4 ms·

What I would like to know is what the justification for capital gains being taxed at a considerably lower rate than other income is. Why treat it preferentially

What I would like to know is what the justification for capital gains being taxed at a considerably lower rate than other income is. Why treat it preferentially?

jeffbee 3y ago
Now do houses. Why is the first $500k of real estate appreciation untaxed?
- jjav 3y ago
  > Now do houses. Why is the first $500k of real estate appreciation untaxed? Because it encourages liquidity in the housing market. If people had to pay taxes on the sale as soon as the house appreciates anything, a lot more people would hold on to the house and never let go.
  - jeffbee 3y ago
    And yet we have less mobility than ever. Curious.
  - geysersam 3y ago
    > a lot more people would hold on to the house and never let go. Subsidizing a behavior we would like to see. As always, the rich gets the carrot and the poor gets the stick. Luckily the same economic theory can be applied to motivate both.
jandrewrogers 3y ago
Capital gains taxes are not treated preferentially, or at least the lower rate does not reflect that, this is a common misunderstanding. Ideally, you want the tax rates on all sources of income to be roughly the same net of risk and inflation so that you don't bias investors into any particular type of activity when chasing rates of return. For wage income, inflation losses are negligible in most countries. Similar for short-term capital gains, which is why those are commonly taxed at wage income rates. Unlike wage income, capital has substantial risk (i.e. you can't deduct most losses). For long-term capital gains, the drag of inflation becomes a large percentage of the total nominal return. If you taxed long-term capital at the same rate as income, no one would make long-term high-risk investments because the expected rate of return on investment, net of taxes, would be lower than short-term rent-seeking type investments! If you want people in your country to invest in high-risk tech ventures at least as much as e.g. buying rental apartments, you have to make the expected investment returns net of taxes, inflation, and risk to be similar. You could make capital gains the same as income tax if inflation and risk was deductible against income. In practice, this would create enormous headaches for governments (massive increase in revenue volatility), so instead they tax it at a lower rate that loosely approximates what the tax rate might look like on average if you were allowed to deduct inflation and risk.
deleted 3y ago
[deleted]

What I would like to know is what the justification for capital gains being taxed at a considerably lower rate than other income is. Why treat it preferentially?

jeffbee 3y ago

Now do houses. Why is the first $500k of real estate appreciation untaxed?

jjav 3y ago
> Now do houses. Why is the first $500k of real estate appreciation untaxed? Because it encourages liquidity in the housing market. If people had to pay taxes on the sale as soon as the house appreciates anything, a lot more people would hold on to the house and never let go.
- jeffbee 3y ago
  And yet we have less mobility than ever. Curious.
- geysersam 3y ago
  > a lot more people would hold on to the house and never let go. Subsidizing a behavior we would like to see. As always, the rich gets the carrot and the poor gets the stick. Luckily the same economic theory can be applied to motivate both.

jandrewrogers 3y ago

Capital gains taxes are not treated preferentially, or at least the lower rate does not reflect that, this is a common misunderstanding. Ideally, you want the tax rates on all sources of income to be roughly the same net of risk and inflation so that you don't bias investors into any particular type of activity when chasing rates of return. For wage income, inflation losses are negligible in most countries. Similar for short-term capital gains, which is why those are commonly taxed at wage income rates. Unlike wage income, capital has substantial risk (i.e. you can't deduct most losses). For long-term capital gains, the drag of inflation becomes a large percentage of the total nominal return. If you taxed long-term capital at the same rate as income, no one would make long-term high-risk investments because the expected rate of return on investment, net of taxes, would be lower than short-term rent-seeking type investments! If you want people in your country to invest in high-risk tech ventures at least as much as e.g. buying rental apartments, you have to make the expected investment returns net of taxes, inflation, and risk to be similar. You could make capital gains the same as income tax if inflation and risk was deductible against income. In practice, this would create enormous headaches for governments (massive increase in revenue volatility), so instead they tax it at a lower rate that loosely approximates what the tax rate might look like on average if you were allowed to deduct inflation and risk.

deleted 3y ago

[deleted]