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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 c

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.
  - gohrt 13y ago
    One of the most basic principles in political science is that economic efficiency is not the only relevant factor in policy decisions.
dragonwriter 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 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) Teaching anything that has "should" in it (other than the norms of the scientific method itself) in a science class, which economics purports to be, is wrong, plain and simple. Economics profs that are abusing their position to teach their personal policy preferences and conflating them with the science of economics are the kind of thing that gives economics, and the other social sciences, a bad name. But, in any case, it is not any kind of economic theory (basic or otherwise), its a policy preference. Real economic theories deal with the behavior of economic systems, not preferences for how government should interact with them. Obviously, real economic theories combined with value assumptions can inform policy preferences. > I added my own comments on why we do tax capital gains Which are also wrong, and seem to be an attempt to rationalize the crackpot "theory" from the class you TA'd with your misunderstanding of how capital gains are taxed (which seems to mistake the way long-term capital gains are taxed for how all capital gains are taxed.) The real reason capital gains are taxed the way they are is because they viewed as income, so short-term capital gains (earned over a period of one year or less holding the asset) are taxed as normal income, and long-term capital gains are taxed at a lower rate based on the observation that, in a system with progressive taxation on annual income, taxing income earned over a period longer than a year as normal income in the year the gains are realized would result in that income being overtaxed. There's also certainly a school of thought that capital gains should be taxed preferentially so as to encourage activities that produce capital income, from those who think that favoring those activities has desirable effects. This seems to be far more common (among people in general, and economists in particular, than the crackpot "capital gains aren't income" idea you taught), but, still, it isn't an economic theory, its a political preference (and many notable economists disagree with it.)

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.
- gohrt 13y ago
  One of the most basic principles in political science is that economic efficiency is not the only relevant factor in policy decisions.

dragonwriter 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 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) Teaching anything that has "should" in it (other than the norms of the scientific method itself) in a science class, which economics purports to be, is wrong, plain and simple. Economics profs that are abusing their position to teach their personal policy preferences and conflating them with the science of economics are the kind of thing that gives economics, and the other social sciences, a bad name. But, in any case, it is not any kind of economic theory (basic or otherwise), its a policy preference. Real economic theories deal with the behavior of economic systems, not preferences for how government should interact with them. Obviously, real economic theories combined with value assumptions can inform policy preferences. > I added my own comments on why we do tax capital gains Which are also wrong, and seem to be an attempt to rationalize the crackpot "theory" from the class you TA'd with your misunderstanding of how capital gains are taxed (which seems to mistake the way long-term capital gains are taxed for how all capital gains are taxed.) The real reason capital gains are taxed the way they are is because they viewed as income, so short-term capital gains (earned over a period of one year or less holding the asset) are taxed as normal income, and long-term capital gains are taxed at a lower rate based on the observation that, in a system with progressive taxation on annual income, taxing income earned over a period longer than a year as normal income in the year the gains are realized would result in that income being overtaxed. There's also certainly a school of thought that capital gains should be taxed preferentially so as to encourage activities that produce capital income, from those who think that favoring those activities has desirable effects. This seems to be far more common (among people in general, and economists in particular, than the crackpot "capital gains aren't income" idea you taught), but, still, it isn't an economic theory, its a political preference (and many notable economists disagree with it.)