4 ms·

Here's my take on the two main issues: Social Security: he is probably right. The most obvious social security system (ignoring welfare) is that you save mone

Here's my take on the two main issues: Social Security: he is probably right. The most obvious social security system (ignoring welfare) is that you save money yourself, or the government saves it for you, and you get it back when you retire (this is Australia's system). Some clever economists figured out that since the total value of everything produced for the rest of time is infinite, you can make every generation better off by having each generation "borrow" from the next one. This results in the US PAYG (pay as you go) system where our generation is taxed to pay the last generation. PAYG allows people to receive a higher rate of returns on their "savings" than the market would provide. However, because demographics aren't growing at constant rate like in mathematical models used to justify PAYG, this is extremely expensive. This is how I interpret his statements about boomers who expect our generation to pay a higher tax rate than they did. In short: demographics broke the PAYG model and so it's reasonable that current retirees get less than they might have expected under the original promises of the social security system. On capital gains tax: he is wrong. If all capital gains were people investing in the stock market at arms length, then capital gains should be 0% because they are just a way to shift money forwards in time. A person who invests has more money in the future, but it is worth less to them because it is in the future. The reason we tax capital gains is that some kinds of capital gains are really income in disguise, like people who own 90% of a company and do a lot of work to increase its value. This should be taxed at the income tax rate. So the current system is a hack, putting the capital gains tax between 0% and the income tax rate. But it is not a subsidy for people who have more wealth, it is a subsidy for people who can disguise income as capital gains.

dragonwriter 13y ago
Capital gains are income, pure and simple; insofar as there is a justification for taxing long-term capital gains less than other income, its because it is income earned over period of greater than one year, which would thus be over-taxed in a progressive tax system if it were simply taxed as income in the year it is realized. Of course, a flat lower rate for long-term capital gains results in them being under taxed compared to other income; a simpler and fairer solution is to tax capital gains as normal income in the year realized, but to allow taxpayers to optionally recognize gains (or, really, any income) for tax purposes in advance of realizing it.
- yetanotherphd 13y ago
  Consider the following thought experiment: Person A earns $100 and spends it in year 1, then earns $100 in year 2 and spends it in year 2. Person B earns the same, but invests the $100 earned in year 1 at 10% interest, and spends $210 in year 2. I claim that that $10 interest earned by person B should not be treated as income, and should not be taxed. The reason is that all person B did, was exchange consumption in year 1 at the market rate, for consumption in year 2. The fact that they got to consume more in year 2 wasn't because they were particularly advantaged in being able to save more than person A, but rather because they preferred to spend more later than earlier. Economically speaking, interest earned is not income. Now for other kinds of capital gain, it is generally considered that people earn some compensation for risk (again, not income) plus some small premium (the "equity premium") that might possibly be considered income.
  - dragonwriter 13y ago
    How is exchanging money now for more money later any less earning income than exchanging labor now for money (now or later)—the idea that the extra money earned by the former means is somehow "not income" and should not be taxed while the money earned by the latter means is "income" and should be taxed is ludicrous. Economically, neither interest earned nor payment recieved from the sale of goods and services in an efficient market is a gain, but if you define income in terms of economic gains then nothing but rents extracted via market inefficiencies and outright gifts are income.
  - gbhn 13y ago
    One motivation for such taxation would be precisely to encourage people to spend money closer to the time it is earned.
    - yetanotherphd 13y ago
      I don't doubt that this counts as a plus in some people's books. However in my opinion it is a very bad motivation. Even Keynes never advocated permanently stimulating consumption (vs saving), he only wanted to do this during recessions. I've never heard an economically sound reason for wanting to shift people's preferences from saving to consumption in ordinary times.
rayiner 13y ago
Income = net change in wealth (that's the Haig-Simons definition underlying the theory of the income tax). Capital gains are income as much as any other net change in wealth.
- yetanotherphd 13y ago
  No matter what definition you have heard of, the claim that the capital gains tax should be zero is basic economic theory that is taught to undergrads (I know cause I taught it as a TA). If you define "income" to mean "what economists think should be taxed" then your equality is incorrect. I added my own comments on why we do tax capital gains, because I prefer real life to theory.
  - rayiner 13y ago
    This definition of income was developed by economists who developed the theory of income taxes.
    - yetanotherphd 13y ago
      Haig-Simon income is easy to define in legal and accounting terms, hence its popularity. But it is not what economists would consider the "correct" definition of income. I'll quote an article from The Economist which summarizes mainstream opinion quite well: One of the most basic principles in economics is that the taxation of capital income is inefficient. Taxes on interest, dividends, and capital gains represent a sort of “double taxation”, of wage income. http://www.economist.com/economics/by-invitation/guest-contributions/proper-tax-rate-capital-income-zero http://www.economist.com/economics/by-invitation/guest-contr...
      - rayiner 13y ago
        You're conflating two different things. The article you linked to argues that we should only have wage taxes, not income taxes. It does not support the point that capital gains aren't "income." That particular piece also conflates in a hand-wavey way market returns with adjusting for the net present value of future consumption. It's a slight of hand to treat those two discount rates as the same.
cam_l 13y ago
I always thought the reason capital gains are taxed (and more importantly, should be taxed higher) is that most capital gains are essentially rent-seeking in nature. As in, they add no further wealth to the system but through successively higher valuations, extract money from it. The reason we do NOT tax capital gains (and shouldn't) at a much higher rate is that to some degree you want investment in the future and also "that some kinds of capital gains are really income in disguise" - ie. that not all wealth creation is appropriately valued through trade (or appropriately timed).

dragonwriter 13y ago

Capital gains are income, pure and simple; insofar as there is a justification for taxing long-term capital gains less than other income, its because it is income earned over period of greater than one year, which would thus be over-taxed in a progressive tax system if it were simply taxed as income in the year it is realized. Of course, a flat lower rate for long-term capital gains results in them being under taxed compared to other income; a simpler and fairer solution is to tax capital gains as normal income in the year realized, but to allow taxpayers to optionally recognize gains (or, really, any income) for tax purposes in advance of realizing it.

yetanotherphd 13y ago
Consider the following thought experiment: Person A earns $100 and spends it in year 1, then earns $100 in year 2 and spends it in year 2. Person B earns the same, but invests the $100 earned in year 1 at 10% interest, and spends $210 in year 2. I claim that that $10 interest earned by person B should not be treated as income, and should not be taxed. The reason is that all person B did, was exchange consumption in year 1 at the market rate, for consumption in year 2. The fact that they got to consume more in year 2 wasn't because they were particularly advantaged in being able to save more than person A, but rather because they preferred to spend more later than earlier. Economically speaking, interest earned is not income. Now for other kinds of capital gain, it is generally considered that people earn some compensation for risk (again, not income) plus some small premium (the "equity premium") that might possibly be considered income.
- dragonwriter 13y ago
  How is exchanging money now for more money later any less earning income than exchanging labor now for money (now or later)—the idea that the extra money earned by the former means is somehow "not income" and should not be taxed while the money earned by the latter means is "income" and should be taxed is ludicrous. Economically, neither interest earned nor payment recieved from the sale of goods and services in an efficient market is a gain, but if you define income in terms of economic gains then nothing but rents extracted via market inefficiencies and outright gifts are income.
- gbhn 13y ago
  One motivation for such taxation would be precisely to encourage people to spend money closer to the time it is earned.
  - yetanotherphd 13y ago
    I don't doubt that this counts as a plus in some people's books. However in my opinion it is a very bad motivation. Even Keynes never advocated permanently stimulating consumption (vs saving), he only wanted to do this during recessions. I've never heard an economically sound reason for wanting to shift people's preferences from saving to consumption in ordinary times.

rayiner 13y ago

Income = net change in wealth (that's the Haig-Simons definition underlying the theory of the income tax). Capital gains are income as much as any other net change in wealth.

yetanotherphd 13y ago
No matter what definition you have heard of, the claim that the capital gains tax should be zero is basic economic theory that is taught to undergrads (I know cause I taught it as a TA). If you define "income" to mean "what economists think should be taxed" then your equality is incorrect. I added my own comments on why we do tax capital gains, because I prefer real life to theory.
- rayiner 13y ago
  This definition of income was developed by economists who developed the theory of income taxes.
  - yetanotherphd 13y ago
    Haig-Simon income is easy to define in legal and accounting terms, hence its popularity. But it is not what economists would consider the "correct" definition of income. I'll quote an article from The Economist which summarizes mainstream opinion quite well: One of the most basic principles in economics is that the taxation of capital income is inefficient. Taxes on interest, dividends, and capital gains represent a sort of “double taxation”, of wage income. http://www.economist.com/economics/by-invitation/guest-contributions/proper-tax-rate-capital-income-zero http://www.economist.com/economics/by-invitation/guest-contr...
    - rayiner 13y ago
      You're conflating two different things. The article you linked to argues that we should only have wage taxes, not income taxes. It does not support the point that capital gains aren't "income." That particular piece also conflates in a hand-wavey way market returns with adjusting for the net present value of future consumption. It's a slight of hand to treat those two discount rates as the same.

cam_l 13y ago

I always thought the reason capital gains are taxed (and more importantly, should be taxed higher) is that most capital gains are essentially rent-seeking in nature. As in, they add no further wealth to the system but through successively higher valuations, extract money from it. The reason we do NOT tax capital gains (and shouldn't) at a much higher rate is that to some degree you want investment in the future and also "that some kinds of capital gains are really income in disguise" - ie. that not all wealth creation is appropriately valued through trade (or appropriately timed).