smt88 8y ago
  There are lots of arguments against taxing consumption, but one of them is that in a capitalist system where growth is necessary, taxing consumption is risky. It's like disincentivizing the exact behavior you need to keep the whole system running.
- arachnids 8y ago
  Tax on consumption hurts poor people. The 1$ sales tax on soap worth X$ hurts me much less than someone making minimum wage.
- jayd16 8y ago
  Like sales tax or some other form? They're usually regressive taxes.
  - davidivadavid 8y ago
    Nope, they're usually flat taxes.
    - jayd16 8y ago
      Flat taxes are regressive.
  - deleted 8y ago
    [deleted]
- geofft 8y ago
  It's very common to want to minimize taxes on consumption for two reasons: first, it's very regressive—someone making $1,000,000 a year probably doesn't spend 100x as much on food as someone making $10,000 a year-and it's common across the political spectrum to consider regressive taxes an anti-feature. Second, encouraging consumption encourages a vibrant economy by keeping money moving. The amount that consumers are willing to spend is generally seen as positively correlated with the strength/quality of the economy. So people don't want to disincentivize consumption.
  - davidivadavid 8y ago
    That's not what "regressive" means. A regressive tax means that the marginal tax rate is lower the more people pay taxes. Most consumption taxes are flat taxes. Economic literature has proposed many schemes offering progressive consumption taxes. Since other comments keep repeating that fallacy, here's a link to an article that covers that a little bit as well as other interesting tax-related subjects: http://www.themoneyillusion.com/clear-thinking-about-taxes/ http://www.themoneyillusion.com/clear-thinking-about-taxes/ Edit: higher->lower.
    - geofft 8y ago
      Yes, "regressive" has a strict technical meaning of marginal rates going down. It has a very common practical meaning of affecting people with less income more than people with more income. (For instance, it would be a coherent and meaningful sentence, despite being technically incorrect, to argue that subway fares are regressive.) Do you have a better word for that that is in common use? The blog post you link (which I am attempting to read through, but the condescending first paragraph doesn't help) argues in favor of a progressive tax on the amount of consumption, which I will admit is a proposal I haven't seen before. If you can make this work logistically, it would address the problem of consumption taxes being "regressive." (So would other approaches like food stamps.) However, I don't see any discussion of how these taxes would influence the decision to consume vs. save. Is the person with $100K in income going to make the same decision in both scenarios? I would assume they'd be likely to consume more in scenario 1 and less in scenario 2, where they get taxed more as they consume more. (And they would consume even less under a progressive consumption tax.) In particular I worry about money being "lost"—instead of the $50K that has doubled to $100K being spent all in 20 years, perhaps only the $50K interest is spent or perhaps not even that because there's a disincentive to consume, and then the person lives off of investment income for the rest of their life. For the casual meaning of "regressive," I think it's politically/socially important to many people that someone who lives off passive income and chooses not to work not be in the same position as someone who works long hours and lives paycheck-to-paycheck, even if they consume the same amount - or at least that there's a meaningful route for the latter person to become the former person. I also don't understand why Bill Gates giving $10B less to Africa doesn't count as reducing consumption. It's a use of money to exert his will on the world; I think that should count as consumption (and be taxed as a consumption tax).
- DennisP 8y ago
  What's even more surprising is that none whatsoever is on the carbon emissions that threaten to crash the whole system.
- moogly 8y ago
  Is it really that little? Standard VAT is 25%. There are two other reduced levels: 12% for, for example groceries, restaurant visits, accomodation and 6% for culture (books, newspapers, museum visits, concerts, theatre, opera, zoos). Education, health care, insurance and financial services carry 0% VAT.
- m0zg 8y ago
  Where I live it's 10%. I wouldn't say it's "little". That's on top of like 45% total tax that gets paid before the money reaches me (in the form of payroll tax, social security, medicare, income tax, etc), as well as on top of taxes the retailer pays, and in addition to $10k/yr I pay in real estate tax for my home. At some point you just end up suffocating the economy with this nickel and diming. I'd rather everything was consolidated into a single, predictable rate with no loopholes that I can easily calculate and pay, and all of which every tax payer will see, meaning the whole thing not splitting it into "employer portion" or other bullshit. I would basically like each taxpayer to know exactly how much they are paying, and how all that largesse is being spent. Currently that's not the case in part because the system is deliberately so complicated not even tax accountants can figure it out sometimes. Not to mention that taxes on consumption are strongly regressive and they disproportionately affect the poor. I certainly don't spend all my money, and that's not the case for the vast majority of people. Add more tax, and they can afford even less.
  - davidivadavid 8y ago
    Like most people in this thread, you assume all consumption taxes need to be flat. That's not the case.
    - m0zg 8y ago
      And how do you propose this should be implemented and enforced?
      - davidivadavid 8y ago
        There's a lot of literature on the topic. Here's an article to get started: https://johnhcochrane.blogspot.com/2016/10/a-first-step-to-progressive-consumption.html https://johnhcochrane.blogspot.com/2016/10/a-first-step-to-p...
        geofft 8y ago
        Is the proposal to have a flat consumption tax + use some of those revenues as a stipend, so people who consume less have less effective tax? How does that interact with the well-known result (e.g., from the aftermath of the Stanford marshmallow experiment) that people with less savings and less cash flow are legitimately more skeptical of promises of money in the future, even if those promises are assessed as the same present value by well-off economists? In general given the volatile political climate of the US, I'm skeptical that plans of the form "We'll institute a change that disproportionately affects the poor, and we'll solve it with a complicated and not-universally-politically-popular system that will fix things in the steady state" are likely to accomplish their goals. The balance of power in government might change before the steady state. If you create a federal sales tax, which doesn't currently exist, and also increase "handouts" / "entitlements" / "welfare" to address its disproportionate effect on the poor, I expect that the handout will get canceled one year and the sales tax won't.
skh 8y ago
What's interesting from a political science perspective from the U.S. is that Ronal Reagan believed that the tax on labor should be less than the tax on capital. The U.S. has shifted very much rightward on this issue in the last 40 years.
RickJWagner 8y ago
Those people don't 'do nothing'. Most have worked hard, denied immediate gratification, saved and invested. They did their hard work log ago.
- arachnids 8y ago
  This. The Republican perspective is that these are not actually different groups of people, but the same people at different points in their lives. The people making salary are younger. They save, then go on to live off their investments when they get older. It is reasonable to tax younger people with earning potential ahead of them rather than older people.
  - perfmode 8y ago
    What of inherited wealth?
- geofft 8y ago
  I'd expect that many of these people inherit money, or "spend" money by giving it to their children. If the argument is that people who worked hard shouldn't be penalized, then that argues in favor of an extremely high estate tax; children who happened to be born to parents who worked hard shouldn't be significantly better off than children who happened not to have that fortune.
  - RickJWagner 8y ago
    I'm of mixed opinion on this one. On one hand, I think 'That person earned their money, they can spend it as they see fit. If the kids splurge it, it still gets distributed.' On the other hand, I see how this makes it hard for life to seem fair. (But then again, some people are born attractive, tall, athletic, smart, etc. The upshot: life just isn't fair.) Even if we agreed that high taxes on inherited wealth were proper, I doubt if it'd become law. The Kennedys, Bushes, Clintons, etc. wouldn't like it for obvious reasons.
    - 8y ago
plainOldText 8y ago
And who would you say are the people doing nothing while earning capital gains and profits?
- perfmode 8y ago
  People who inherit fortunes, for one.
  - plainOldText 8y ago
    I'm not particularly familiar with the tax code in Sweden, but there is such a thing as inheritance tax, so people that inherit fortunes do get taxed.
    - moogly 8y ago
      Sweden abolished inheritance tax in 2005.
    - deleted 8y ago
      [deleted]
hliyan 8y ago
On a related (and more fundamental) note, why do we base tax rates on the first derivative of wealth (i.e. income) and not wealth itself? What would happen if we set tax brackets based on net worth? E.g. any income that raises a person's net worth over $1,000,000 is taxed at %X?
- perfmode 8y ago
  Wealth can be concealed. Income passes hands. You can “see” the transfer.
  - ball_of_lint 8y ago
    Except that you can be paid in cash and buy things with cash and leave no hard evidence of your income. Most illegal things are impossible to completely prevent but the punishments keep many from doing them anyways.
    - whamlastxmas 8y ago
      The incredible vast majority of major purchases cannot be done in an untraceable manner. Cars, yachts, planes, property, art. The businesses that sell these items necessitate a paper trail. And because you cannot spend more than the income you have been taxed on (minus legal gifting limits which again have a paper trail) it is extremely difficult to hide your income without leaving an obvious trail from the expensive things you buy
    - perfmode 8y ago
      I’m not arguing from absolutes. I’m saying that there is something inherent in income that makes it more visible than wealth.
  - hliyan 8y ago
    True. That is a practical issue. But would you say in ideal terms, wealth is a better measure than income? Also, if you can see transfer, why not take the differential between income and expenditure, which should be the retained wealth?
notacoward 8y ago
Somewhere along the line, we decided that risking some of one's disposable wealth deserved a higher premium than risking years of one's life in labor. Of course, the "we" making that decision was the people who have wealth, and policy makers who could be influenced by wealth. Because for everyone else it's obviously insane and unjust.
chii 8y ago
> It seems strange to me that so much focus of tax is on labor ... capital gains and profits (what some people 'earn' simply by doing nothing) this is the exact topic on discussion from the earliest days of communism. Have a good read of 'Das Kapital' by Karl Marx, he proposes some answers for why, and what the future brings under this course.

davidivadavid 8y ago

What's more surprising is that so little is on consumption.

smt88 8y ago
There are lots of arguments against taxing consumption, but one of them is that in a capitalist system where growth is necessary, taxing consumption is risky. It's like disincentivizing the exact behavior you need to keep the whole system running.
arachnids 8y ago
Tax on consumption hurts poor people. The 1$ sales tax on soap worth X$ hurts me much less than someone making minimum wage.
jayd16 8y ago
Like sales tax or some other form? They're usually regressive taxes.
- davidivadavid 8y ago
  Nope, they're usually flat taxes.
  - jayd16 8y ago
    Flat taxes are regressive.
- deleted 8y ago
  [deleted]
geofft 8y ago
It's very common to want to minimize taxes on consumption for two reasons: first, it's very regressive—someone making $1,000,000 a year probably doesn't spend 100x as much on food as someone making $10,000 a year-and it's common across the political spectrum to consider regressive taxes an anti-feature. Second, encouraging consumption encourages a vibrant economy by keeping money moving. The amount that consumers are willing to spend is generally seen as positively correlated with the strength/quality of the economy. So people don't want to disincentivize consumption.
- davidivadavid 8y ago
  That's not what "regressive" means. A regressive tax means that the marginal tax rate is lower the more people pay taxes. Most consumption taxes are flat taxes. Economic literature has proposed many schemes offering progressive consumption taxes. Since other comments keep repeating that fallacy, here's a link to an article that covers that a little bit as well as other interesting tax-related subjects: http://www.themoneyillusion.com/clear-thinking-about-taxes/ http://www.themoneyillusion.com/clear-thinking-about-taxes/ Edit: higher->lower.
  - geofft 8y ago
    Yes, "regressive" has a strict technical meaning of marginal rates going down. It has a very common practical meaning of affecting people with less income more than people with more income. (For instance, it would be a coherent and meaningful sentence, despite being technically incorrect, to argue that subway fares are regressive.) Do you have a better word for that that is in common use? The blog post you link (which I am attempting to read through, but the condescending first paragraph doesn't help) argues in favor of a progressive tax on the amount of consumption, which I will admit is a proposal I haven't seen before. If you can make this work logistically, it would address the problem of consumption taxes being "regressive." (So would other approaches like food stamps.) However, I don't see any discussion of how these taxes would influence the decision to consume vs. save. Is the person with $100K in income going to make the same decision in both scenarios? I would assume they'd be likely to consume more in scenario 1 and less in scenario 2, where they get taxed more as they consume more. (And they would consume even less under a progressive consumption tax.) In particular I worry about money being "lost"—instead of the $50K that has doubled to $100K being spent all in 20 years, perhaps only the $50K interest is spent or perhaps not even that because there's a disincentive to consume, and then the person lives off of investment income for the rest of their life. For the casual meaning of "regressive," I think it's politically/socially important to many people that someone who lives off passive income and chooses not to work not be in the same position as someone who works long hours and lives paycheck-to-paycheck, even if they consume the same amount - or at least that there's a meaningful route for the latter person to become the former person. I also don't understand why Bill Gates giving $10B less to Africa doesn't count as reducing consumption. It's a use of money to exert his will on the world; I think that should count as consumption (and be taxed as a consumption tax).
DennisP 8y ago
What's even more surprising is that none whatsoever is on the carbon emissions that threaten to crash the whole system.
moogly 8y ago
Is it really that little? Standard VAT is 25%. There are two other reduced levels: 12% for, for example groceries, restaurant visits, accomodation and 6% for culture (books, newspapers, museum visits, concerts, theatre, opera, zoos). Education, health care, insurance and financial services carry 0% VAT.
m0zg 8y ago
Where I live it's 10%. I wouldn't say it's "little". That's on top of like 45% total tax that gets paid before the money reaches me (in the form of payroll tax, social security, medicare, income tax, etc), as well as on top of taxes the retailer pays, and in addition to $10k/yr I pay in real estate tax for my home. At some point you just end up suffocating the economy with this nickel and diming. I'd rather everything was consolidated into a single, predictable rate with no loopholes that I can easily calculate and pay, and all of which every tax payer will see, meaning the whole thing not splitting it into "employer portion" or other bullshit. I would basically like each taxpayer to know exactly how much they are paying, and how all that largesse is being spent. Currently that's not the case in part because the system is deliberately so complicated not even tax accountants can figure it out sometimes. Not to mention that taxes on consumption are strongly regressive and they disproportionately affect the poor. I certainly don't spend all my money, and that's not the case for the vast majority of people. Add more tax, and they can afford even less.
- davidivadavid 8y ago
  Like most people in this thread, you assume all consumption taxes need to be flat. That's not the case.
  - m0zg 8y ago
    And how do you propose this should be implemented and enforced?
    - davidivadavid 8y ago
      There's a lot of literature on the topic. Here's an article to get started: https://johnhcochrane.blogspot.com/2016/10/a-first-step-to-progressive-consumption.html https://johnhcochrane.blogspot.com/2016/10/a-first-step-to-p...
      - geofft 8y ago
        Is the proposal to have a flat consumption tax + use some of those revenues as a stipend, so people who consume less have less effective tax? How does that interact with the well-known result (e.g., from the aftermath of the Stanford marshmallow experiment) that people with less savings and less cash flow are legitimately more skeptical of promises of money in the future, even if those promises are assessed as the same present value by well-off economists? In general given the volatile political climate of the US, I'm skeptical that plans of the form "We'll institute a change that disproportionately affects the poor, and we'll solve it with a complicated and not-universally-politically-popular system that will fix things in the steady state" are likely to accomplish their goals. The balance of power in government might change before the steady state. If you create a federal sales tax, which doesn't currently exist, and also increase "handouts" / "entitlements" / "welfare" to address its disproportionate effect on the poor, I expect that the handout will get canceled one year and the sales tax won't.

skh 8y ago

What's interesting from a political science perspective from the U.S. is that Ronal Reagan believed that the tax on labor should be less than the tax on capital. The U.S. has shifted very much rightward on this issue in the last 40 years.

RickJWagner 8y ago

Those people don't 'do nothing'. Most have worked hard, denied immediate gratification, saved and invested. They did their hard work log ago.

arachnids 8y ago
This. The Republican perspective is that these are not actually different groups of people, but the same people at different points in their lives. The people making salary are younger. They save, then go on to live off their investments when they get older. It is reasonable to tax younger people with earning potential ahead of them rather than older people.
- perfmode 8y ago
  What of inherited wealth?
geofft 8y ago
I'd expect that many of these people inherit money, or "spend" money by giving it to their children. If the argument is that people who worked hard shouldn't be penalized, then that argues in favor of an extremely high estate tax; children who happened to be born to parents who worked hard shouldn't be significantly better off than children who happened not to have that fortune.
- RickJWagner 8y ago
  I'm of mixed opinion on this one. On one hand, I think 'That person earned their money, they can spend it as they see fit. If the kids splurge it, it still gets distributed.' On the other hand, I see how this makes it hard for life to seem fair. (But then again, some people are born attractive, tall, athletic, smart, etc. The upshot: life just isn't fair.) Even if we agreed that high taxes on inherited wealth were proper, I doubt if it'd become law. The Kennedys, Bushes, Clintons, etc. wouldn't like it for obvious reasons.
  - 8y ago

plainOldText 8y ago

And who would you say are the people doing nothing while earning capital gains and profits?

perfmode 8y ago
People who inherit fortunes, for one.
- plainOldText 8y ago
  I'm not particularly familiar with the tax code in Sweden, but there is such a thing as inheritance tax, so people that inherit fortunes do get taxed.
  - moogly 8y ago
    Sweden abolished inheritance tax in 2005.
  - deleted 8y ago
    [deleted]

hliyan 8y ago

On a related (and more fundamental) note, why do we base tax rates on the first derivative of wealth (i.e. income) and not wealth itself? What would happen if we set tax brackets based on net worth? E.g. any income that raises a person's net worth over $1,000,000 is taxed at %X?

perfmode 8y ago
Wealth can be concealed. Income passes hands. You can “see” the transfer.
- ball_of_lint 8y ago
  Except that you can be paid in cash and buy things with cash and leave no hard evidence of your income. Most illegal things are impossible to completely prevent but the punishments keep many from doing them anyways.
  - whamlastxmas 8y ago
    The incredible vast majority of major purchases cannot be done in an untraceable manner. Cars, yachts, planes, property, art. The businesses that sell these items necessitate a paper trail. And because you cannot spend more than the income you have been taxed on (minus legal gifting limits which again have a paper trail) it is extremely difficult to hide your income without leaving an obvious trail from the expensive things you buy
  - perfmode 8y ago
    I’m not arguing from absolutes. I’m saying that there is something inherent in income that makes it more visible than wealth.
- hliyan 8y ago
  True. That is a practical issue. But would you say in ideal terms, wealth is a better measure than income? Also, if you can see transfer, why not take the differential between income and expenditure, which should be the retained wealth?

notacoward 8y ago

Somewhere along the line, we decided that risking some of one's disposable wealth deserved a higher premium than risking years of one's life in labor. Of course, the "we" making that decision was the people who have wealth, and policy makers who could be influenced by wealth. Because for everyone else it's obviously insane and unjust.

chii 8y ago

> It seems strange to me that so much focus of tax is on labor ... capital gains and profits (what some people 'earn' simply by doing nothing) this is the exact topic on discussion from the earliest days of communism. Have a good read of 'Das Kapital' by Karl Marx, he proposes some answers for why, and what the future brings under this course.