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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 s
by 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 agoHow 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 agoOne motivation for such taxation would be precisely to encourage people to spend money closer to the time it is earned.
- yetanotherphd 13y agoI 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.