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Why should income and capital gains be taxed differently anyway? If it's to stop Grandma getting hit with a huge marginal tax when she sells her house (despite

by wisty 15y ago

Why should income and capital gains be taxed differently anyway? If it's to stop Grandma getting hit with a huge marginal tax when she sells her house (despite it being a once-off kind of thing), just introduce some kind of smoothing. If your income is uneven, the tax man can give concessions (if you get a lot of money after a period of low income), and rebates (if you have a low income period after making a lot of money). Easy, right? No more need for tricky rules about how to move money between the different categories.

roel_v 15y ago
Because of incentives, because the actions that created the capitals gains in the first place were already taxed, to be able to correct for the self-employed who incorporate vs those who don't (situation of getting dividend on 5 stocks Coca Cola is very different from being a sole proprietor and paying yourself effectively through dividend), to keep the administration sane (how can you smooth a windfall like selling a house? You'd have to do it over 10 years or so, how are you going to keep track of that? What if the person moves, across the country or abroad? etc...) None of it is as simple as it looks - there is a reason we ended up in the situation we are now. Nobody likes it, the IRS itself the least. It's not a matter of saying 'oh let's just start from scratch'. (See also: 'second system syndrome', which applies to law just as much as to software)
dantheman 15y ago
Because income and capital gains are two different things. Capital gains should be lower because there is a risk that you may lose money, if you add a high tax on top of that lots of investments become not worth it.
- yaix 15y ago
  If you start a company and then pay yourself part of the earnings, there is a risk too that the company goes bankrupt. If you specialize in an industry and get a paid job, there is a risk too that you dont find a job or get laid off. I dont see how the risk of capital investments is any different to other kinds of investment that would justfy it to be taxed differently. A better explanation would be the higher capitalization of the groups lobbying for a lower tax for that income group.
- sqrt17 15y ago
  The problem with this way of thinking is that, this is not necessarily true: Regular ways of getting income also make you take part in the risk of whatever or whoever you get your income from, and as a result, more and more things that would be income get wrapped into capital gains. The fair thing to do would be something where losing money (or unvoluntarily suffering relocation expenses or losses as a result of your source of income) gives you a tax credit, valid for the next 10 years.
SamReidHughes 15y ago
> Why should income and capital gains be taxed differently anyway? Because of inflation, because there's already a corporate income tax.
- smutticus 15y ago
  1) Inflation effects salaries just as much as capital gains. Inflation does not discriminate between income types. 2) I pay capital gains tax rates on some of my income but I'm not a corporation so I pay no corporate income tax. The 2 are only tangentially related.
  - SamReidHughes 15y ago
    1) Inflation does discriminate between income types, in the following manner. If there's 5% annual inflation and somebody pays you a dollar for some work today, you're getting one dollar in whatever today's dollar is worth, and you're paying income taxes in whatever today's dollar is worth. If there's 5% annual inflation, and you invested $20 a year ago and today you sold your investment for $22, you've made $1 in whatever today's dollar is worth. But you're paying income taxes on $2. 2) Corporate income taxes decrease the amount of capital gains you have.
- artsrc 15y ago
  The correct way to deal with corporate income tax is to have corporations disburse their income, and to disburse the tax credits along with the income. The correct way to deal with inflation is to to keep it low, and understand that inflation + capital gains tax creates an effective wealth tax, and that some wealth tax in the mix, along with income and consumption taxes, is a good thing. Inflation is not, and should not, be taken into account on term deposits for the same reason.

by wisty 15y ago

roel_v 15y ago

Because of incentives, because the actions that created the capitals gains in the first place were already taxed, to be able to correct for the self-employed who incorporate vs those who don't (situation of getting dividend on 5 stocks Coca Cola is very different from being a sole proprietor and paying yourself effectively through dividend), to keep the administration sane (how can you smooth a windfall like selling a house? You'd have to do it over 10 years or so, how are you going to keep track of that? What if the person moves, across the country or abroad? etc...) None of it is as simple as it looks - there is a reason we ended up in the situation we are now. Nobody likes it, the IRS itself the least. It's not a matter of saying 'oh let's just start from scratch'. (See also: 'second system syndrome', which applies to law just as much as to software)

dantheman 15y ago

Because income and capital gains are two different things. Capital gains should be lower because there is a risk that you may lose money, if you add a high tax on top of that lots of investments become not worth it.

yaix 15y ago
If you start a company and then pay yourself part of the earnings, there is a risk too that the company goes bankrupt. If you specialize in an industry and get a paid job, there is a risk too that you dont find a job or get laid off. I dont see how the risk of capital investments is any different to other kinds of investment that would justfy it to be taxed differently. A better explanation would be the higher capitalization of the groups lobbying for a lower tax for that income group.
sqrt17 15y ago
The problem with this way of thinking is that, this is not necessarily true: Regular ways of getting income also make you take part in the risk of whatever or whoever you get your income from, and as a result, more and more things that would be income get wrapped into capital gains. The fair thing to do would be something where losing money (or unvoluntarily suffering relocation expenses or losses as a result of your source of income) gives you a tax credit, valid for the next 10 years.

SamReidHughes 15y ago

> Why should income and capital gains be taxed differently anyway? Because of inflation, because there's already a corporate income tax.

smutticus 15y ago
1) Inflation effects salaries just as much as capital gains. Inflation does not discriminate between income types. 2) I pay capital gains tax rates on some of my income but I'm not a corporation so I pay no corporate income tax. The 2 are only tangentially related.
- SamReidHughes 15y ago
  1) Inflation does discriminate between income types, in the following manner. If there's 5% annual inflation and somebody pays you a dollar for some work today, you're getting one dollar in whatever today's dollar is worth, and you're paying income taxes in whatever today's dollar is worth. If there's 5% annual inflation, and you invested $20 a year ago and today you sold your investment for $22, you've made $1 in whatever today's dollar is worth. But you're paying income taxes on $2. 2) Corporate income taxes decrease the amount of capital gains you have.
artsrc 15y ago
The correct way to deal with corporate income tax is to have corporations disburse their income, and to disburse the tax credits along with the income. The correct way to deal with inflation is to to keep it low, and understand that inflation + capital gains tax creates an effective wealth tax, and that some wealth tax in the mix, along with income and consumption taxes, is a good thing. Inflation is not, and should not, be taken into account on term deposits for the same reason.