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There are more people holding equity than ever before. If we raised capital gains taxes, would people sell? Would they hold until capital gains taxes lowered?
by an_opabinia 6y ago
There are more people holding equity than ever before. If we raised capital gains taxes, would people sell? Would they hold until capital gains taxes lowered?
If capital gains taxes are raised, would equity prices rise, because fewer people are selling? Would more people sell, causing prices to fall? Would fewer people buy, because they anticipate paying those taxes in the future?
Would rising prices attract more people to buy equities? So that would mean, rising capital gains taxes could cause an even higher rise in equity prices, because both fewer people are selling and more people are buying in response to rising prices?
Doesn't someone have to sell their equities, into cash, in order to have a gain? Is it a complete picture to just count, "market value = shares outstanding * last price paid?" If no one is selling are those returns real?
If capital gains taxes are increased, and fewer people sell, is revenue offset by the increase in equity prices? Or not? What does it mean, for your theory about taxes?
These are extremely basic questions about how markets operate.
Anyway, my point is, you have no idea how tax laws wield influence of how markets operate. You're totally right about how trite you are.
In my experience researching these questions, the answers are inconclusive, and cannot at all be predicted from some kind of first principles understanding of taxes or economics.
- WalterBright 6y agoFor my own investments, capital gains taxes certainly cause me to trade less, because each trade is a taxable event. Trading less means I stay invested much longer in less productive investments. In the tax regime before Reagan, tax rates were so high that people found it worthwhile to invest instead into poorly performing tax shelters. Reagan's deal was to trade lowering marginal rates for eliminating the shelters. It was a good deal, as shown by increased GDP growth rate. Tax policy is why employers offer health insurance. Tax policy is why we have estate planners, trusts, etc. Tax policy is why we have 401ks. So yeah, I do have an idea how tax laws influence how markets work.
- an_opabinia 6y agoAll I'm trying to say is, it would seem logically and empirically, at least from your personal experience, that higher capital gains is associated with higher equity prices, because fewer people, including you, are selling. Which means higher capital gains are, in an important sense, making you more money. That is totally and utterly surprising if our typical feelings about taxes are that they make us less wealthy. It is indeed possible that taxes make us more wealthy.
- WalterBright 6y agoSo holding a lower performing investment would make more money than moving to a higher performing one? I doubt it.
- nickpp 6y agoHigher capital gains tax would mean fewer people investing in equities, since their gains would be diminished by taxation. Fewer equity buyers means lower equity prices. People already in the markets must find a buyer to exit and realize those gains. There may be other factors I am missing, of course, but as Walt said: tax something if you want less of it.
- 6510 6y agoI wonder, could we automate the hell out of everything, do audits, valuations of all assets etc, tax total wealth in real time and get rid of the transaction taxes? Perhaps give people a choice and make it financially attractive enough?