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Most economists feel it's correct to tax consumption, not income. Taxing income has the effect of compound-taxing investment, which is A Bad Thing. This is why

Most economists feel it's correct to tax consumption, not income. Taxing income has the effect of compound-taxing investment, which is A Bad Thing. This is why the capital gains tax rate is 15%, since capital gains usually come from money put down that was already taxed. So we get unfair situations, where a business founder is taxed once on his initial investment, again on his company's income tax, and finally on capital gains; whereas someone like Romney is taxed much less. One obvious way to fix this is to protect investment accounts. You know how a traditional IRA is tax deductible when you invest, and taxed when you withdraw? Open up more tax-advantaged investment accounts like that[1]. Money isn't taxed until it's withdrawn, presumably to be spent. With such a system in place it will also become reasonable to tax the rich at a very high rate, without inefficiencies like over-taxing transient income or "destroying jobs". The argument the author presents is strange to me. He says, essentially, that for economic reasons it's fine to tax capital gains at a lower rate. But then in the next paragraph he calls it "unfair". So... he proposes an unsustainably low flat tax rate, which he just implied would be bad, but feel fair... doesn't seem like sound economic thinking to me. [1] Greg Mankiw mentions this idea in a NYT op-ed: https://www.nytimes.com/2012/01/22/business/four-keys-to-a-better-tax-system-economic-view.html?_r=1 https://www.nytimes.com/2012/01/22/business/four-keys-to-a-b... . I've seen a few other economists also toss around this idea also.

mgkimsal 15y ago
"You know how a traditional IRA is tax deductible when you invest, and taxed when you withdraw? Just open that up. Money isn't taxed until it's withdrawn, presumably to be spent." Huh? You just wrote that money is taxed when withdrawn, then suggested taxing money when it's withdrawn. Roth IRAs allow you to deduct tax free, because you pay tax on the money before you invest it, generally a good deal for most people, as you don't know what tax policy will be in effect when you come to withdraw it later, but you do know today's tax policies.
- ceejayoz 15y ago
  > Roth IRAs allow you to deduct tax free, because you pay tax on the money before you invest it, generally a good deal for most people, as you don't know what tax policy will be in effect when you come to withdraw it later, but you do know today's tax policies. Is there really anything preventing them from changing the way Roth IRAs work, though?
  - mgkimsal 15y ago
    Technically no. I suspect it's been around long enough that it may be 'untouchable' like mortgage interest deduction, but I wouldn't be surprised if there's some change in the future which re-taxes x% over your initial base contributions.
- cynicalkane 15y ago
  Roth IRAs and 'traditional' IRAs work differently. Roth IRAs are neither taxed or tax-deductible. Traditional IRAs give you a deduction when you invest, deferring the taxes until you withdraw.

mgkimsal 15y ago

"You know how a traditional IRA is tax deductible when you invest, and taxed when you withdraw? Just open that up. Money isn't taxed until it's withdrawn, presumably to be spent." Huh? You just wrote that money is taxed when withdrawn, then suggested taxing money when it's withdrawn. Roth IRAs allow you to deduct tax free, because you pay tax on the money before you invest it, generally a good deal for most people, as you don't know what tax policy will be in effect when you come to withdraw it later, but you do know today's tax policies.

ceejayoz 15y ago
> Roth IRAs allow you to deduct tax free, because you pay tax on the money before you invest it, generally a good deal for most people, as you don't know what tax policy will be in effect when you come to withdraw it later, but you do know today's tax policies. Is there really anything preventing them from changing the way Roth IRAs work, though?
- mgkimsal 15y ago
  Technically no. I suspect it's been around long enough that it may be 'untouchable' like mortgage interest deduction, but I wouldn't be surprised if there's some change in the future which re-taxes x% over your initial base contributions.
cynicalkane 15y ago
Roth IRAs and 'traditional' IRAs work differently. Roth IRAs are neither taxed or tax-deductible. Traditional IRAs give you a deduction when you invest, deferring the taxes until you withdraw.