5 ms·

There's a pretty simple solution: Abolish the capital gains tax, and tax all capital gains at the income tax rate. There is no more "capital gain". Only income.

There's a pretty simple solution: Abolish the capital gains tax, and tax all capital gains at the income tax rate. There is no more "capital gain". Only income. Whether your income was earned through labor or rents on capital that you own seems rather irrelevant to me.

lionhearted 15y ago
Let's think about secondary effects. What percent of very wealthy Americans do you think would renounce their citizenship based on this? How much less investment capital would there be in the USA based on that? Note: Not asking for a value judgment ("good riddance if they do!" - not productive). Just your estimate as to what percent of wealthy Americans would give up their citizenship and how much less investment capital would result. It's an important detail to consider.
- ww520 15y ago
  The wealthy can renounce U.S. citizenship and lose the protection of U.S. system on their properties. Just don't cry when some thugs in their new home island state rob them of their wealth. The U.S. system provides the scalability for these people to make vast wealth. Shouldn't they pay it back to keep it up? The system is expensive to upkeep. There ain't no free lunch.
  - econgeeker 15y ago
    You think property rights don't exist elsewhere? The only "free lunch" is the one paid for with stolen money, e.g.: taxes. The rich are leaving and renouncing. There are a lot of countries out there, and many of them provide a more hospitable climate for wealth.
- rayiner 15y ago
  Renounce their citizenship to go where? Europe (which is far less friendly to the rich)? Asia (what's the point of being rich if you have to live in the developing world?) Fears of wealthy people leaving are a red-herring. Plus, who says we have a shortage of investment capital in the US? There is a ton of money floating around from pension funds and 401k accounts, even leaving out the money held by the very wealthy. If you look at the economy today, it's absurd to say that lack of capital is the reason for the lack of top-line growth.
- radicaldreamer 15y ago
  I'm not sure a significant portion of people will renounce their citizenship over the capital gains tax rate. We didn't have a brain drain or mass emigration when the top income tax rate was 91% either. To make tax policy based on a fear of wealthy Americans deciding to stop being American seems ludicrous. Similarly, I think investment capital will remain in the US because of the opportunities this country provides for investment and enterprise. You have many countries which have much lower, or even zero capital gains taxes and only the ones with talent and the ability to produce return attract and maintain significant amounts of investment capital. The Isle of Man, Jamaica, and Mexico don't have any capital gains taxes, but are obviously not attracting the kind of capital that the US does- and for good reasons.
  - gopi 15y ago
    When the top income tax was 91% (from 1951-1964), the capital gain tax was 25%. So while doctors and small businessmen pay >50% tax on earned income the uber rich paid 25%
- rkalla 15y ago
  Good point, but could you argue that those Americans that would renounce their citizen ship are already hiding that income in untaxable locations already? I wonder if it would be a wash, you suddenly up the tax, and everyone that was ducking anyway leaves and the rest get taxed and fill the void. All speculation of course, none of us would have numbers to know.
- potatolicious 15y ago
  Echoing what rayiner said - where are the rich going to go? Europe is less friendly to the rich - extremely so in the most pleasant of places. China? India? Neither are very pleasant places, and even with truckloads of cash has a hard time competing with the quality of life enjoyed in the US even under onerous taxation. I think you're not giving enough credit to the American quality of life - it's why my family immigrated here from Asia. While developing Asian countries have seem dramatic improvements in the last two decades, the QOL in most of these countries still pales in comparison. Just about anywhere someone used to the Western quality of life would want to go would have higher taxes.
  - lefstathiou 15y ago
    That's not true. How about Hong Kong or Singapore where you certainly get a western style life with extra benefits: safer, cleaner, live-in maid service, better access to healthcare and a 15-20% all in tax rate. Have you been to Thailand or Indonesia? Sounds ridiculous but this is happening right now. I'm in banking and I hear my clients talk about it all the time. They're doing it as we speak (slowly migrating their business operations and key personell) The thing about entrepreneurs is that they are an irrational bunch. I could introduce you to a couple of people who would rather put all their money into a boat and sink it than pay it as additional tax. Sounds crazy but from a growing number of people's perspectives, the problem isnt excess taxation, its excess taxation coupled with gross mismanagement. Nobody likes seeing their money go to waste, especially to causes they dont agree with (ie union pensions for government employees that retire after 20 years of service).
    - jwhitlark 15y ago
      Drawbacks also... http://www.freedomhouse.org/template.cfm?page=363&year=2010&country=7915 http://www.freedomhouse.org/template.cfm?page=363&year=2...
    - rayiner 15y ago
      I was born in Thailand and go back to Bangkok regularly. Unless you want to live in isolation (maybe with your banker buddies), there is no comparison between living in the US and living in Thailand.
- jwhitlark 15y ago
  Renouncing your citizenship for tax reasons triggers secondary tax laws that offset any benefits. (It's been a few years since I reviewed any tax law, but I've not heard of any changes in this area.)
  - cellularmitosis 15y ago
    according to Neil Strauss in "Emergency", recently changes in law require you to pay some taxes up to 10 years after renouncing citizenship.
- philiphodgen 15y ago
  For those of you responding skeptically to Lionhearted's question, I'm in the business of helping these people exit the United States. At any given point I have four or five of these cases going. They go everywhere. Their money goes with them.
  - _delirium 15y ago
    The total number for 2009 was 743, though, which is pretty small peanuts by the scale of the U.S. economy. It's not even large as a proportion of very-rich people.
    - econgeeker 15y ago
      That's the number of people who renounced. And that number is going up dramatically, and I've heard that the published figures for renouncement are way under-reported. (as in here are lawyers who have more clients who have renounced than the government claims renounced in total.) But on both sides these are just claims. The number of people who simply moved their butts and their assets overseas is much higher. You can tell this is the case because the administration has been saber rattling for the last four years, and starting to work their way into currency controls. Did you know, in order to renounce, you have to get the permission of the government? They charge an exit tax too for your funds. This is a currency control and it is one of the things that marked the soviet union as a bad regime. If you can't move your money in and out of a country, then you're not likely to invest in that country. I'm not very rich, and I will renounce as soon as my second citizenship gets in. It will be easier for me because, not being very rich yet, I will be more likely to get permission of the government to give up my citizenship.
      - _delirium 15y ago
        Yeah, I'd support making it both easier to leave the U.S. as well as to enter it--- make both renunciation and green-card procurement easier. I think the U.S. would come out pretty well on overall balance there, because it's a fairly popular place to live, and is artificially keeping out many people who would like to live there. The evidence I can find is that the outward flow is a trickle rather than a flood (or even a modest current), though. Even if the 743 number is a 5x underestimate, that's still not much. I'm not sure it even balances the rich people flowing the other direction, e.g. the businessmen getting green cards under the ">$1m to invest" criterion (and no doubt there would be more of them if the green-card process were streamlined). I don't think the U.S. is particularly unique in making it hard to renounce citizenship, though perhaps it's for different reasons. Many countries make it very hard to renounce citizenship if they think you're doing it to get out of mandatory military service, for example. For economic reasons, many require that there no longer be any links with the country, e.g. you can't renounce German citizenship if you still own businesses or property in Germany. France seems to have an additional timing requirement, where you can only renounce French citizenship within the first year after acquiring a second citizenship, so dual nationals can't decide 10 years later to leave the country and renounce the French citizenship.
- pbreit 15y ago
  You could graduate it over many years and the departures would unlikely be noticeable. Investment capital levels cannot trump everything.
Astrohacker 15y ago
You also need to end the Federal Reserve and make fractional reserve banking illegal so no one can create new money and give it to themselves. Allow the market to handle the distribution of purchasing power. Not the government banking cartel.
dantheman 15y ago
Rents on capital have the possibility of loss, whereas income does not.
- rayiner 15y ago
  And?
danteembermage 15y ago
Suppose I had invested $1 million in a private company 10 years ago. It is now worth much, much more, how much no one really knows. I go to a bank and mention I own 100,000 shares of XYZ corp. Could I have a loan please, collateralized with some of my shares? The bank says sure, how about $2 million at prime +0.3%. I say that's just fine. Under current tax law there is no capital gain recognized, and it's hard to imagine how there could be, I don't even know how much my income is at this point, only that some bank is pretty sure it's bigger than $1 million. It's not that this was some complicated tax avoidance strategy through the Isle of Mann either, it's just a loan. Taxing non-cash income as cash income causes many difficult problems. Ask folks who exercised options on shares whose value evaporated during the lockup period how they felt about their tax bill? This is an arms race we can't win, I'm pretty sure there's always going to be assets with values to murky to tax, but not too murky to borrow against no matter how generous we are with defining income. The top 0.1% are going to be a moving target, there's too much money at stake for them not to be.
- jackpirate 15y ago
  Does this effect have a name?
  - danteembermage 15y ago
    This issue is generally described under the heading "effective capital gains tax rate" in the literature, which back when the rate was higher was between 3.4% and 6.6% (1960 to 1978). http://www.jstor.org/pss/2352820 http://www.jstor.org/pss/2352820 for an abstract that relates
civilian 15y ago
Wait, what's the problem that you're solving?
- cstross 15y ago
  Tax avoidance. (The marginal rate of tax on capital gains is generally much lower than the marginal rate of tax on an equivalent earned income. The investment professionals who strike it big do so by engineering their income to arrive in the shape of capital. Tax it as income and suddenly a whole lot more tax revenue shows up ... and the Gini coefficient in the society in question drops a little bit.)
  - civilian 15y ago
    Taking advantage of capital gains might be tax avoidance from a certain point of view, but it's also a useful for helping grow wealth and the economy in general. Having large sums of private capital helps the economy-- how does it help it? By making it easy to borrow money, like the VC that so many HNers are seeking.
    - daemin 15y ago
      If capital gains were taxed as regular income, that would mean a whole lot more money would be flowing into the governments coffers, and as such the income tax rate could be lowered as a result for all parties. You'd have to run the numbers to see but it seems reasonable.
    - rayiner 15y ago
      So the argument for differential taxation of income versus capital gains is to incentive investment. However, I'm not sure investment needs to be incentivized right now. There is a ton of private capital floating around right now looking for productive investments in the US, and they just don't exist. So the money goes overseas, or into elaborate, questionable financial instruments.
    - rubashov 15y ago
      Another problem with taxing capital gains heavily is that it distorts investment by discouraging dividends and buybacks in favor of risky attempts at growth. Companies irrationally choose to grow and make high risk acquisitions rather than simply pay out big dividends. This contributes to business cycle instability, as well as inefficient allocation of capital; the incentive is to keep capital locked up in a conglomerate.

lionhearted 15y ago

Let's think about secondary effects. What percent of very wealthy Americans do you think would renounce their citizenship based on this? How much less investment capital would there be in the USA based on that? Note: Not asking for a value judgment ("good riddance if they do!" - not productive). Just your estimate as to what percent of wealthy Americans would give up their citizenship and how much less investment capital would result. It's an important detail to consider.

ww520 15y ago
The wealthy can renounce U.S. citizenship and lose the protection of U.S. system on their properties. Just don't cry when some thugs in their new home island state rob them of their wealth. The U.S. system provides the scalability for these people to make vast wealth. Shouldn't they pay it back to keep it up? The system is expensive to upkeep. There ain't no free lunch.
- econgeeker 15y ago
  You think property rights don't exist elsewhere? The only "free lunch" is the one paid for with stolen money, e.g.: taxes. The rich are leaving and renouncing. There are a lot of countries out there, and many of them provide a more hospitable climate for wealth.
rayiner 15y ago
Renounce their citizenship to go where? Europe (which is far less friendly to the rich)? Asia (what's the point of being rich if you have to live in the developing world?) Fears of wealthy people leaving are a red-herring. Plus, who says we have a shortage of investment capital in the US? There is a ton of money floating around from pension funds and 401k accounts, even leaving out the money held by the very wealthy. If you look at the economy today, it's absurd to say that lack of capital is the reason for the lack of top-line growth.
radicaldreamer 15y ago
I'm not sure a significant portion of people will renounce their citizenship over the capital gains tax rate. We didn't have a brain drain or mass emigration when the top income tax rate was 91% either. To make tax policy based on a fear of wealthy Americans deciding to stop being American seems ludicrous. Similarly, I think investment capital will remain in the US because of the opportunities this country provides for investment and enterprise. You have many countries which have much lower, or even zero capital gains taxes and only the ones with talent and the ability to produce return attract and maintain significant amounts of investment capital. The Isle of Man, Jamaica, and Mexico don't have any capital gains taxes, but are obviously not attracting the kind of capital that the US does- and for good reasons.
- gopi 15y ago
  When the top income tax was 91% (from 1951-1964), the capital gain tax was 25%. So while doctors and small businessmen pay >50% tax on earned income the uber rich paid 25%
rkalla 15y ago
Good point, but could you argue that those Americans that would renounce their citizen ship are already hiding that income in untaxable locations already? I wonder if it would be a wash, you suddenly up the tax, and everyone that was ducking anyway leaves and the rest get taxed and fill the void. All speculation of course, none of us would have numbers to know.
potatolicious 15y ago
Echoing what rayiner said - where are the rich going to go? Europe is less friendly to the rich - extremely so in the most pleasant of places. China? India? Neither are very pleasant places, and even with truckloads of cash has a hard time competing with the quality of life enjoyed in the US even under onerous taxation. I think you're not giving enough credit to the American quality of life - it's why my family immigrated here from Asia. While developing Asian countries have seem dramatic improvements in the last two decades, the QOL in most of these countries still pales in comparison. Just about anywhere someone used to the Western quality of life would want to go would have higher taxes.
- lefstathiou 15y ago
  That's not true. How about Hong Kong or Singapore where you certainly get a western style life with extra benefits: safer, cleaner, live-in maid service, better access to healthcare and a 15-20% all in tax rate. Have you been to Thailand or Indonesia? Sounds ridiculous but this is happening right now. I'm in banking and I hear my clients talk about it all the time. They're doing it as we speak (slowly migrating their business operations and key personell) The thing about entrepreneurs is that they are an irrational bunch. I could introduce you to a couple of people who would rather put all their money into a boat and sink it than pay it as additional tax. Sounds crazy but from a growing number of people's perspectives, the problem isnt excess taxation, its excess taxation coupled with gross mismanagement. Nobody likes seeing their money go to waste, especially to causes they dont agree with (ie union pensions for government employees that retire after 20 years of service).
  - jwhitlark 15y ago
    Drawbacks also... http://www.freedomhouse.org/template.cfm?page=363&year=2010&country=7915 http://www.freedomhouse.org/template.cfm?page=363&year=2...
  - rayiner 15y ago
    I was born in Thailand and go back to Bangkok regularly. Unless you want to live in isolation (maybe with your banker buddies), there is no comparison between living in the US and living in Thailand.
jwhitlark 15y ago
Renouncing your citizenship for tax reasons triggers secondary tax laws that offset any benefits. (It's been a few years since I reviewed any tax law, but I've not heard of any changes in this area.)
- cellularmitosis 15y ago
  according to Neil Strauss in "Emergency", recently changes in law require you to pay some taxes up to 10 years after renouncing citizenship.
philiphodgen 15y ago
For those of you responding skeptically to Lionhearted's question, I'm in the business of helping these people exit the United States. At any given point I have four or five of these cases going. They go everywhere. Their money goes with them.
- _delirium 15y ago
  The total number for 2009 was 743, though, which is pretty small peanuts by the scale of the U.S. economy. It's not even large as a proportion of very-rich people.
  - econgeeker 15y ago
    That's the number of people who renounced. And that number is going up dramatically, and I've heard that the published figures for renouncement are way under-reported. (as in here are lawyers who have more clients who have renounced than the government claims renounced in total.) But on both sides these are just claims. The number of people who simply moved their butts and their assets overseas is much higher. You can tell this is the case because the administration has been saber rattling for the last four years, and starting to work their way into currency controls. Did you know, in order to renounce, you have to get the permission of the government? They charge an exit tax too for your funds. This is a currency control and it is one of the things that marked the soviet union as a bad regime. If you can't move your money in and out of a country, then you're not likely to invest in that country. I'm not very rich, and I will renounce as soon as my second citizenship gets in. It will be easier for me because, not being very rich yet, I will be more likely to get permission of the government to give up my citizenship.
    - _delirium 15y ago
      Yeah, I'd support making it both easier to leave the U.S. as well as to enter it--- make both renunciation and green-card procurement easier. I think the U.S. would come out pretty well on overall balance there, because it's a fairly popular place to live, and is artificially keeping out many people who would like to live there. The evidence I can find is that the outward flow is a trickle rather than a flood (or even a modest current), though. Even if the 743 number is a 5x underestimate, that's still not much. I'm not sure it even balances the rich people flowing the other direction, e.g. the businessmen getting green cards under the ">$1m to invest" criterion (and no doubt there would be more of them if the green-card process were streamlined). I don't think the U.S. is particularly unique in making it hard to renounce citizenship, though perhaps it's for different reasons. Many countries make it very hard to renounce citizenship if they think you're doing it to get out of mandatory military service, for example. For economic reasons, many require that there no longer be any links with the country, e.g. you can't renounce German citizenship if you still own businesses or property in Germany. France seems to have an additional timing requirement, where you can only renounce French citizenship within the first year after acquiring a second citizenship, so dual nationals can't decide 10 years later to leave the country and renounce the French citizenship.
pbreit 15y ago
You could graduate it over many years and the departures would unlikely be noticeable. Investment capital levels cannot trump everything.

Astrohacker 15y ago

You also need to end the Federal Reserve and make fractional reserve banking illegal so no one can create new money and give it to themselves. Allow the market to handle the distribution of purchasing power. Not the government banking cartel.

dantheman 15y ago

Rents on capital have the possibility of loss, whereas income does not.

rayiner 15y ago
And?

danteembermage 15y ago

Suppose I had invested $1 million in a private company 10 years ago. It is now worth much, much more, how much no one really knows. I go to a bank and mention I own 100,000 shares of XYZ corp. Could I have a loan please, collateralized with some of my shares? The bank says sure, how about $2 million at prime +0.3%. I say that's just fine. Under current tax law there is no capital gain recognized, and it's hard to imagine how there could be, I don't even know how much my income is at this point, only that some bank is pretty sure it's bigger than $1 million. It's not that this was some complicated tax avoidance strategy through the Isle of Mann either, it's just a loan. Taxing non-cash income as cash income causes many difficult problems. Ask folks who exercised options on shares whose value evaporated during the lockup period how they felt about their tax bill? This is an arms race we can't win, I'm pretty sure there's always going to be assets with values to murky to tax, but not too murky to borrow against no matter how generous we are with defining income. The top 0.1% are going to be a moving target, there's too much money at stake for them not to be.

jackpirate 15y ago
Does this effect have a name?
- danteembermage 15y ago
  This issue is generally described under the heading "effective capital gains tax rate" in the literature, which back when the rate was higher was between 3.4% and 6.6% (1960 to 1978). http://www.jstor.org/pss/2352820 http://www.jstor.org/pss/2352820 for an abstract that relates

civilian 15y ago

Wait, what's the problem that you're solving?

cstross 15y ago
Tax avoidance. (The marginal rate of tax on capital gains is generally much lower than the marginal rate of tax on an equivalent earned income. The investment professionals who strike it big do so by engineering their income to arrive in the shape of capital. Tax it as income and suddenly a whole lot more tax revenue shows up ... and the Gini coefficient in the society in question drops a little bit.)
- civilian 15y ago
  Taking advantage of capital gains might be tax avoidance from a certain point of view, but it's also a useful for helping grow wealth and the economy in general. Having large sums of private capital helps the economy-- how does it help it? By making it easy to borrow money, like the VC that so many HNers are seeking.
  - daemin 15y ago
    If capital gains were taxed as regular income, that would mean a whole lot more money would be flowing into the governments coffers, and as such the income tax rate could be lowered as a result for all parties. You'd have to run the numbers to see but it seems reasonable.
  - rayiner 15y ago
    So the argument for differential taxation of income versus capital gains is to incentive investment. However, I'm not sure investment needs to be incentivized right now. There is a ton of private capital floating around right now looking for productive investments in the US, and they just don't exist. So the money goes overseas, or into elaborate, questionable financial instruments.
  - rubashov 15y ago
    Another problem with taxing capital gains heavily is that it distorts investment by discouraging dividends and buybacks in favor of risky attempts at growth. Companies irrationally choose to grow and make high risk acquisitions rather than simply pay out big dividends. This contributes to business cycle instability, as well as inefficient allocation of capital; the incentive is to keep capital locked up in a conglomerate.