Lets talk about taxes: US edition.

[wheresmywoft]

Why? They're already not taxed on their losses, only on their gains. Plus, the problem right now isn't that there isn't enough reason to invest. There's a shit ton of investment money floating around right now just looking for places to put it. The problem is that there's not enough demand out there to make those investments pay off. There's an oversupply of investment capital.

If anything, profits from investment should be taxed at higher than earned income rates, not lower.

I agree that there's a ton of investment capital just floating about. But I disagree with the conclusion that investment should be taxed at higher than earned income rates. I'm thinking taxation in parity with income tax brackets would be better as neither side would be at an inherent disadvantage.

[Nadiru]

i.e. labor vs capital

And the answer is that profitable capital is spread between so few people that they're rich enough to control the lawmakers.

Which is, you know, the exact opposite of the point of representative democracy, but, uh, 'murca.

That only holds as long as voters aren't willing to actually be informed and vote in primaries and kick the shitheads out. Unfortunately, people tend to like their representative, even if they don't like the system he integrates into.

[Daelak]

I agree that there's a ton of investment capital just floating about. But I disagree with the conclusion that investment should be taxed at higher than earned income rates. I'm thinking taxation in parity with income tax brackets would be better as neither side would be at an inherent disadvantage.

I don't think the capital gain taxation levels are at anywhere near levels which would actually discourage people to invest because of the tax rate, that is guaranteed 100% propaganda. The easiest way to "raise all boats" so to speak is to let the wealthiest 1-2% of wage earners and wealthiest to pay the burden of all federal and state taxation, enabling the real driver of our economy, the middle and working classes consumption, to be freed from its inhibitors. You would see double digit growth in GDP, giving double digit returns to the wealthiest class. The bullshit arguments centered around taxation and federal debt are distractions designed to make this country into a mediocre hellhole, not the global leader in industry and public investment.

[Endus]

I agree that there's a ton of investment capital just floating about. But I disagree with the conclusion that investment should be taxed at higher than earned income rates. I'm thinking taxation in parity with income tax brackets would be better as neither side would be at an inherent disadvantage.

This isn't really true. Investment returns and earned income aren't the same thing, and treating them as alternatives to each other is a fundamentally baseless argument. So long as investors can make money, they will continue to invest, and since taxation on capital gains is taxed on the gains, unless it's at or over 100%, they're still making a profit off their investments.

Lower capital gains taxes don't fundamentally "encourage investment"; there's no observable connection between the two, historically.

Capital gains are essentially a form of luxury; those with the free capital to invest are those who make capital gains, in the first place. There's a long history of luxury taxes. Increasing capital gains taxes is by no means unprecedented. It also changes the executive pay schemes; right now, with a lower capital gains tax, it's possible for a CEO to be paid in stock options and such, at least in part, where he can effective sell them immediately, and pay significantly less tax than if he'd been paid the same amount of value in straight salary. With a higher capital gains tax, this is less feasible; the desire would be to hold on to those shares for as long as possible, while ensuring that the company does successfully enough that the dividends and value increase are higher than other investments; it encourages a long-term investment in the company's success by the executives that run it.

[Yvaelle]

Edit:
a) I wrote a rambling novel - sorry for that,
b) while I was doing that Endus beat me to it, and more succinctly

I think there is a lot of confusion on this page about how capital gains tax works, the interaction it has with motivating investment, and the ways in which capital gains taxes in particular are reduced, deferred, or avoided.

So first, there is an important distinction between realized Capital Gains, and unrealized. If you sell off capital for a profit, you are realizing your capital gains. If you maintain ownership of that capital (a building, a company, etc) that is called unrealized capital gains: and you pay no tax on unrealized gains until the year you realize them. We'll come back to this at the end, but keep it in mind for now.

Almost everything the very wealthy do is capital gains, salaried income is usually a joke ($1/year, which they then promptly hand to a homeless person so they can claim they gave their entire years salary to the homeless, or they burn it and laugh maniacally, or wipe their butt with it, you get the idea). So, when choosing whether to either leave your money in a bank account and let it accumulate virtually no interest per year above inflation and bank fees, or whether you put it into a new company: both of those are capital gains.

You are very wealthy and have some pocket change, $10,000,000.

You can sit it in the bank and watch it earn 0.5% real interest over the next 12 months, or, you can give it to a startup company promising you 8% ROI after the same time period.

In the first case you would earn $50,000 that year, and since it is in cash (unless you employ a fancy accountant, which you do - but let's skip that for a moment) the bank will likely force you to acknowledge it as realized capital gains. You gained $50k, of which half of your income tax bracket is your capital gains tax rate, so you pay ~$9k, and keep the other $41k.

In the second case, you earn $800k (plus whatever your share of the company is and has grown to be, but lets ignore that for now), your capital gains tax rate is half your income tax rate, which lets say is 35%, so you would owe ~$135k in taxes, and retain the other $665k as profit.

Now, if you are trying to encourage investment - does raising the capital gains rate encourage you to keep your money in the bank? It shouldn't, because $665k > $41k, and you pay capital gains either way. If the rate goes a bump upward, maybe you only earn either $40k (down from 41k), or $650k (down from $665k).

But remember what I said about the bank making you realize your cash equivalent capital gains the year you earn them? The company into which you are invested doesn't. That money is still assets of the company until the moment you realize your capital gains by cashing out your share of the company: unrealized capital gains (not taxed).

So what if every decade or so, a political candidate were to offer a series of exemptions on capital gains? Or loopholes that allows you to otherwise realize all your capital gains over the past decade, at no tax? This was effectively the result of the Bush Tax Cuts from 2001-2003, and some persist to this day - but Obama ended some of the capital gains specific ones at the start of his first term, during the economic crash. Bush Sr. also did it while in office, Reagan practically invented taxfree capital gains (albeit through exemptions and loopholes that make it sound like you're paying something). It was also the only section of the Ryan Plan (from the Mitt Romney / Paul Ryan presidential campaign) that made any sense at all: the rest of the document was gibberish (which isn't to say that it was a good idea, just that it seemed like it was the only section that was proofread).

In fact, since a lot of the more conservative posters probably think I'm a biased jerk right now - let me offer a fig leaf by citing a great Heritage Foundation report from 2001, that brilliantly explains all the benefits that these tax exemptions, loopholes, and cuts created for the economy. You see, by eliminating the estate tax and reducing the income tax rate on the very top earners (which in turn reduces their capital gains rate) - the Heritage Foundation projected that the economy would explode so fast that tax revenue would actually rise. Not just a little either, it eliminated the federal debt by 2010. Remember when the US had a national debt? Totally gone thanks to not taxing the rich. It worked when Bush Sr. and Reagan did it too. Oh no wait, the opposite thing happened all three times. It turns out you pay off debt with tax revenue, not wishes and wet dreams.

So, by being able to defer the realization of capital gains until a Republican is in office, the rich can effectively pay no real tax on assets (sometimes they want to realize their gains in off years, but for the most part they can afford to just sit on it for awhile). It means they become asset rich and cash poor when Democrats (generally) are in office - but it has no bearing on their desire or ability to invest. Like the example before, whether you leave your money in a GIC, or hand it to a start-up, you still pay capital gains - and if you can use companies to create unrealized gains that you can defer until a loophole is created, you can sit on huge asset gains virtually tax-free.

The only way you pay more capital gains tax, is if you make more profit from capital gains: so there is never a scenario where higher capital gains tax reduces your desire to invest, versus sit on your money, still pay capital gains tax, and earn less profit.

[Nadiru]

In fact, since a lot of the more conservative posters probably think I'm a biased jerk right now - let me offer a fig leaf by citing a great Heritage Foundation report from 2001, that brilliantly explains all the benefits that these tax exemptions, loopholes, and cuts created for the economy. You see, by eliminating the estate tax and reducing the income tax rate on the very top earners (which in turn reduces their capital gains rate) - the Heritage Foundation projected that the economy would explode so fast that tax revenue would actually rise. Not just a little either, it eliminated the federal debt by 2010. Remember when the US had a national debt? Totally gone thanks to not taxing the rich. It worked when Bush Sr. and Reagan did it too. Oh no wait, the opposite thing happened all three times. It turns out you pay off debt with tax revenue, not wishes.

I'm not sure citing a ten-year debt outlook that didn't come true (in large part due to events that hadn't happened as of the publishing of said outlook) is particularly compelling evidence; I'd be more inclined to point out that the Bush era US economy was tepid at best in spite of the tax cuts since that's their central claim anyway.

[Yvaelle]

I'm not sure citing a ten-year debt outlook that didn't come true (in large part due to events that hadn't happened as of the publishing of said outlook) is particularly compelling evidence; I'd be more inclined to point out that the Bush era US economy was tepid at best in spite of the tax cuts since that's their central claim anyway.

I was citing it to demonstrate how wildly inaccurate the idea (and "evidence") that cutting capital gains taxes and estate taxes would act as economic or investment stimulus. They sell it by saying it will actually increase tax revenue because the economy will be so caught up in the throes of investment orgasms, that increased economic activity will dwarf the lost revenue. In the case of the last time they made that argument, they said it was going to be so amazing it would eliminate the national debt.

It's a collection of misconceptions that are hilariously untrue, I think I overdid it with the sarcasm in that paragraph.

[Nadiru]

I was citing it to demonstrate how wildly inaccurate the idea (and "evidence") that cutting capital gains taxes and estate taxes would act as economic or investment stimulus. They sell it by saying it will actually increase tax revenue because the economy will be so caught up in the throes of investment orgasms, that increased economic activity will dwarf the lost revenue. In the case of the last time they made that argument, they said it was going to be so amazing it would eliminate the national debt.

It's a collection of misconceptions that are hilariously untrue, I think I overdid it with the sarcasm in that paragraph.

The Laffer Curve is a difficult thing to assess; while it may have been true that tax rates were too high coming into the 1980s, it is no longer true. It's not really surprising that people buy into it, though. Look at Steam and the bucks they rake in every time there's a seasonal sale.

[Yvaelle]

The Laffer Curve is a difficult thing to assess; while it may have been true that tax rates were too high coming into the 1980s, it is no longer true. It's not really surprising that people buy into it, though. Look at Steam and the bucks they rake in every time there's a seasonal sale.

More likely it wasn't true then and it isn't true now (at the levels discussed both then and now). I'm not sure how steam sales demonstrate a difference in the level of taxation though?

The implication of supply-side economics and the laffer curve is that if both 100% and 0% tax rate result 0 tax revenue, then a curve must exist between these points that reaches maximal benefit to the economy, relative to taxation. The biggest problem with the idea, is that the success of the economy is much more complex than just dialing up or down the level of taxation: if that were the case we could dial the tax rates up and down 5% at a time and see how the economy responds year-to-year.

Instead, the role that tax plays is probably trivial compared to the means by which the government spends revenue to grow the economy (small business loans, education, interest rates, etc), the level of foreign trade and foreign direct investment (the amount of money in the economy that stays in the economy, comes in from other countries, or goes out), the spending patterns of consumers (whether they save their earnings for retirement, or spend themselves into debt slavery, and the interest rates on consumer debt when that is the case, as it is now). All of these things influence economic growth, the tax rate is just one other factor amongst them all - and depending upon the structure of the society - it's probably not a particularly significant one: but certainly not the be-all, end-all.

If we're really worried about economic growth, the velocity of money model makes way more sense - it's about how quickly the money moves through the economy - including how it is re-invested by the wealthy, rather than saved - and how the government spends revenue - and how the middle class spends or saves - and how aggressively businesses expand or bide their time.

So tax revenue becomes government spending, and nearly 100% of it stays within the country (foreign aide, both economic and military, is ~1.5% of the US budget that leaks out per year, and some of that comes back in trade of course). It is high velocity money because it circulates in less than one year (when we pay tax, and when the government spends it) - as opposed to long-term investments or savings, which may take decades to cycle. Which means tax revenue isn't lost money as far as the economy is concerned: we might lose it out of our hands, but we receive it back in services - but it's still within the economy doing stuff.

So tax rate alone isn't growing the economy, the velocity of money - and all the factors that contribute or retard that velocity is a far better metric. The question then becomes - knowing it's more about velocity and less about relative tax - whether the velocity is higher or lower in the hands of the people taxed versus in the hands of the government.

Now, the government doesn't hold onto money - people generally think that's a bad thing - but from a velocity standpoint, running a balanced or deficit budget is a good thing for economic growth, at least as far as government spending is concerned. They have a cycle time of at least less than a year - any money you give them will be back in the economy within the year at the very latest (some program will nom that money up before the next budget cycle).

Is it faster (velocity) in the hands of people than one year? In the case of the middle class and below, it very likely is - even the upper middle class isn't big on long-term cash equivalent investments (money sitting in bank accounts). When you talk about the very rich though, cash equivalents are much more common - and that money just sits there collecting dust. That's the underlying principle for progressive taxation - because it's always been true - peasants spend their coins within a matter of hours, and kings have vaults of gold and jewels for years. The faster money moves, the faster consumption/production cycles turn.

So just as reductio ad absurdum - if the tax rate were 100% - it would require communism - but if you lived in a communist society with extremely high consumption (and the production to support it) - the assumption of the Laffer curve (that 100% and 0% tax rates both result in zero tax revenue) would break. It implies that tax reduces consumption, but fails to account for increased tax resulting in increased government services (from anarchy, to pure capitalism, mixed economies, to socialism, to communism) - and these services are themselves a form of consumption which requires production.


If a country decided "Okay, we will all spend 5% more tax per year, but the government will now produce and distribute all our food free of charge" (not advocating that, it's just an example) - the tax rate has risen, but the consumption/production of food has not fallen: therefore increased taxes do not always correspond to decreased consumption, which as I suggested is the true economic driver. Meaning there is no ideal tax rate (no peak to the parabola) for economic growth, the tax rate is irrelevant so long as consumption/production are maximized.


Edit: I wonder if I wrap a bunch of my posts together, and email them off to my old supervisor, whether he will give me an extra degree for collections of Gen-OT rants disguised as a thesis

[Endus]

The Laffer Curve is a difficult thing to assess; while it may have been true that tax rates were too high coming into the 1980s, it is no longer true. It's not really surprising that people buy into it, though. Look at Steam and the bucks they rake in every time there's a seasonal sale.

The other problem with the Laffer Curve is that conservatives always assume we're on the right-hand side; where taxes are so high that it depresses the economy.

There's no evidence that this is the case. Almost all the evidence we have, in fact, suggests we're pretty firmly on the left side of the Curve, meaning we should increase taxes.

Even if you accept the Laffer Curve as theory, and there's plenty of evidence that it doesn't actually hold true, to begin with.

[Laila]

I was citing it to demonstrate how wildly inaccurate the idea (and "evidence") that cutting capital gains taxes and estate taxes would act as economic or investment stimulus. They sell it by saying it will actually increase tax revenue because the economy will be so caught up in the throes of investment orgasms, that increased economic activity will dwarf the lost revenue. In the case of the last time they made that argument, they said it was going to be so amazing it would eliminate the national debt.

It's a collection of misconceptions that are hilariously untrue, I think I overdid it with the sarcasm in that paragraph.

To be fair, at the time they were still riding the Clinton economy, and in the final year of running a surplus from it... so eliminating the debt wasn't so outlandish, if, you know, trickle down economics were actually legit.

[Emageht Tsoluoy]

A distinct narrative is going to arise from this thread - we want more services from the government, all while paying less for them.

Talk about having it both ways.

i would like for more of the taxes that i DO pay, go towards national infrastructure maintenance and upgrades.

such as:
power grids
roads
bridges
telecommunications

I do not mind paying more taxes, as long as my community gets a direct benefir from those taxes, and not more bombs and bullets.

[Varabently]

"Simple" solution, go back to how it was in the 50s - tax corporate profits more (and stop allowing them to be hidden off-shore); tax high-income earners more; and cut defense and security spending back to something sane (and more importantly, stop giving flag officers and defense contractors blank checks and no accountability). $300 billion (inflation adjusted) a year was enough to fight the Cold War; why twice than necessary to deal with a comparative handful of rag-tag religious zealots?

Just as a point of clarification, I work for a defense contractor (typically SUB contractor, but we are subject to exactly the same rules) and while most of our contracts are flexible, we have to tip toe around EVERYTHING we do because of regulatory concerns. You have to control for how you transport goods and information (e.g. certain documents can't be SEEN by anyone who isn't a US citizen and can't pass through a non-US server for data), you have to manage inventory, down to the last bolt. You have to have a specific type of accounting system that's subject to auditing with NO warning.

And guess what, if you fuck up any of those, you can lose your ability to get government contracts and if you do so maliciously, the owners of the company can go to jail. We spend an inordinate amount of time and money making sure we stay compliant with all sorts of regulations that even we don't fully understand (because they are SO convoluted). So when you say "...and defense contracctors blank checks and no accountability," let me say in no uncertain terms that you are completely uninformed about this. There are I am sure some contractors who spend money without the best interest of the tax payer at heart, but I would imagine the majority of us are intimately concerned with that. Because if we don't do a good job on every contract, we are less likely to get other contracts.

Spending too much money also means we have all this overhead that we have to pass on to non-government clients in most situations. There is incredible risk associated with taking government contracts. Yes, we can make a lot of money because there is a huge budget for defense spending, however don't forget that many government contracts have a limit to the amount of profit you can make. So if we make more than say 7 or 8 or 9%, we have to pay that back to the government. We aren't making any crazy profit off government spending. In fact, it's one of the least profitable ways to do business, which is why we are constantly trying to do LESS business with them. Sure, the pipe is big, but there's SO much baggage that comes along with it.

[Spectral]

There's no evidence that this is the case. Almost all the evidence we have, in fact, suggests we're pretty firmly on the left side of the Curve, meaning we should increase taxes.

I think you've fundamentally misunderstood the curve if you think being on the left of it means you should increase taxes. The curve has literally nothing to do with prescriptive policy to increase taxes - the only thing it could tell you (if accurately plotted) is that we're not presently maximizing government revenue. Arguing that we should maximize government revenue is an entirely separate argument from whether we are. Increasing government revenue is only optimal if there is something better for the government to spend it on than how it's currently being spent/saved privately.

[Conspicuous Cultist]

snip

Don't ruin their scapegoat for them.

Now they'll have to blame Bush instead.

[Poopymonster]

lets see germany universal healtchare, unionized labor in all sector, minimum wage around 30% higher than the US. College tuition fully subsidized by the government, tarrifs on goods produced in foreign nations to protect their workers, higher tax rates.


According to conservatives germany must be what the apocalypse looks like, and definitely not the most stable economy in europe and one of the best middle class in the world...

BUT MOAR TAXES!

Ya know, fuck it, I'm OK with paying more taxes if shit gets done.

- - - Updated - - -

Why is income that requires actual time and work taxed more than income that requires no time or effort?

Originally, capital gains/investments would have their money put back into a company, benefiting consumers, the employees, and the gov't (more products, more jobs, more taxes on employee income/stuff bought). So no reason to tax it very much, since it will improve society.

Then everything went to shit, I'd say around the 70s/80s, when greed became god, and you reinvested the bare mininum you had to keep your business profitable, and fuck society.

[Endus]

I think you've fundamentally misunderstood the curve if you think being on the left of it means you should increase taxes. The curve has literally nothing to do with prescriptive policy to increase taxes - the only thing it could tell you (if accurately plotted) is that we're not presently maximizing government revenue. Arguing that we should maximize government revenue is an entirely separate argument from whether we are. Increasing government revenue is only optimal if there is something better for the government to spend it on than how it's currently being spent/saved privately.

Well, sure. But if you're talking about the Laffer Curve, then you're explicitly talking about trying to maximize government revenue; there's literally no other reason to bring it up, for either side, because that's all it refers to.

I thought that was implicit in talking about the Laffer Curve to begin with.

[Yvaelle]

The way the media and politicians interact with the Laffer Curve is invariably as a justification to lower tax, on the grounds that it will be in the best interest of the country as a whole. That occurs because Laffer was economic advisor to Reagan - and he consistently promoted that viewpoint publicly while filling that role.

Since then Laffer has said repeatedly, as Endus did, that we are almost undoubtedly taxing too low to maximize revenue: contrary to his public opinion in the 80's.

The point I was trying to make (and I think Spectral might have been responding more to my rant more than Endus's post?), was that the popular interpretation - that the curve is a justification for reduced taxes, as a lever for total economic growth - was completely inaccurate.

[Masark]

That occurs because Laffer was economic advisor to Reagan - and he consistently promoted that viewpoint publicly while filling that role.

And Laffer is now an adviser to Brownback, and is still promoting that viewpoint publicly while filling that role.