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This guy is independent, maybe, but definitely right-leaning. And, I don't know that I have heard anyone on the right put forward the ideas of taxing capital ga

This guy is independent, maybe, but definitely right-leaning. And, I don't know that I have heard anyone on the right put forward the ideas of taxing capital gains as normal income and doing away with corporate taxes. They normally want to do the latter, without the former. In other words, they want a no-holds barred tax holiday for the wealthiest (which will eventually trickle down, of course). But, what he is saying might be workable. I am curious to know how much additional revenue the government would raise by taxing capital gains at normal income rates vs. how much they'd lose by not taxing corporations. Anybody have a reliable source on that? Because, in some respects, C-corps would then become more like S-corps, in that a significant amount of untaxed income would flow through as dividends to shareholders where it would now be taxed at the normal income rate.

saosebastiao 13y ago
The problem with the corporate income tax is that it is so easy to avoid...because you avoid it by having expenses. Luxury hotel rooms and corporate jets are legitimate business expenses, where they aren't deductible for personal income. I have no problem believing that tax collections would increase by taxing capital gains as income and removing the corporate tax. And it would certainly be more fair than the current setup, with corporate taxation's terribly regressive incidence. The only kink is that they would have to have foreign investors paying income tax in the US, which might be hard to accomplish.
jandrewrogers 13y ago
Short-term capital gains are taxed at income rates. And long-term capital gains are taxed at lower rates to compensate for the fact that they have substantial losses due to inflation that are not deductible. You are taxed on the inflation in addition to the gains and can incur a substantial tax bill even if you lost money on your investment in real terms. The net effect of greatly increasing tax rates on long-term capital gains is that risky long-term capital investments that may take a long time to pay off, such as tech startups, become much less attractive. Expected returns matter a lot to investors, and factors like taxation rates, inflation, risk, and liquidity factor into that calculus. Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders, so I don't see it as much of a loss. At a minimum it would eliminate a lot of the incentive to engage in complex financial structuring games to minimize the amount of double taxation shareholders are faced with.
- mbetter 13y ago
  You believe this nonsense, do you?
- Guvante 13y ago
  > Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders Only problem with this is the growth stocks, how long was Microsoft making a profit before it started paying dividends? I believe the US government would be fine playing the long game by dropping capital gains tax, but I don't believe they have the stomach for the short term loss of revenue.
  - deleted 13y ago
    [deleted]
- unclebucknasty 13y ago
  >Short-term capital gains are taxed at income rates. And long-term capital gains are taxed... Of course. I used the generic term "capital gains" as a stand-in for "long-term capital gains", since the latter is the one that realizes the different tax treatment and is thus relevant to this discussion. My apologies for not being clearer there. >Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders I agree. I think this can be a "healthy" behavior change as a result of tax code changes. Still, I would be curious to know how much the additional individual tax revenue would serve to offset the loss of corporate tax revenue. On the face, there would seem to be a gap--one that may be filled by a simultaneous increase in the long-term capital gains rate. I'm sure this info is available. Just need to stop being lazy!
jpmattia 13y ago
> Because, in some respects, C-corps would then become more like S-corps, in that a significant amount of untaxed income would flow through as dividends to shareholders where it would now be taxed at the normal income rate. Some respects yes, but not in one important aspect: With an S-Corp, the income must flow on an annual basis. If you removed C-Corp taxation, there would be no reason to have an S-Corp. You can just leave the net gains in the C-Corp (tax-free!) and take it out whenever you want.
rayiner 13y ago
As a theoretical matter, capital gains are indistinguishable from other kinds of income and should be taxed as such. Corporate income taxes, moreover, are just the simple consequence of the fact that a corporation is a distinct legal person and is taxed as such. These are two incredibly obvious points that get buried beneath the bullshit on these subjects.
- harryh 13y ago
  As a theoretical matter, I'm afraid that you are incorrect. There are essentially zero theoretical arguments that support taxing capital gains at the same rate as ordinary income and many economists have found that a 0% tax on capital gains is the least distortionary. (see the Chamley-Judd Result).
  - rayiner 13y ago
    You're making a slightly different point, which is that we shouldn't tax all income, just wage income. My point is that we don't have a "wage" tax, we have an "income" tax, and capital gains falls under that definition of "income." The theoretical definition of "income" used by the U.S. tax code and developed by economists is simply income = consumption + change in value of property rights. The U of Chicago economist who developed this formulation and espoused the introduction of the income tax in the U.S. had somewhat different policy objectives for the tax than current economists. See: http://taxprof.typepad.com/taxprof_blog/files/Duff.pdf http://taxprof.typepad.com/taxprof_blog/files/Duff.pdf (p. 6-11).
    - harryh 13y ago
      You're playing word games. Our tax code does, in fact, treat wage income differently from capital gains (at least those > 1 year). How this relates to a definition of income that some guy wrote in the 20s or 30s isn't relevant.
      - rayiner 13y ago
        I'm not playing word games, but rather trying to clarify policy conflict that gets obscured by terminology. Simon's definition of income is the one animating the U.S. income tax. Lots of things have been added to the income tax over the years (the capital gains preference wasn't added until 1921), but the underlying theory is one of taxing net changes in wealth. Capital gains, being changes in the value of property rights, are clearly income within that framework. Many economists do believe that we shouldn't tax capital gains, and they might be right. But it's also true that the income tax was conceived as a progressive measure to reduce income inequality and shift the tax burden to the families of wealthy industrialists like Carnegie and Rockefeller. A theory that exempts capital gains from the definition of "income" is plainly inconsistent with those purposes. So I stand by my original point, which is that capital gains are income and so long as we have an income tax, should be taxed as such. There are compelling arguments that consumptive taxes would be more efficient, but efficiency isn't the only policy concern in play.
AnthonyMouse 13y ago
It's basically a fact that all forms of taxation cause problems and they interact with each other to cause subtle and exploitable problems. Take corporate income tax, capital gains tax and taxation of dividends. The entire concept of corporate income tax is completely nonsensical for international corporations because they don't need to do much more than rearrange their books and they can report the bulk of their profits in a lower tax jurisdiction, which is what all of them do and there is almost nothing you can do to stop them if you insist on taxing "profit" but allowing profits to be taxed non-uniformly based on international tax jurisdiction. Which means that "corporate income tax" in practice means "tax small and medium sized corporations at a much higher rate than large international corporations." Which is obviously totally inane, so lets get rid of corporate income tax, right? At this point you've just handed the rich a trivial method of deferring taxation of dividends indefinitely. Instead of issuing profits as dividends at all, corporations can hold the capital internally which causes share price appreciation, and have stock splits as necessary to keep the share price from getting out of hand. Then the shareholder pays no taxes until the shares are sold, which can be put off indefinitely. The disadvantage is that you have a corporation that makes e.g. iPads which holds more cash than they can possibly have a productive internal use for, so they end up investing it perhaps quite inefficiently in sectors of the economy outside of their expertise because doing so is more profitable than issuing dividends and causing shareholders to incur massive taxation. Which is naturally what we see the corporations frequently doing when they have a de facto lack of corporate income tax through tax avoidance. So you say, fine, corporate income tax sucks and taxing dividends doesn't work, but at least we can really stick it to them with capital gains tax when they sell the shares, right? And now you have a different problem, which is that you're making shares inalienable. If you own a million dollars of shares which you bought for a thousand dollars, you're not going to sell the shares if selling them causes you to lose half of your capital to taxation, even if the stock is clearly under-performing the market. Which causes huge market inefficiencies because capital is tied up in under-performing businesses which can't be sold without incurring significant tax liabilities. There is a trivial way to solve this, which is to allow stockholders to defer capital gains tax when they sell one investment only in order to change what they're investing in by purchasing another investment. But the result is a "weird" tax -- it isn't a capital gains tax anymore, what it really is is a consumption tax with a different rate for spent income derived from investments if the "capital gains" rate isn't set at the earned income rate. Certainly not what most people think of when they discuss a capital gains tax, and on paper allowing investments as a deduction would cause it to not generate nearly as much tax revenue (though it may in practice given tax avoidance). So all of that is quite irritating if you're trying to extract tax revenue from corporations and the wealthy. The problem is, at bottom, that taxing something discourages that thing and you don't want to discourage investment. The remaining major tool in the tax box is a normal consumption tax. The problem there is that it's obviously regressive -- the less money you make, the larger a portion of it you have to consume rather than invest, so taxing consumption will cause the rich to pay an unavoidably large amount of taxation (unless they intend to stop buying cars and mansions and air travel), but will disproportionately also tax those less fortunate who must spend a higher percentage of what they make. As far as I can tell the best solution is to get rid of all taxes other than a consumption tax, and then deal with the fact that consumption taxes are regressive by combining it with a basic income which you can make arbitrarily progressive by increasing its size. This has the additional advantage that the basic income can subsume the plethora of programs like social security which impose arbitrary constraints which (like "retirement age") or are "need based" which, if you consider the programs as a form of negative taxation, turn out to be preposterously regressive because the marginal tax rate of increasing your income and thus becoming ineligible for the programs can approach or even exceed 100%. The "problem" with flat consumption tax + basic income is that it takes all the horse trading out of the equation, removes all the tax loopholes and pork and treats everyone equally regardless of their lobbying strength, even though you can make it as progressive as you like. K-Street will not be a fan. Everyone else probably should be though -- anyone want to explain how I'm wrong?

saosebastiao 13y ago

The problem with the corporate income tax is that it is so easy to avoid...because you avoid it by having expenses. Luxury hotel rooms and corporate jets are legitimate business expenses, where they aren't deductible for personal income. I have no problem believing that tax collections would increase by taxing capital gains as income and removing the corporate tax. And it would certainly be more fair than the current setup, with corporate taxation's terribly regressive incidence. The only kink is that they would have to have foreign investors paying income tax in the US, which might be hard to accomplish.

jandrewrogers 13y ago

Short-term capital gains are taxed at income rates. And long-term capital gains are taxed at lower rates to compensate for the fact that they have substantial losses due to inflation that are not deductible. You are taxed on the inflation in addition to the gains and can incur a substantial tax bill even if you lost money on your investment in real terms. The net effect of greatly increasing tax rates on long-term capital gains is that risky long-term capital investments that may take a long time to pay off, such as tech startups, become much less attractive. Expected returns matter a lot to investors, and factors like taxation rates, inflation, risk, and liquidity factor into that calculus. Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders, so I don't see it as much of a loss. At a minimum it would eliminate a lot of the incentive to engage in complex financial structuring games to minimize the amount of double taxation shareholders are faced with.

mbetter 13y ago
You believe this nonsense, do you?
Guvante 13y ago
> Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders Only problem with this is the growth stocks, how long was Microsoft making a profit before it started paying dividends? I believe the US government would be fine playing the long game by dropping capital gains tax, but I don't believe they have the stomach for the short term loss of revenue.
- deleted 13y ago
  [deleted]
unclebucknasty 13y ago
>Short-term capital gains are taxed at income rates. And long-term capital gains are taxed... Of course. I used the generic term "capital gains" as a stand-in for "long-term capital gains", since the latter is the one that realizes the different tax treatment and is thus relevant to this discussion. My apologies for not being clearer there. >Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders I agree. I think this can be a "healthy" behavior change as a result of tax code changes. Still, I would be curious to know how much the additional individual tax revenue would serve to offset the loss of corporate tax revenue. On the face, there would seem to be a gap--one that may be filled by a simultaneous increase in the long-term capital gains rate. I'm sure this info is available. Just need to stop being lazy!

jpmattia 13y ago

> Because, in some respects, C-corps would then become more like S-corps, in that a significant amount of untaxed income would flow through as dividends to shareholders where it would now be taxed at the normal income rate. Some respects yes, but not in one important aspect: With an S-Corp, the income must flow on an annual basis. If you removed C-Corp taxation, there would be no reason to have an S-Corp. You can just leave the net gains in the C-Corp (tax-free!) and take it out whenever you want.

rayiner 13y ago

As a theoretical matter, capital gains are indistinguishable from other kinds of income and should be taxed as such. Corporate income taxes, moreover, are just the simple consequence of the fact that a corporation is a distinct legal person and is taxed as such. These are two incredibly obvious points that get buried beneath the bullshit on these subjects.

harryh 13y ago
As a theoretical matter, I'm afraid that you are incorrect. There are essentially zero theoretical arguments that support taxing capital gains at the same rate as ordinary income and many economists have found that a 0% tax on capital gains is the least distortionary. (see the Chamley-Judd Result).
- rayiner 13y ago
  You're making a slightly different point, which is that we shouldn't tax all income, just wage income. My point is that we don't have a "wage" tax, we have an "income" tax, and capital gains falls under that definition of "income." The theoretical definition of "income" used by the U.S. tax code and developed by economists is simply income = consumption + change in value of property rights. The U of Chicago economist who developed this formulation and espoused the introduction of the income tax in the U.S. had somewhat different policy objectives for the tax than current economists. See: http://taxprof.typepad.com/taxprof_blog/files/Duff.pdf http://taxprof.typepad.com/taxprof_blog/files/Duff.pdf (p. 6-11).
  - harryh 13y ago
    You're playing word games. Our tax code does, in fact, treat wage income differently from capital gains (at least those > 1 year). How this relates to a definition of income that some guy wrote in the 20s or 30s isn't relevant.
    - rayiner 13y ago
      I'm not playing word games, but rather trying to clarify policy conflict that gets obscured by terminology. Simon's definition of income is the one animating the U.S. income tax. Lots of things have been added to the income tax over the years (the capital gains preference wasn't added until 1921), but the underlying theory is one of taxing net changes in wealth. Capital gains, being changes in the value of property rights, are clearly income within that framework. Many economists do believe that we shouldn't tax capital gains, and they might be right. But it's also true that the income tax was conceived as a progressive measure to reduce income inequality and shift the tax burden to the families of wealthy industrialists like Carnegie and Rockefeller. A theory that exempts capital gains from the definition of "income" is plainly inconsistent with those purposes. So I stand by my original point, which is that capital gains are income and so long as we have an income tax, should be taxed as such. There are compelling arguments that consumptive taxes would be more efficient, but efficiency isn't the only policy concern in play.

AnthonyMouse 13y ago

It's basically a fact that all forms of taxation cause problems and they interact with each other to cause subtle and exploitable problems. Take corporate income tax, capital gains tax and taxation of dividends. The entire concept of corporate income tax is completely nonsensical for international corporations because they don't need to do much more than rearrange their books and they can report the bulk of their profits in a lower tax jurisdiction, which is what all of them do and there is almost nothing you can do to stop them if you insist on taxing "profit" but allowing profits to be taxed non-uniformly based on international tax jurisdiction. Which means that "corporate income tax" in practice means "tax small and medium sized corporations at a much higher rate than large international corporations." Which is obviously totally inane, so lets get rid of corporate income tax, right? At this point you've just handed the rich a trivial method of deferring taxation of dividends indefinitely. Instead of issuing profits as dividends at all, corporations can hold the capital internally which causes share price appreciation, and have stock splits as necessary to keep the share price from getting out of hand. Then the shareholder pays no taxes until the shares are sold, which can be put off indefinitely. The disadvantage is that you have a corporation that makes e.g. iPads which holds more cash than they can possibly have a productive internal use for, so they end up investing it perhaps quite inefficiently in sectors of the economy outside of their expertise because doing so is more profitable than issuing dividends and causing shareholders to incur massive taxation. Which is naturally what we see the corporations frequently doing when they have a de facto lack of corporate income tax through tax avoidance. So you say, fine, corporate income tax sucks and taxing dividends doesn't work, but at least we can really stick it to them with capital gains tax when they sell the shares, right? And now you have a different problem, which is that you're making shares inalienable. If you own a million dollars of shares which you bought for a thousand dollars, you're not going to sell the shares if selling them causes you to lose half of your capital to taxation, even if the stock is clearly under-performing the market. Which causes huge market inefficiencies because capital is tied up in under-performing businesses which can't be sold without incurring significant tax liabilities. There is a trivial way to solve this, which is to allow stockholders to defer capital gains tax when they sell one investment only in order to change what they're investing in by purchasing another investment. But the result is a "weird" tax -- it isn't a capital gains tax anymore, what it really is is a consumption tax with a different rate for spent income derived from investments if the "capital gains" rate isn't set at the earned income rate. Certainly not what most people think of when they discuss a capital gains tax, and on paper allowing investments as a deduction would cause it to not generate nearly as much tax revenue (though it may in practice given tax avoidance). So all of that is quite irritating if you're trying to extract tax revenue from corporations and the wealthy. The problem is, at bottom, that taxing something discourages that thing and you don't want to discourage investment. The remaining major tool in the tax box is a normal consumption tax. The problem there is that it's obviously regressive -- the less money you make, the larger a portion of it you have to consume rather than invest, so taxing consumption will cause the rich to pay an unavoidably large amount of taxation (unless they intend to stop buying cars and mansions and air travel), but will disproportionately also tax those less fortunate who must spend a higher percentage of what they make. As far as I can tell the best solution is to get rid of all taxes other than a consumption tax, and then deal with the fact that consumption taxes are regressive by combining it with a basic income which you can make arbitrarily progressive by increasing its size. This has the additional advantage that the basic income can subsume the plethora of programs like social security which impose arbitrary constraints which (like "retirement age") or are "need based" which, if you consider the programs as a form of negative taxation, turn out to be preposterously regressive because the marginal tax rate of increasing your income and thus becoming ineligible for the programs can approach or even exceed 100%. The "problem" with flat consumption tax + basic income is that it takes all the horse trading out of the equation, removes all the tax loopholes and pork and treats everyone equally regardless of their lobbying strength, even though you can make it as progressive as you like. K-Street will not be a fan. Everyone else probably should be though -- anyone want to explain how I'm wrong?