5 ms·

Instead of an asset tax why not just tax capital gains as regular income? How is classification of that income somehow less worthy of taxation than a salary?

tonyedgecombe 6y ago
Capital gains is messy, the UK has been doing a review on it and I don't think there are any easy answers. Ideally you'd want to exclude inflation but that would become a bureaucratic nightmare. Having said that I think there is a good case for treating it and dividends as regular income.
randerson 6y ago
Or at least just increasing CGT rates to somewhere between the current rates and income tax rates. But if we got rid of lower CGT rates it could destabilize the stock market. My gripe with income taxes is how each year is taxed in isolation. You could be making minimum wage your whole life except for 1 year where you get a big windfall, and that year you'll be taxed as if you're wealthy and lose most of it to taxes despite needing the money more than most people who paid less tax that year. Perhaps income taxes should be taxed based on a rolling average or something. I can't see how wealth / asset taxes would play out in practice. Elon Musk is the wealthiest man in the world but most of that is unvested TSLA options that he can't sell. The world's wealthiest person could end up owing more tax than he has liquidity for. I think we need to stop all taxation on unrealized gains. Already, things like AMT on ISO exercises penalize the middle class the most, as plenty of people realize each year trying to participate in their employer stock plans. Increasing capital gains tax (only when cash out or transferring) would increase tax on the wealthy, and make life simpler and less stressful for all.
- austincheney 6y ago
  Changes to CGT will not have any immediate impact on the market. Invested capital isn't income until it is withdrawn from a market account at which point it is taxed. If investment capital remains in the market and is not withdrawn it isn't income. For example if I make $7 million in the market tomorrow I cannot use that money to buy a $7 lunch until I pull some of that money out of the market into a more liquid account (checking or saving). Pulling the money out of the market is where it becomes taxable income. Changes to CGT may have some minor indirect changes on investment by altering perceptions of investment principle. It may even benefit the market by reducing the frequency of money leaving the market.
jandrewrogers 6y ago
A couple reasons. First, long-term capital gains do not have their cost basis adjusted for inflation in the US (some other countries do), which is a significant drag on real returns -- you are literally paying taxes on inflation. This does not materially affect income. Second, income does not have any downside risk, you can't lose money, whereas capital gains do and with limited ability to deduct those losses in the US. Lower tax rates offset lack of deductibility for material losses that don't affect income. If these losses became deductible, which they are in some other countries, then treating it like income would be fair. It is also worth noting that the combined long-term capital gains tax rates in the many parts of the US are already among the highest in the world. You will receive more favorable tax treatment in most of Europe than California, for example. There is a separate policy issue: governments want to incentivize long-term investment, which are inherently more risky than short-term investments, ceteris paribus. If you treat long-term capital investments like short-term income investments, it strongly incentivizes investment to flow into rent-seeking cashflow businesses -- same expected return with much less risk. You see this in many parts of Europe where an enormous percentage of available capital flows into rental property investment.
- austincheney 6y ago
  > Second, income does not have any downside risk, you can't lose money That isn't correct. You can lose money with income. As a consultant you are on your own for expenses and can end up earning a negative rate if your expenses exceed your income rate. Whether or now those expenses are deductible against your income taxes is immaterial to the more immediate accounting at hand.
  - jandrewrogers 6y ago
    A consultant is running a business, it isn't wage income which is what most people mean by "regular income". I can deduct expenses against my consulting income but not my wage income. It is always possible to spend more money than you earn in wages but that doesn't mean you have negative income as a consequence. Other kinds of income can be negative even with no expenses. The point stands that there is no such thing as a negative paycheck.

tonyedgecombe 6y ago

Capital gains is messy, the UK has been doing a review on it and I don't think there are any easy answers. Ideally you'd want to exclude inflation but that would become a bureaucratic nightmare. Having said that I think there is a good case for treating it and dividends as regular income.

randerson 6y ago

Or at least just increasing CGT rates to somewhere between the current rates and income tax rates. But if we got rid of lower CGT rates it could destabilize the stock market. My gripe with income taxes is how each year is taxed in isolation. You could be making minimum wage your whole life except for 1 year where you get a big windfall, and that year you'll be taxed as if you're wealthy and lose most of it to taxes despite needing the money more than most people who paid less tax that year. Perhaps income taxes should be taxed based on a rolling average or something. I can't see how wealth / asset taxes would play out in practice. Elon Musk is the wealthiest man in the world but most of that is unvested TSLA options that he can't sell. The world's wealthiest person could end up owing more tax than he has liquidity for. I think we need to stop all taxation on unrealized gains. Already, things like AMT on ISO exercises penalize the middle class the most, as plenty of people realize each year trying to participate in their employer stock plans. Increasing capital gains tax (only when cash out or transferring) would increase tax on the wealthy, and make life simpler and less stressful for all.

austincheney 6y ago
Changes to CGT will not have any immediate impact on the market. Invested capital isn't income until it is withdrawn from a market account at which point it is taxed. If investment capital remains in the market and is not withdrawn it isn't income. For example if I make $7 million in the market tomorrow I cannot use that money to buy a $7 lunch until I pull some of that money out of the market into a more liquid account (checking or saving). Pulling the money out of the market is where it becomes taxable income. Changes to CGT may have some minor indirect changes on investment by altering perceptions of investment principle. It may even benefit the market by reducing the frequency of money leaving the market.

jandrewrogers 6y ago

A couple reasons. First, long-term capital gains do not have their cost basis adjusted for inflation in the US (some other countries do), which is a significant drag on real returns -- you are literally paying taxes on inflation. This does not materially affect income. Second, income does not have any downside risk, you can't lose money, whereas capital gains do and with limited ability to deduct those losses in the US. Lower tax rates offset lack of deductibility for material losses that don't affect income. If these losses became deductible, which they are in some other countries, then treating it like income would be fair. It is also worth noting that the combined long-term capital gains tax rates in the many parts of the US are already among the highest in the world. You will receive more favorable tax treatment in most of Europe than California, for example. There is a separate policy issue: governments want to incentivize long-term investment, which are inherently more risky than short-term investments, ceteris paribus. If you treat long-term capital investments like short-term income investments, it strongly incentivizes investment to flow into rent-seeking cashflow businesses -- same expected return with much less risk. You see this in many parts of Europe where an enormous percentage of available capital flows into rental property investment.

austincheney 6y ago
> Second, income does not have any downside risk, you can't lose money That isn't correct. You can lose money with income. As a consultant you are on your own for expenses and can end up earning a negative rate if your expenses exceed your income rate. Whether or now those expenses are deductible against your income taxes is immaterial to the more immediate accounting at hand.
- jandrewrogers 6y ago
  A consultant is running a business, it isn't wage income which is what most people mean by "regular income". I can deduct expenses against my consulting income but not my wage income. It is always possible to spend more money than you earn in wages but that doesn't mean you have negative income as a consequence. Other kinds of income can be negative even with no expenses. The point stands that there is no such thing as a negative paycheck.