by Eric Martin
Following in the fine tradition of tax allergic Colorado Springs, the government of the State of Arizona has penned one peculiar "Dear John" letter to its constituents:
The people of Arizona kept their upper lips stiff when officials mortgaged off the state’s executive office tower and a “Daily Show” crew rolled into town to chronicle the transaction in mocking tones. They remained calm as lawmakers pondered privatizing death row.
But then the state took away their toilets, and residents began to revolt.
“Why don’t they charge a quarter or something?’” said Connie Lucas, who lives in Pine, Ariz., about a two-and-a-half-hour drive from here. “There was one rest stop between here and Phoenix, and we really needed it.”
Arizona has the largest budget gap in the country when measured as a percentage of its overall budget, and the state Department of Transportation was $100 million in the red last fall when it decided to close 13 of the state’s 18 highway rest stops.
Just don't raise taxes on the uberwealthy – who pay a much lower effective rate than working class, middle class, upper middle class and upper upper middle class Americans. Or create new tax brackets at higher rates at the top. Or anything really.
Also, government is the problem, never the solution, Atlas Shrugged changed my life, socialism, tea parties, Europe is a decadent hellhole, etc., etc.
Frist!
the proles can suck it. it’s their fault they’re poor, after all. if they’d just get off their lazy asses and inherit a bunch of money, or find a way to suck on the military-industrial teat – like productive Americans do – they wouldn’t have to worry about toilets. they could hire someone to poop for them.
you don’t miss the water ’til the well runs dry.
cleek, you left out ‘extort money from people with no option’.
Heard recently that Rand modeled her “heroes” after a serial-killer / sociopath who fascinated her. LOVE it.
chmood: I have a hard time believing that any serial killer/sociopath could be so dry, boring, and stiffly-characterized.
Say what you will about serial killers, but they usually don’t deliver boring 50-page long speeches.
“you don’t miss the water ’til the well runs dry.”
The pump don’t work ’cause the vandals took the handle.
Perhaps Say’s Law is indeed valid. The supply of publicly funded toilets has created a demand for them.
We best disband our military establishment immediately.
Wow…the top 5% of wage earners already pay almost 60% of all tax revenue but that’s not enough?
It’s not fair?
How much of their income would you take away before you thought it was fair?
How about all the folks who pay NOTHING in taxes and actually (with the E.I.C.)come out ahead? They get all their withholdings back as well as a nice little bonus, courtesy of the taxpayers. Is that fair?
BTW, once – just once – would I like to see one of you “tax the rich, feed the poor, till there are no rich no more” lefties come out and state that you have REFUSED the evil Bush tax cuts and that you intend to pay the IRS at the older, higher rate.
Put your money where your mouth is.
The strawmen . . . the smoke . . . the misinformation . . . can’t . . . breathe . . .
Wow…the top 5% of wage earners already pay almost 60% of all tax revenue but that’s not enough?
Heh. You didn’t list how much they earn. It’s kind of important.
How much of their income would you take away before you thought it was fair?
They currently pay an effective rate of roughly 16%. I would be willing to double that (which is the effective rate most people pay). How’s that?
How about all the folks who pay NOTHING in taxes and actually (with the E.I.C.)come out ahead?
Not too many people pay “nothing in taxes.” You’re confused.
BTW, once – just once – would I like to see one of you “tax the rich, feed the poor, till there are no rich no more” lefties come out and state that you have REFUSED the evil Bush tax cuts and that you intend to pay the IRS at the older, higher rate.
That is an incredibly ignorant statement. That’s not how laws work. Please refer to the free rider problem, then come back once you’ve done your homework. Kthxbai.
Dammit, cut the other guys services. That’s where the waste is.
Eric, your usually broad brush is even broader today. Do all 400 top incomes live in Arizona? Are the Federal income tax rates to blame for Arizona’s budget woes? Seriously, how will raising Federal taxes put more money in Arizonan’s pockets so that they can be taxed more locally to cover the local shortfall?
Progressives just love taxes, and the top 400 incomes are just the bloody shirt that is waved to promote taxes on everyone. The current progressive target is people earning over 250K a year. When that well runs dry, it will be incomes over 200K. Even the current bloody shirt is misleading to the point of being BS. The top incomes have lower effective rates because their income is capital gains, i.e. sale of capital assets in which these fricking pirate/thieves have invested. The whole idea behind cap gains, as Eric well knows, is to encourage investors to take long term risks with their capital. Capital, by the way, is money that people have left over after they pay their income tax. Capital gains are earned on invested, after tax dollars.
This is populist rant, and not even very good rant. Eric, you can do better.
They get all their withholdings back as well as a nice little bonus, courtesy of the taxpayers. Is that fair?
Ask Milton Friedman.
Wow, tomaig, that’s the most original argument I’ve ever seen.
A few of your more basic mistakes:
1. You wrote “all tax revenue” when you meant “Federal Income Tax revenue”.
2. You wrote almost 60% when you meant 55.2%
3. The top 5% take 25.2% of income.
4. Taking together Social Security and Federal Income taxes, the top 5% pay 38.5% of those taxes.
5. Their share of all taxes (adding sales taxes, property taxes, etc…) is even lower.
6. The top 400 earners have an even lower average tax rate.
When come back, bring evidence.
Are the Federal income tax rates to blame for Arizona’s budget woes?
If you are not aware, after nine years, of the connection between the 2001 Bush tax cuts and the states’ lack of ability to adequately fund programs, I don’t think we can help you. Maybe Google can.
Progressives just love taxes
Strawman.
The current progressive target is people earning over 250K a year.
A group which comprises only 2% of American households but makes more than 24% of all household income.
The top incomes have lower effective rates because their income is capital gains
So some income is more equal than others. Got it.
Capital, by the way, is money that people have left over after they pay their income tax.
Yes, and capital gains are assessed on brand new, fresh, shiny income derived from investing that capital.
Personally, I don’t understand the motivation for taxing any and all capital gains at a lower rate.
If you have surplus money, you can stuff it in your mattress, making zero additional income, or you can invest it, making whatever additional income you can.
Are there folks who would invest their money if the income would be taxed at 15% who would refuse to invest it if it were taxed at 30%?
I’d like to see a preferential tax rate limited to investments that actually provide net new capital to specific businesses. IPO stock offerings, venture capital, direct investment in business.
Maybe bonds issued to fund specific capital projects.
In other words, investment that directly contributes to some productive effort.
I don’t see why people who basically speculate in the equity market deserve a tax rate lower than people who get up every day and do something tangibly productive.
You know, actually freaking work.
Maybe you can explain the fairness of it to me, I don’t see it.
Are the Federal income tax rates to blame for Arizona’s budget woes? Seriously, how will raising Federal taxes put more money in Arizonan’s pockets so that they can be taxed more locally to cover the local shortfall?
Two responses: First, states in general have less revenue from the Fed Government due to shortfalls after Bush’s series of tax cuts. So, in part, yes. Second, Arizona should probably raise taxes as well, as they are left to cut basic services as the alternative.
Progressives just love taxes
And conservatives just love all government services, but don’t want to pay for them.
The current progressive target is people earning over 250K a year.
No, it says right in the post that the current progressive target is more tax brackets with higher rates at the top. And, as you know, I speak for all progressives.
The top incomes have lower effective rates because their income is capital gains
First, this is not entirely true. They also have lower effective rates due to the regressive structure of payroll/FICA/medicare taxes. Secondly, the resulting inequity seems like an excellent reason to raise income tax rates.
The whole idea behind cap gains, as Eric well knows, is to encourage investors to take long term risks with their capital.
See russell’s response.
Arizona, of all places. Most of Arizona, particularly the southern and more populated part, doesn’t even have good trees to hide behind. I’m not particularly inclined to expose my particulars anywhere near a Saguaro.
don’t forget to watch for scorpions!!
I’m not particularly inclined to expose my particulars anywhere near a Saguaro
that could be a prick-ly situation 😉
(yeah, I suck)
The idea that capital investments would decrease if capital gains taxes were increased doesn’t seem to have much real support. The idea is to encourage investment over consumption. The problem is that the filthy rich aren’t making a choice between investment and consumption. At a certain level, there just isn’t anything left to consume. You can only have so many jets and houses and yachts and crystal statues of little boys that pee champagne; for one thing, it’s expensive to maintain all that junk, so spending all your money on crap is a good way to stop being filthy rich.
So the rich don’t really have a choice. If you have $100 million, you can’t just spend it – by the time you’ve spent $50 million you’ll be looking at huge maintenance costs on all your toys sufficient to eat up the other $50 million within a few years – so your choices are really between investing it and sitting on a big pile of money like Scrooge McDuck. The latter is fun but pays very poor returns. So you invest it. You invest it whether you get 50% of the gains back after taxes or 84% or 20%, because the alternative is no gains at all.
Not to mention that what we lack in this economy (national, global, whichever) is not investment funds. In fact there is so much damn money floating around that its main function is as a serial bubble-inflator and consequent cause of massive malinvestment. What we lack is consumption – demand for products produced by the enormous overcapacity in productive industries that exists around the world. If rich people actually did spend 80% of their income on crystal statues that pee champagne, we’d be a lot better off than we are in the situation where their massive floating piles of money just drift around distorting or destroying whatever part of the economy they come into contact with.
Er, also, what russell said, which was kind of the same thing.
Although he didn’t have any statues that pee champagne, so.
Capital, by the way, is money that people have left over after they pay their income tax. Capital gains are earned on invested, after tax dollars.
Sales taxes are also on post-income-tax dollars. The government takes money out at various points in its flow through the economy. Not sure if your point is moral or pratical here, neither make particular sense to me.
The whole idea behind cap gains, as Eric well knows, is to encourage investors to take long term risks with their capital.
As opposed to what? Stuffing it in their matresses? There is some marginal pressure towards lower-risk investments, but that’s pretty small potatoes I suspect at the rates we’re talking about.
If anything, the world has been suffering from an excess of liquid capital for the last 15 years or so. Fast-moving capital seeking high returns has given us the Asian/Russian financial crises, the dot-com bubble, and the housing bubble.
Under normal conditions, low interest rates = easy access to capital. If we were suffering from high interest rates and businesses in normal times had difficulty finding financing, Id be sympathetic to the idea that we needed to encourage investment. When interest rates have been pretty low for decades and the markets have been suffering from boom-bust cycles driven by bubbles, then I don’t see the rationale. Other than “capital should be privileged.”
You know, actually freaking work.
Maybe you can explain the fairness of it to me, I don’t see it.
It’s the opposite of Marxism; Capital is the real source of wealth, labor is basically unimproved scum. Another feedstock for the factory.
You see this attitude in the words of those who talk about ‘providing jobs’ to their employees. An economist sees a bargain to provide a service for a payment, where each provides something essential to the finished product. The capitalist sees himself as something more like a medieval lord or a Medici-era patron. (To complete the view, the Marxist worker sees himself as being exploited by someone who is providing nothing to the equation).
Wow, Eric, you were up early reading the Arizona papers. As a Tucson resident, what struck me even more this morning was an editorial about our esteemed Junior Senator John Kyl’s take on what a disincentive unemployment benefits are for those out of work (like me, still, arrrgghgh). The piece is here but it may be behind a subscription wall. In case you can’t access it, here’s a tidbit:
Can’t tell anymore what’s real and what’s The Onion
Oh, BTW, one thing those weenie, decadent Europeens have is… soclialist public restrooms.
efgoldman: one thing those weenie, decadent Europeens have is… socialist public restrooms
Yeah, well, America has STARBUCKS, we don’t need no public restrooms.
Sure, you have to buy a $3.50 latte to take a whiz, but that’s capitalism in action. Actually, one of my crackpot theories is that provision of restrooms is Starbucks’ secret sauce. Forget the coffee, it’s the relatively clean toilet that is the big draw. Due to the distinct lack of public restrooms in the US, and the combination of suggestibility and the social norm that you don’t use a restroom without buying something, Starbucks profits from providing something that in most countries is a public service.
Speaking as a caffeine addict, I’m basically okay with this except in those benighted places where there are no goddamn Starbucks for thousands of miles and you have to pee in some run-down gas station’s stinking bathroom that hasn’t been cleaned since Eisenhower put in the freeway. AND they don’t have any goddamn coffee worth the name. Which describes much of the mountain west and the high plains, unfortunately.
But yeah, coming from Europe, I had to adjust to a completely different availability of restrooms. In Europe you can count on a public restroom (maybe not a very nice one) being available in any city center, but that’s not true at all in the US.
“Not to mention that what we lack in this economy (national, global, whichever) is not investment funds. In fact there is so much damn money floating around that its main function is as a serial bubble-inflator and consequent cause of massive malinvestment. ”
This is very insightful, however what we do need is a tax policy that creates the investment of this money in what we see is good social policy. The problem is that we disagree on what that is (not me and you, the more generic we). I would like to see huge tax breaks for capital investment in almost any kind of manufacturing, or any other trade related business development.
We have, for at least thirty years, made huge tax concessions at local and state level to create technology centers in places like Austin and Raleigh. These centers have tended to provide jobs for college educated and up white collar workers, where the bulk of any associated manufacturing keeps being shipped overseas.
It is clear that the innovation required to create jobs has been fostered by our tax policy and investment focus, unfortunately those jobs have been shipped overseas as they have been created.
So, what does the government do? In complete backwards prioritizarion they start clamping down on people coming here from other countries looking for those white collar jobs, all the time letting the blue collar jobs go away.
John Kyl is a ninny. Unemployment benefits are not a disincentive to get a job, they are a disincentive to take the job that only pays you what unemployment does, or, more positively stated, it gives you the time to look for a decent job.
Marty: I think I agree with you on those points. The only thing I’d add is that there’s no reason to overpay for the social benefit created (a principle which applies to both direct expenditures and expenditures via preferential tax treatment).
If Warren Buffet pays a lower average tax rate than I do, then we’re probably overpaying for that benefit. It’s unlikely that top income-takers would invest significantly less if capital gains tax had additional, higher-rate brackets.
The idea that capital investments would decrease if capital gains taxes were increased doesn’t seem to have much real support. The idea is to encourage investment over consumption. The problem is that the filthy rich aren’t making a choice between investment and consumption.
This pretty much captures the flavor of the other responses I got and is a fair reflection of progressive economic thinking.
The subtext of Jacob’s statement is that (1) investors do not gauge risk against anticipated return, (2) investment in the private sector doesn’t accomplish anything (but government investment is a wonderful thing) and (3) people who invest are filthy rich.
Investors are simply another source–actually the principle source–of private equity. At the extreme, they bet big on longer shots with a higher potential rate of return. More modest investors buy stock or bonds. The tax code encourages any long term investment by taxing returns off of that investment. Losses, except to a very limited extent, cannot be offset against ordinary income, only against other capital gains.
If people with substantial savings simply held their money or spent it on themselves, progressives would criticize their selfishness and demand tax code revisions to promote investment and job creation. When people invest successfully, progressives want to tax that success even more than it is already taxed.
When people successfully invest, and thereby ‘save or create’ X number of jobs, progressives disregard the benefit conferred by investors and instead resent the monetary success. No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business (not so much, though, for artists, actors, certain trust fund babies, athletes and a particular SEC basketball coach).
Another example of progressive antipathy for capitalism passing as policy proposal is Russell’s comment:I’d like to see a preferential tax rate limited to investments that actually provide net new capital to specific businesses. IPO stock offerings, venture capital, direct investment in business.
I don’t have time to address each subcategory, so let’s take the rather amorphous direct investment in business. Assuming this means putting cash into a new or existing operation, this only happens by either lending money to the business (banks, private equity) or buying an interest. Now, for either party, the lender or the purchaser, to have any motivation to invest, there has to be a reward that exceeds the risk. Do you give banks a break for lending their money? That would be new for progressives: tax breaks for lending institutions. If the investor buys an interest, does he/she get to sell that interest to someone else with favorable tax treatment? What about the next purchaser? Buying an ongoing business, if not as risky as starting one up, still is plenty risky. A principle reason why otherwise sane people run that risk is the hope of selling out someday and getting to keep most of what they make off of the sale. Progressives are fine with every part of this except for the keeping most of what they make part. Finally, unless an investor has a ready market for his/her investment, i.e. someone willing to buy and assume the risk, there will be no investment in the first place. And, in order for their to be a market for the first investor’s return, there has to be an incentive for any downstream investors. As much as Russell and everyone else would like to prefer only certain kinds of investment, you won’t even get those if the investors can’t sell their property and keep what they’ve made, at least for the most part, which means downstream purchasers have to be incentivized to invest. Part of the incentive is taxing capital gains at reduced rates.
When people invest successfully, progressives want to tax that success even more than it is already taxed.
conservatives are puppy-abusers – every last one.
When people successfully invest, and thereby ‘save or create’ X number of jobs, progressives disregard the benefit conferred by investors and instead resent the monetary success
and, conservatives hate babies.
i wonder what kind of wild, dissonant, psychopathy must go on inside the head of successful progressive investors ?
But then the state took away their toilets, and residents began to revolt.
Life imitates art.
McKinneyTexas: When people invest successfully, progressives want to tax that success even more than it is already taxed.
But the “success” part of it hasn’t been taxed. If you have $100 post-tax, invest it and get $15 back a year later, the $15 hasn’t been taxed before, and you aren’t taxed on the $100.
I respect investing successfully, and I don’t want to disproportionately burden the rewards from it. But I also respect workers, and I don’t see why low-to-moderate income workers should pay a higher effective tax rate than investors do on their capital gains. I’m also not really sold on the idea that it is solely investors who take the actions that create new jobs. Workers (which includes salaried managers) expand the businesses they work for, produce innovations, and manage the day-to-day work that’s actually involved in improving productivity and creating new products and services. For all that they might be slowed by having to do that from retained income rather than taking money from investors, investors can’t get anywhere at all without workers.
So why do workers see a bigger chunk of the share in this enterprise that they negotiate taken by taxes? Capital needs labor and labor needs capital, it’s true, but why is labor supposed to subsidize capital? What is equitable about that? Is there evidence that in the end it produces more gains for everyone? I’d say that the evidence is exactly the opposite: the last few decades of giving tax breaks to capital at the expense of labor have led to stagnation in incomes for labor and large increases in income for capital. Why should workers continue to agree to this deal?
McKinneyTexas, with those madd mindreading skillz you clearly have, can you please tell me tonight’s winning Ohio Mega Millions numbers? I’d like to become one of the idle rich so I can pay fewer taxes.
No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business
I’ll tell noted progressive Warren Buffett that when I see him in May at the Berkshire Hathaway shareholder meeting.
(NB: Yes, I actually will be there. No, I am not a shareholder. BH is my company’s corporate parent.)
I mean, dude, there are actually for-real, in-person, living, breathing people commenting here who consider themselves progressives, if not even something farther left than that. Why don’t you ASK them what they think instead of pretending to know? Is that too hard to do?
You and Sebastian seem to be masters of this trick. If it helps you feel better about yourselves, OK, but you aren’t doing anyone else any favors.
(1) investors do not gauge risk against anticipated return, (2) investment in the private sector doesn’t accomplish anything (but government investment is a wonderful thing) and (3) people who invest are filthy rich.
Let me clear a couple of things up.
I can’t speak for Jacob, but the three things you say here bear no relationship to my point of view, or to most folks I know who share my political and economic views.
I’m an investor. I have significant (for me, anyway) funds in equities and other financial investments. I plan, or at least hope, to live on the gains from them at some point.
My wife is a corporation. She has been self-employed for most of her working life as a marketing consultant and as a designer. Her work has been reviewed favorably, above the fold, on the front page of the Wall St Journal.
Can you say that?
My wife is also very frugal, and has been an investor for quite a long time. A non-trivial amount of her income comes directly from gains on capital investments.
Between us, we know a generous number of people who are entrepreneurs. By “entreprenuer” I mean people who have started and built successful businesses. Many of them have made themselves and lots of other people very wealthy. I see what they do as being very valuable and worthy of reward, and I have no resentment whatsoever toward any of them.
I am *most definitely* a lefty, but it has nothing to do with class resentment, or resentment of people who are wealthy.
People who contribute capital to the overall economy provide a valuable service. They deserve a reward for putting their money at risk, and for making it available to use in building productive businesses or other productive uses.
People who work for a living *also make a valuable contribution to the economy*. They deserve a reward for investing their time, thought, skills, and effort into building productive, successful businesses, or other productive uses.
I’m making one point and only one point.
The tax regime we currently have treats income derived from capital investment more generously than it derives income from labor.
In some cases, in particular where that capital *actually is invested in some specific productive enterprise*, I can see an argument for favorable tax treatment.
In cases where people are, literally, simply speculating in equities, I don’t. Because that money doesn’t actually increase the productive capacity of businesses.
There are people who are, literally, billionaires, who pay a lower effective tax rate than people who do actual, useful, productive work for a living. They pay a lower effective tax rate than cops, firemen, teachers, small business owners, factory workers, and the guy who cleans my office building every night.
They achieve that by deriving their income from investment, rather than working.
I think that’s f**ked up.
Not because they’re rich, but because the value they create through what they do is not greater in kind than the value created by the folks who work for a living.
So I don’t see why the rewards for their contribution to the economy as a whole should be treated favorably, as compared to that of folks whose contribution is *actually doing the things that businesses get paid for*.
And I gotta say, the argument that people *will not invest their money at all* if their gains will be taxed at a rate comparable to labor income is bizarre.
McTex:
Have I mentioned before that I’m a successful lawyer, working at a Madison Avenue law firm – which, I was told at this year’s review – will make me partner next year.
In addition, my wife works at a high paying, white collar job. Combined, our salary is well over the “progressive aim” threshold that you mentioned upthread.
So, am I a self-hating success?
Feh, yours was a rather pathetic attempt at reading minds, a knee-jerk ad hominem and a theory totally misses the point.
I am well aware that there is a point of diminishing returns on taxation. I, myself, invest and make money and am happy with that notion, and do not want to tax all of my money awway – income, or investment.
But when Buffett, Gates and Trump are complaining that the tax system benefits the rich too much, maybe we should listen. And not assume that they are just progressives who must have “antipathy…for people who make a lot of money in business.”
Clearly, there are other explanations.
PS: Gains made from investment have not already been taxed. The money invested has, which is not taxed again as JD so ably pointed out.
Sorry, Eric, but McKinneyTexas has declared that you hate rich people and success and businesses, and he clearly knows what he’s talking about.
“But the “success” part of it hasn’t been taxed. If you have $100 post-tax, invest it and get $15 back a year later, the $15 hasn’t been taxed before, and you aren’t taxed on the $100.”
Jd, This is really confusing. So if I have after tax dollars of $100, I should get taxed again if I invest it in something? The $15 hasn’t been taxed before, but it will be, and the point is of course “How Much”?
The idea of tax breaks “for the rich” from an investment standpoint is to make the reward of investment in job growth greater than the risk and that ratio greater than buying Treasurys (or cd’s or even blue chips that pay dividends that provide little value to economic growth). Focusing these breaks in areas where we as a country would like investment is important. Assuming the value proposition is the same to the investors no matter what the tax consequences is just wrong.
Assuming the value proposition is the same to the investors no matter what the tax consequences is just wrong.
That explains all the calls for 100% taxation on all capital gains. What were these people thinking?
I don’t want to explain the ins and outs of my situation, but I work at a (very, very) small software startup and if we succeed, low capital gains rates would mean I got to keep a much larger share of whatever it winds up being worth.
That has very little to do with why I’m doing it. The capital gains rate could be 90% and it wouldn’t change my calculation – admittedly I am not a direct financial investor, but while I’m far from hurting, I am drawing substantially below-market salary in exchange for equity.
I think that’s some useful context for comments here. As for “filthy rich”, even though investors exist at all income levels, the upper few percentage points invest the most and reap the largest rewards for what is, after all, the same amount of work as everyone else. (There’s only so many hours in the day.)
Marty: The $15 hasn’t been taxed before, but it will be, and the point is of course “How Much”?
I’d say, “About the same as other income”.
And one excellent reason for this is to discourage accounting maneuvers that reclassify what is effectively wage income as capital gains.
Too much screwing around with the tax code is exactly the kind of government interference I thought conservatives didn’t like. And if we want to direct industrial policy – and I think we should – we can do that directly through grants and spending, not through tax breaks that may or may not ever accomplish the thing they’re aimed at.
So if I have after tax dollars of $100, I should get taxed again if I invest it in something?
So if I have after tax dollars of $100, I should get taxed again if I buy something at the mall?
So if I have after tax dollars of $100, I should get taxed again when I pay my cable bill?
So if I have after tax dollars of $100, I should get taxed again when I fill my car with gas?
“we can do that directly through grants and spending, not through tax breaks that may or may not ever accomplish the thing they’re aimed at.”
So here it is in a nutshell, what you leave out of this sentence is:
“We can do that by TAXING, grants and spending…..”
Conservatives believe that there is a greater value in encouraging individual and private investment over government DIRECTED investment. I have never seen a bureaucracy as rife with abuse as government grant programs. Those grants and spending things have a greater chance of not accomplishing their purpose than targeted tax breaks.
Now, if you want to take all of the social engineering out of the tax code then that will certainly stifle investment ihn the short term, perhaps drive a lot overseas, and then start from even and make the decisions you are talking about. But discounting the effectiveness of providing the right incentives for targeted capital investment is ignoring both the dot com and mortgage bubbles. Both were the results of targeted investment incentives targeted poorly.
No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business
No objective reader at this site can avoid the antipathy that convservatives have for nonwhites.
You’re right, lumping everyone on the other side together and ascribing objectionable views to them that are probably only shared by a minority of that group is way fun.
But let’s get back to the debate.
The subtext of Jacob’s statement is that (1) investors do not gauge risk against anticipated return, (2) investment in the private sector doesn’t accomplish anything (but government investment is a wonderful thing) and (3) people who invest are filthy rich.
The *text* of Jacob’s statement is really at issue, not some attempt to find strawmen that bear a passing resemblance to it.
Investors gauge risk against return. In the simplified case where all returns are subject to the same capital gains tax, that may have some marginal effect on investment choices. It might even push *small* amounts of investment over into consumption.
If people with substantial savings simply held their money or spent it on themselves, progressives would criticize their selfishness…
Actually, we would say “whats wrong with these crazy rich people, rather than getting 85% of an 8% return, they’d rather stick their money under a mattress.”
Because that’s what you’re postulating- crazy rich people who don’t want to make money. Or punatively high cap gains rates.
Progressives are fine with every part of this except for the keeping most of what they make part.
The only concrete suggestion Ive seen is that cap gains be taxed at the same rate as other income. Which is nb less than 50%. More than 50% is, in fact, most of something.
You appear to be arguing against 100% cap gains. I think you’ll find that almost everyone here would agree with that position. But your burst of outrage came in reaction to a suggested cap gains in the 35% range. Perhaps you’d like to tailor your arguments more specifically?
As much as Russell and everyone else would like to prefer only certain kinds of investment
Where did everyone else come from? Man, you are so full of straw you need a septic tank. (Man, that joke just does not work in translation).
I would offer a seminar in distinguishing “russell” from “russell and everybody else”, but I don’t imagine Id have more than one student.
“So if I have after tax dollars of $100, I should get taxed again when I fill my car with gas?”
Great argument against a sales tax, not even remotely related to the discussion.
How about “So if I have after tax dollars of $100, I should get taxed again when I deposit it in the bank?” Thats closer at least.
My wife is a corporation.
I knew this Citizens United thing would get out of hand. And yet, where is the conservative bible-based outrage? Adam and Eve, not Adam and Exxon!
But I also respect workers, and I don’t see why low-to-moderate income workers should pay a higher effective tax rate than investors do on their capital gains,
First, low-to-moderate income workers (which I assume means family income of less than 60K) pay roughly the same tax rate as capital gains. Second, this same class of workers bears no risk of losing anything other than their jobs if the owner’s business fails. The owner not only loses his/her job, but his/her investment and, in most cases, credit rating and other assets pledged to secured the business’ operating line of credit. Third, most businesses value their employees through things like 401K’s, insurance, bonuses and in the case of employees who make extraordinary contributions, either significant pay/bonuses or even an interest in the operation. Fourth, at any time, any worker who chooses is free to put his/her life savings on the line and start a business. He/she will find its much easier said than done.
The difference between earned income and income through capital investment is the risk attendant to the initial investment and the time the money must remain in the investment. No such risks/limitations are imposed on earned income.
In cases where people are, literally, simply speculating in equities, I don’t. Because that money doesn’t actually increase the productive capacity of businesses.
This is an entirely subjective and, IMHO, class-envy, statement, in addition to being wrong in its fundamental premise. How does one differ between ‘speculating in equities’ and investing in a publicly traded company? The subtext here seems to be that buying stock in a going concern only benefits the seller of that stock and doesn’t provide any investment in the concern itself and therefore isn’t the kind of productive investment Russell would have the government approve of. The flaws here are (1) you wouldn’t get the initial investment, the initial public offering, etc. if there wasn’t a downstream market (2) the publicly traded company is operated for the benefit of the shareholders (at least in theory) and (3) the downstream investor bears the risk of poor management, superior competition etc..
Eric, congratulations on making partner or, at least, being in line. And also, congratulations on your and your wife’s success. As for the rest, first, your post mixes and matches and comes to the conclusion that higher federal tax rates for everyone making over 250K, justified by the fact that the wealthiest 400 pay mostly cap gains, would have prevented the rest stop in Arizona from closing. That is your post. It is not well thought out and saying so is not ad hominem.
Second, when three of the wealthiest men in the world opine that my taxes aren’t high enough, I don’t see the Oracle at Delphi having a particularly insightful day, I see three bastards who’ve already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together. Screw those guys. More to the point, suppose they said taxes were too high, would you give them the same consideration? Not likely. You hold them out because they validate your view and their extraordinary, over the top success gives the appearance of credence to your position. What I see is sanctimonious a-holes pulling up the ladder.
Third, did I say that Buffet et al were progressives with antipathy for people who succeed in business? I don’t think so. I referred to a number of progressive posters here who seem to feel that way. Some take this observation as an insult which totally baffles me. Progressives typically are not market friendly and routinely rail against the privileged.
Finally, you and Jacob both misread my statement, “When people invest successfully, progressives want to tax that success even more than it is already taxed.” The idea here is that progressives want to increase the tax on capital gains, i.e. taxing success more than it is already taxed.
And one excellent reason for this is to discourage accounting maneuvers that reclassify what is effectively wage income as capital gains.
Another thing that is bothersome when progressives talk about other people’s money and what they’d like to do with it is statements like this. What accounting maneuver converts income into a long term capital gain, i.e. the only capital gain that is taxed at reduced rates?
So if I have after tax dollars of $100, I should get taxed again when I fill my car with gas?
Or, as perhaps a better analogy:
If I have after tax dollars of $100, I should get taxed again if go back to work on Monday and make some more money?
The owner not only loses his/her job, but his/her investment and, in most cases, credit rating and other assets pledged to secured the business’ operating line of credit.
My brother-in-law owns a fairly successful printing business. If it goes under, all of the things you describe may well happen to him.
I own a piece of god only knows how many for-profit corporations. If any one of them goes belly up, I’ll lose a few bucks, which I will then write off against whatever I make on the other ones.
“Own” is a very flexible word.
This is an entirely subjective and, IMHO, class-envy, statement
Everybody’s entitled to their HO.
Look McKinney, there’s a difference between the kind of ownership that my brother in law has in his printing business, and the ownership I have in Microsoft.
It’s called skin in the game.
Skin in the game deserves a reward.
My brother in law employs 50 people and built his business himself with his own money and money he borrowed by putting his own name on the line.
I probably own some Microsoft stock. I don’t know how much, I don’t know what it’s worth, my broker handles all of that. I have absolutely no input into any operational decision made at Microsoft. If Microsoft tanks tomorrow, I’ll write it off.
I can see an argument for giving my brother in law’s capital gains from his business preferential treatment tax wise.
I can’t see a single damned reason why my investment in Microsoft should receive more generous tax treatment than the wages of the guy who cleans my office.
Got it?
Seriously, if I hear another word about class envy I’m gonna get pissed off.
By any reasonable definition of the word, I *am* upper class.
I’m gonna go home now and spend my bonus.
Where did everyone else come from?
I am large, I contain multitudes.
What accounting maneuver converts income into a long term capital gain
At the moment, if more than a year passes from the time you bought it until the time you sold it, it’s long term.
I think this stuff is less squishy than you seem to think it is.
What accounting maneuver converts income into a long term capital gain?
If you can forgive that the link comes from the HuffPo: Obama Seeks To Kill Hedge Fund Tax Break
That gives a little overview. Basically if you’re a fund manager you get to take your slice of the customer’s profit as capital gains instead of earned income, even though none of your own money was at risk. If you imagine an individual investor engaging the services of a private consultant to advise on investment, that investor would be paying the adviser earned income, not capital gains, because it’s not the adviser’s money that’s at risk. So why does it work differently for fund managers?
Some take this observation as an insult which totally baffles me. Progressives typically are not market friendly
Assuming facts not in evidence. Which progressives here are not “market-friendly”? I love markets. I’ve only ever worked at private companies. I don’t think you should be surprised that calling people who work in private enterprise Communists for wanting a bit of tax equity doesn’t go down too well. I don’t want a socialist economy. I want a mixed economy with a slightly larger government share to supply some important public goods, and much more tax equity. That’s pretty far from modern-day Europe, let alone the USSR.
No such risks/limitations are imposed on earned income.
Which is why salary income is generally lower – pre-tax – than income that goes to the owners. The owners take on risk in exchange for rewards, workers take lower salaries in exchange for lower risk. The question is what happens after everyone gets paid. The government says workers get to keep a smaller slice than investors. What’s up with that?
the rest of us who are trying to hold our little operations together
You don’t hold your operations together with capital gains income. You hold them together with retained income, which is not subject to capital gains taxation. Am I wrong here? Capital gains comes into play after the holding-together part has already happened. I am no way diminishing the effort involved in holding said operation together. I’m just saying that I don’t see what capital gains has to do with it.
low-to-moderate income workers (which I assume means family income of less than 60K) pay roughly the same tax rate as capital gains
Not counting the employer side of the payroll tax, that’s about right, maybe 15%. If you throw that in as compensation that is effectively 100% taxed – and to be fair throw in other untaxed goodies that are part of total employee compensation, like health insurance and retirement plans – the rate is a bit higher.
So it would be fine if the rate for capital gains income of $60k/year was 15%.
Unfortunately, the rate for capital gains income of $600k/year is also 15%, and for $6m/year, and for $60m/year, and so on.
Marty: I have never seen a bureaucracy as rife with abuse as government grant programs. Those grants and spending things have a greater chance of not accomplishing their purpose than targeted tax breaks.
I’d like to see some quantitative analysis of that, but I don’t have it to hand either.
I certainly agree that government grant programs are full of waste and abuse. The question is, compared to what? Private corporations are full of waste and abuse too. And tax breaks scattered in the vague hope that they might encourage a particular behavior seems like a triumph of optimism over experience. If you want something done, pay someone to do it. Scattering candy to the wind in the hope that some of the recipients might (or might not) do something useful with it is not my idea of efficient government.
The difference between earned income and income through capital investment is the risk attendant to the initial investment and the time the money must remain in the investment. No such risks/limitations are imposed on earned income.
First, Im not sure how this has any bearing on your point. Yes, earned income and investment income are not identical. The question is, what in this difference makes you think cap gains shouldn’t be taxed, or should be taxed at a lower rate?
Second, even tyro investors know the risk-return relationship. You’ve avoided discussing return, but it’s important- investors seek out higher returns at higher risk, all else being equal. Investors can choose safe, nonvolatile investments and receive relatively safe but small returns.
I see three bastards who’ve already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together. Screw those guys
Excuse me, *who* has class envy?
Some take this observation as an insult which totally baffles me. Progressives typically are not market friendly and routinely rail against the privileged.
Likewise, conservatives hold their racism as a badge of honor. At least, some of them do.
Marty:Great argument against a sales tax, not even remotely related to the discussion.
It’s extremely relevant to the discussion, as it bears on why different types of income are taxed differently.
How about “So if I have after tax dollars of $100, I should get taxed again when I deposit it in the bank?” Thats closer at least.
Which, in fact, I will. There’s a little form on my 1040 for interest income. Maybe there’s one on yours, too.
McKinneyTexas:This is an entirely subjective and, IMHO, class-envy, statement, in addition to being wrong in its fundamental premise.
Are you actually reading what russell writes, or are you so eager to battle the progressive strawmen in your head that you don’t realize that, near a I can tell, russell is probably richer than you are?
Second, this same class of workers bears no risk of losing anything other than their jobs if the owner’s business fails.
Spoken as someone who doesn’t know any poor people. I can assure you, if the business at which my mother works tanks tomorrow, she will lose a lot more than her job.
I see three bastards who’ve already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together. Screw those guys . . . What I see is sanctimonious a-holes pulling up the ladder.
And yet you accuse others of class envy! Hahahahahahaha! Oh, man, this is rich.
More to the point, suppose they said taxes were too high, would you give them the same consideration? Not likely. You hold them out because they validate your view and their extraordinary, over the top success gives the appearance of credence to your position.
Brett Bellmore can explain this one to you.
Third, did I say that Buffet et al were progressives with antipathy for people who succeed in business? I don’t think so. I referred to a number of progressive posters here who seem to feel that way.
Actually, what you said was, “No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business.” “Progressives,” full stop, not “a number of progressive posters here.” And then you got nailed on your bullshit, and are now backpedaling.
Except you’re so un-self-aware and eager to battle strawmen that you did it again by the end of the paragraph I just quoted!!!! To wit: Progressives typically are not market friendly and routinely rail against the privileged.
So, are we back to talking about progressives, full stop, or “a number of progressive posters here,” or “russell and everyone else” or just russell, or what? Pick a target and stick with it. Name names. If “a number of progressive poster here” are “not market friendly,” surely you can name them. russell clearly doesn’t count, nor do I, so who are you talking about?
What’s especially hilarious is that, in this thread, exactly one (1) person has railed against the privileged: McKinneyTexas.
““Why don’t they charge a quarter or something?’” said Connie Lucas, who lives in Pine, Ariz., about a two-and-a-half-hour drive from here. “There was one rest stop between here and Phoenix, and we really needed it.””
Standard principle of government spending cuts in response to revenue shortfalls: Cut first where it hurts. If you try to manage the cuts to cause the lease pain, the damn public just decides that you can get by without the money…
Popping a quarter to use the toilet wouldn’t hurt enough.
Sorry for three comments in a row, but it just strikes me as hilarious that McKinneyTexas, when presented with three EXTREMELY wealthy men who are using the fact that people pay attention to them to argue in favor of a tax structure and a direction for American society that makes things a tiny, little bit better for lower- and middle-class people, can only view it not as making things better for more Americans, but as trying to “pull the ladder up after them.”
Like, heaven forbid these rich titans of industry do something for the proles. They’re supposed to look after their own: The innovators, the entrepreneurs, the McKinneyTexases!!
And he then accuses other people of class envy.
Man, I needed some cheering up, and this really did the job.
First, low-to-moderate income workers (which I assume means family income of less than 60K) pay roughly the same tax rate as capital gains.
Effective rate? Are you sure?
for the rest, first, your post mixes and matches and comes to the conclusion that higher federal tax rates for everyone making over 250K, justified by the fact that the wealthiest 400 pay mostly cap gains, would have prevented the rest stop in Arizona from closing. That is your post. It is not well thought out and saying so is not ad hominem.
Actually, no. It made no such conclusions, and I already addressed the Arizona issue in my first response. See upthread.
I also specifically suggested that there should be more brackets above the 250K threshold. Also, the post linked to effective tax rates of more than just the 400 – it listed people netting a million or more a year. That’s what the post says. Misconstruing it is…well, not good form.
Second, when three of the wealthiest men in the world opine that my taxes aren’t high enough, I don’t see the Oracle at Delphi having a particularly insightful day, I see three bastards who’ve already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together.
Statements against interest are given more credence than self-serving statements. That’s basic. And, again, why not more tax brackets say, on those netting in the millions? If your operation is NETTING in the millions, you wouldn’t be struggling…
near a I can tell, russell is probably richer than you are?
I’m guessing this is unlikely. And living in the real estate market I live in (north of Boston), my effective standard of living is basically middle class.
I’m fine with that.
If I didn’t have to work, I could play music all day, and that would be fun. Other than that, no complaints, and if you ever hear any from me, give me a dope slap.
Also, a comment about risk. McKinney (and others) talk as if capital investors assume all the risk, people who work for a living do not. Or, at worst, “all that they will lose are their jobs”.
Which comment sort of speaks volumes, but I digress.
When someone decides to go to work somewhere, they are not just selling their services. If they were, they would likely get paid better. They are investing their time, the opportunity cost of not working elsewhere, the training and experience they bring to the table, and their good will and professional reputation, into the enterprise.
If employment involves a move, they are committing to an entire community, and involving their family in the deal as well.
In comparison, just bringing money to the table seems, to me, to be kind of small change. There is nothing in the world more fungible than money. Money, in fact, exists expressly for the purpose of being fungible.
That’s what money is.
When I say “just bring money to the table”, I’m not talking about a small business owner, I’m talking about people who buy stuff with their excess cash and hope its value happens to go up, so they can sell it later for more money.
If what we want to do is use public tax policy to favor activity that builds productive businesses, grows the economy, and increases the general wealth of the nation and its people, then it makes no sense to me that the working person I describe above has their income taxed at a higher rate than the guy who buys stock in publicly traded companies as a speculative investment.
Yes, it’s useful to have a big pool of nice fungible money on tap, so that the guy who, like my brother in law, spends decades building a business from his own money and sweat can cash out if he wants to.
But in the overall scheme of things, from any point of view you want to take, including the risk aspect, I don’t see that as the highest value contribution in the mix.
But it’s rewarded as if it were.
The people who *actually do the thing that businesses get paid for* create a sh*tload of value.
Don’t you think?
Otherwise *nobody gets paid, at all*.
Right?
So they should be treated as if that is so.
That’s my point.
In a nutshell, it’s like this:
Labor and Capital fight it out in a steel cage death match to determine how they will split the rewards from Enterprise. After they emerge from the ring, proudly clutching their share of the winnings, Government comes along and, turning to Labor, demands it pay a percentage of its income ranging from 0% at the very bottom to about 20% at the levels most people pay to a max of about 43%, and then back down to about 35%. Government then turns to Capital and demands only 15% across the board whether you made one dollar or one billion dollars.
Labor saying “WTF!” seems pretty well-justified. Does Capital not drive on roads? Does Capital not send its kids to school? Does Capital not benefit from fire protection? Does Capital create its own untouchable old-age and disability insurance? Does Capital have its own private army to defend the country? What was wrong with the share of income that Capital negotiated with Labor? What business is it of Government how anyone makes their money? Why should Government privilege those who make their money by virtue of having lots of money and putting some of it at risk over those who make their money by working their ass off?
If Capital thinks Government should be smaller, that’s fine. Suggest programs that should be cut, and get politicians elected who will cut them. Let’s get rid of roads and national defense and public schooling. But it’s not fine to just say, I don’t wanna pay for this stuff, and I’m not gonna. Well, hell, you can say that, and you can even do it for a while if you get politicians elected who agree with you, but that stance does not seem fair or equitable to me, and I do not see that everyone benefits from it, and I do not want it to continue. That’s not punishing Capital. That’s just leveling the playing field, as you guys like to say.
The government isn’t losing out anywhere. Almost all ‘capital’ is taxed as ‘labor’ before it gets invested. It almost always gets taxed as ‘sales tax’ when people buy non-investments with it. The government is getting its cut plenty.
“Labor saying “WTF!” seems pretty well-justified. Does Capital not drive on roads? Does Capital not send its kids to school? Does Capital not benefit from fire protection? Does Capital create its own untouchable old-age and disability insurance? Does Capital have its own private army to defend the country?”
Capital responds,
“When I drive to the grocery store, I don’t ride a hundred cars. My children don’t each occupy a hundred seats in school. I don’t collect 100 SS checks, or die 100 times if Canada invades. In short, the services I get from the government don’t cost a hundred times as much as the services each of you get. So why the hell should I pay 100 times as much taxes as any of you?”
Let me add something to the many excellent points made by Jacob, Russell, and others.
Investment is deferred consumption. The investor gives up consumption today in the hope of more consumption tomorrow. The increase is return on investment – the income the investor earns from the investment.
The same logic applies exactly to most labor income. It’s not for nothing that we refer to “human capital.” It’s not some touchy-feely term. It means that people defer consumption, spend money, etc., to build skills that will earn them a return in the future.
This is not just true of brain surgeons, or even lawyers. It’s true of everyone who takes time to acquire a marketable skill – electricians, nurses, teachers, what have you. All these people earn income by virture of an investment they made in their own skills. They gave up some consumption now for more later.
Certainly we want to encourage this, as much as we want to encourage what we ordinarily think of as investment. So why should we tax the return on these investments at a higher rate than the return on other investments?
Taxes! Hooray.
Frist!
You can diagnose this problem after watching the videotape?
The tax regime we currently have treats income derived from capital investment more generously than it derives income from labor.
Where “capital investment” includes buying an existing share of stock for B and selling it for B + P, even though not a cent of the B was ever used as capital.
Phil, I am pretty sure you don’t fill in the principal you deposited on your 1040. At least keep the story straight.
“Where “capital investment” includes buying an existing share of stock for B and selling it for B + P, even though not a cent of the B was ever used as capital”
Technically the market trades the ownership of capital that is still inuse by the corporation. The rise in price of the current amount invested raises the value of that currency to acquire additional investment. I can actually discuss the positives of the market dynamics but suffice it to say that the statement here is simplistic and false.
So why the hell should I pay 100 times as much taxes as any of you?
Hey, it’s shouting at the moon, but what the hell.
You shouldn’t pay 100 times more than any of us relative to the income you make.
And you f**king well don’t. You don’t, nobody you know does, and nobody you don’t know does. Cos nobody does.
Never have, never will.
Here’s my homework. Where’s yours?
Here’s the takeaway:
Bottom quintile: 4.1% of the income, 0.9 percent of the total federal tax burden.
Top quintile: 53.5% of the total income, 67.2% of total federal tax burden.
We have a mildly progressive federal tax regime.
So enough already with this line of argument. Capital E enough. OK?
At least bring some documentation. I’m tired of digging up that CBO PDF every time this comes up.
Everybody pays taxes.
Rich people pay them at a somewhat higher rate than poor people.
Yeah, that gets up your nose. Oh well. We all got something that bugs us.
Technically the market trades the ownership of capital that is still in use by the corporation. The rise in price of the current amount invested raises the value of that currency to acquire additional investment.
The same is true if you bet on football. The market raises the value of the bet when it moves from potentially correct to actually correct. The only difference is that one is illegal in most states and the other is not only legal but subsidized by the tax system.
Sorry, I misread Brett’s point.
Brett is saying that we should all be taxed based on the value of the government services we personally consume, rather than relative to our income.
That’s fine.
When your house catches fire, you can pay the fire department to put the fire out on a fee-for-service basis. The rest of us whose houses are not burning down will feel badly for you, but we will not contribute a dime.
Why should we? Our houses are not on fire.
When somebody robs your house, you can pay the police the full and complete cost of investigating the robbery, finding the criminals, recovering the property, and prosecuting and imprisoning the criminals on a fee-for-service basis.
When you eat a steak, you can cut uncle a check for inspecting the particular cow whose chop you’re eating. Or, you could save a few bucks and take your chances.
Etc etc etc.
It’s not a workable idea, Brett, which is why nobody does it that way. You can propose it 1,000,000 more times, and make all the claims you like for its eminent fairness, and it will still be an unworkable idea, and nobody in their right mind will adopt it.
It’s a cute theoretical point, and it’s utterly useless as a practical recommendation.
I’m not trying to bust on you, I’m just pointing out that it *doesn’t make any freaking sense in practical terms*.
Mike, Really, that’s the best you can come up with?
Technically the market trades the ownership of capital that is still inuse by the corporation. The rise in price of the current amount invested raises the value of that currency to acquire additional investment.
Here’s a scenario:
I buy a share of Company A at IPO. This results in Company A having some new dollars to invest in people, materials, whatever. So, now they can grow and take advantage of some opportunity.
Splendid.
Company A does well, and some time later I find someone who is willing to pay me 10% more than I paid for my slice of ownership in Company A. Mostly because that guy thinks he’ll be able to sell it someone else later for even more.
So, I sell. Profit! Again, splendid.
Is your argument that the difference between what I paid for that share, and what the next guy pays, results in any meaningful way in net new capital flowing to Company A?
If so, can you explain how?
“Is your argument that the difference between what I paid for that share, and what the next guy pays, results in any meaningful way in net new capital flowing to Company A?”
Not directly. However, it is the return on that investors(you) original investment. It is the reward for your risk. He is paying your reward because he thinks that invested capital, wh ichis still in the company being used, will actually provide a higher reward and he is willing to wait longer for the higher reward than you are, for whatever reason.
In the meantime, if the company wants to expand etc. Then they can offer more shares to the public market and that is priced by using the value of the current shares (discounted) so the price does impact the ability to acquire etc to build a company.
Mike, Really, that’s the best you can come up with?
Really, Marty, you think something more elaborate is required?
Marty,
As they say in the literature, there are many reasons to sell. The buyer may have made an educated guess as to the company’s outlook, future growth, dividend yield, etc. Or he may be guessing. The decision may turn out to be a success or a disaster.
Higher share prices give those capitalized shares still held by the company more value. However, this is not a licence to print additional shares…known in the olden days as watered stock.
As a wage slave,
I wish I could be incorporated.
I wish I could write off all my expenses against my income.
I wish I could pay taxes against whatever is left over at capital gains rates.
I wish I could go to school and write off the expense over 5 years as a “tax loss carry forward”.
I wish I could write off depreciation of my body as an expense as I got older.
I wish I could incorporate in the Caymans.
I wish I could live forever.
I wish I could walk away from my debts without penalty due to “limited liability”.
But I am a blood and sweat human being. When I labor, I donate my time, a unique and limited resource. When I get old, nobody is going to take a run at me as an “asset play”. But those who simply “invest” money get a better deal than I do in this world simply because they have a claim on my contribution to the real economy, and they basically donate nothing….because the truth remains, you cant’ take it with you.
Is your argument that the difference between what I paid for that share, and what the next guy pays, results in any meaningful way in net new capital flowing to Company A?
If so, can you explain how?
There are two answers:
1)the fact that this share is partial ownership of the company means that it’s value at the IPO is dependent on the ability to transfer that share easily. That is, the initial transaction is dependent on the second one, so the ability to have the second transaction leads to the first one in which capital reached the corporation.
2)The higher the current share price, the more money the company can raise via additional stock offerings.
Standard principle of government spending cuts in response to revenue shortfalls: Cut first where it hurts. If you try to manage the cuts to cause the lease pain, the damn public just decides that you can get by without the money…
Ive heard that theory a lot from conservatives, but Ive not seen evidence to back it up. It assumes that elected officials will put their positions at risk in order to preserve funding to favored programs, but I suspect that those officials are much more focused on keeping themselves in place.
I don’t ride a hundred cars. My children don’t each occupy a hundred seats in school. I don’t collect 100 SS checks, or die 100 times if Canada invades. In short, the services I get from the government don’t cost a hundred times as much as the services each of you get. So why the hell should I pay 100 times as much taxes as any of you?
But 1)big businesses do get more utility than individuals do from other things eg transportation networks, security, etc. And 2)businesses benefit from those services provided to individuals as well, eg by having access to an educated, healthy labor force.
Brett, where did the 100x multiplier come from?
A highly-paid specialist doctor works for an investor. The doctor is paid $350k a year. The investor has a capital gain of $350k the same year. The investor pays 15% in taxes, the doctor pays about 35-40%.
There’s no difference in income at all there. Why does the doctor pay 2-3x as much tax on the same income as the investor?
Now as for 100x the tax when there’s 100x the income, well, welcome to life in a democracy. Feel free to try to get the Flat-Tax Party elected.
Fact is, money is just another social & technical construct. No moral obligation requires me to deliver the product of my work to other people just because they happen to have a large stack of funny-colored pieces of paper with numbers on them. I do it, we all do it, right now, because we think that it’s a useful system for allocating resources and the inequities it generates are tolerable. Moving to a system where 5% of the population consumes 50% of the work product is likely to result in the cessation of popular respect for the holders of funny-colored pieces of paper. Money & property are a game, a system, whose continued existence as tangible realities relies on the consent of the members of the society around us.
Luckily, the US is a democratic society, and so the response will probably be heavy taxation. You might look to the French & Russian revolutions for what happens when the possessors of large amounts of money decide that they owe nothing to their fellow citizens and the citizens have no way of redressing matters peacefully. They tend to gloss over this in school civics lessons, but the actual purpose of democracy is to give an alternative to gushers of blood running in the street as a means of pursuing social justice. I think it’s a pretty good idea, personally, since the blood-in-the-streets method never turns out very well.
Here’s a great Arizona shake down that I ran into this week. On the edge of a small town (Show Low, to be precise), as you are leaving, the speed limit signs increasing the limit to 55, then 65 are REMOVED!
So then you are seven miles out in the country, clear day, no road construction, nice wide and straight US highway, and virtually zero buildings in the vicinity when you see one of their ubiquitous speed cameras.
BAM! It nails you for going over 45 mph, even though there has been no posted sign in the last seven miles of open country that this is still the speed limit.
BTW, my GPS said the limit was 65 in that stretch, but how much does it cost them to remove two signs and nail everyone from out of town?
“A highly-paid specialist doctor works for an investor. The doctor is paid $350k a year. The investor has a capital gain of $350k the same year. The investor pays 15% in taxes, the doctor pays about 35-40%.
There’s no difference in income at all there. Why does the doctor pay 2-3x as much tax on the same income as the investor?”
Usually it is thought that the investor invests in the company which employs people, which is a good thing.
Generally employees get paid wages as they go along and can’t lose money on the proposition. Generally investors don’t get paid as they go along, and they can lose it all (and often do).
So there are at least some obvious differences.
Of course there are differences. The question is why those differences are any concern of the government.
The government doesn’t distinguish between income earned giving cataract surgery to blind orphans and income earned working in porno movies. It doesn’t distinguish between software engineering and psychic reading. It doesn’t distinguish between pro-footballers and janitors.
Why does it distinguish between investors and salaried workers? In all those other cases, it does not try to discern the social value of the work and tax accordingly. In fact I think conservatives would have a fit if the government started using the tax code to punish occupations it disliked.
I don’t think the argument that “investors create jobs” holds water, especially given the history of the last 30 years, the quite apparent lack of jobs despite floods of cash in the investment system, and the at-least-equal role that workers have in creating jobs.
This is either a pragmatic matter – the government should discriminate because it is socially useful to do so – or it is a principled matter. If it is pragmatic, you are going to have a tough time explaining the last decade of incredible economic suckiness. If it is principled, you are going to have a tough time explaining why the principle that people should pay X rate of tax on their income applies to workers but there is some other principle that applies to investors that means they only pay X/2 rate of tax.
If it is principled, you are going to have a tough time explaining why the principle that people should pay X rate of tax on their income applies to workers but there is some other principle that applies to investors that means they only pay X/2 rate of tax.
I assume it’s the familiar class war principle that rich people should pay proportionally less tax than poor people, because (a) that way the government gets less money, and (b) that way poor people are likely to stay poor, which is how the US triumphs as an aristocratic society with very little social mobility.
Obviously that’s better than the kind of classless mobility you might find in the distressingly egalitarian socialist countries, where people born in poverty just don’t seem to know their place.
Phil, I am pretty sure you don’t fill in the principal you deposited on your 1040. At least keep the story straight.
Sure I do. It’s on my W-2 form under the box “Wages, tips, other compensation.” Where did you imagine it comes from?
Not directly. However, it is the return on that investors(you) original investment. It is the reward for your risk.
Yes, that’s how I think of it as well.
What I don’t see is why, as a matter of public policy, the return folks get for risk is uniformly treated more favorably than the return folks get for labor.
In the meantime, if the company wants to expand etc. Then they can offer more shares to the public market and that is priced by using the value of the current shares (discounted) so the price does impact the ability to acquire etc to build a company.
See, this is where I think you have it backwards.
You’re arguing that the fact that the first investor can sell his piece of ownership at a profit enables the company expand further, because if they wish to issue further stock they can get more money for it.
The reason the first guy can sell his piece at a profit is because the company has done well, and has some prospect of further success. That’s due to a number of factors, not least of which is *the efforts of the people who work there*.
Investor #1 has arguably made a contribution by making useful capital available to the enterprise.
Investor #2 has contributed nothing to the success of the enterprise, although he hopes to benefit from it.
Russell, I can point to hundreds of companies with competent hard working people that NEED the ability to access the capital markets to be successful. Those very hard working competent people want the capital so their efforts and dedication can create even more value. You keep setting up some either/or on the value of the capital markets and people that simply doesn’t exist. Investor. Number 2 is the only reason investor number 1 would ever invest his money. BTW, investor number 2 is now an owner with voting rights on the make up of the board etc. So depending on the size of his stake he could have a pretty significant contribution to the companyn or not.
You keep setting up some either/or on the value of the capital markets and people that simply doesn’t exist.
Aside from their being taxed differently, you mean?
Isn’t that what started the conversation – the presumption that because what Investor #1 and Investor #2 do by investing their money in a company is of more value than what the people who work for the company do, they deserve lower tax rates?
I think capital markets are great. I participate in them.
I agree completely that the market in publicly traded equities makes it that much more possible for investor #1 to realize the gains from his investment.
All good. Splendid, even.
What I do not see is why folks whose contribution to the economy is making their cash available for other folks to use should, uniformly and in all cases, have their gains treated more favorably than the folks who *do the thing that the enterprise gets paid for*.
I’m still waiting to hear a good argument.
What I’ve heard is that capital investors make a valuable contribution. I agree.
I’ve heard they take risk. That’s true, and the reward they receive is generally commensurate with the risk they take. They *get paid* for taking risk.
And, as I note upthread, folks who contribute their own labor assume all kinds of risk as well. Including, as McKinney so astutely notes, losing their jobs, because most folks work at the pleasure of their employer.
If you derive your income from gains on capital, your income is taxed at 15%. 5% if you’re poor, but there aren’t many folks who are that poor who have income from capital gains.
If you derive your income by doing something productive with your days, your income is taxed somewhere between 10% and 35%.
Why should someone who earns money by doing the actual valuable thing, the thing that someone will pay good money to have done, have their income taxed at a higher rate than the person whose sole contribution is capital?
Jes, They are not taxed differently except in the instance that investor #1 or #2 holds their investement for more than a year. Long term capital gains taxes are designed to create incentives for building businesses (that create jobs) rather than day trading or short term trend trading. It is an incentive that makes sense in the very concepts Russel is circling.
My point is that it is a false comparison and a false conflict. People who want to start equity funded businesses count on the smooth operation of those markets, they also count on, and pay as they go, the employees necessary. The difference is that long term gains get taxed at a lower level to maximize the stability and attractiveness of the market, short term gains and labor get taxed because they are an immediate gain.
You keep setting up some either/or on the value of the capital markets and people that simply doesn’t exist.
And actually, I don’t do this. I think they both make valuable contributions.
Who does this? The US tax code does this. The tax code distinguishes between income derived from capital investment and income derived from labor, and treats the first type more favorably than the second.
I am arguing *against* making that distinction.
The difference is that long term gains get taxed at a lower level to maximize the stability and attractiveness of the market, short term gains and labor get taxed because they are an immediate gain.
If I sign an employment contract with my employer, agreeing to work for them at an agreed wage for at least one year, can I get a break on my taxes?
I’d sign up for that. Make it three years, or five years for that matter.
There’s value in having a stable work force. People learn the business, get to know the customers and their needs, become more effective at their jobs with time.
I think it should be encouraged.
Agree to work for your employer for N years at some mutually agreed upon wage, and your income is taxed at 15%.
Splendid. Let’s do that.
No Russell, if you sign an agreement to provide your labor for three years without getting paid, get a lump sum at the end I belive you could structure that as an investment and pay long term gains on it, probably. But if you take your money out of the company every two weeks it is a short term investment.
They are not taxed differently except in the instance that investor #1 or #2 holds their investement for more than a year.
In which case, they’re taxed at a lower rate.
But someone who holds down a job for more than a year isn’t taxed at a lower rate.
You feel that’s a fair distinction to make – that investors deserve to be treated more favorably than people who work for a living – okay, try to defend that.
But don’t try to pretend the distinction isn’t being made.
One reason for taxing capital at a lower rate than labor is that it is a lot easier for capital to pack up and leave the country than it is for labor.
Marty,
The three year balloon payment is simply deferred income and would be taxed at ordinary rates.
The state enforced (yes, that pesky government) concept of limited liability is a huge benefit to the investing class. Lower tax rates on their unearned income allows the power of compound interest to increase their financial wealth geometrically. Again, an action of the state.
But conservatives will whine and chew the carpet about being “self made” and get red in the face asserting “anybody can do this”.
This is patently untrue.
State power initiates your road to wealth, keeps the traffic flowing in an orderly fashion, and favors those who already possess wealth and the power that flows from it.
That the rich do not desire to pay the state the true value of what it provides them is simply astonishing.
The difference is that long term gains get taxed at a lower level to maximize the stability and attractiveness of the market
They get a lower rate because they (the rich) have the political power to enforce this artificial distinction.
The fact that it is called “unearned income” should be a big clue here.
Inflation is a component of the effective capital gains tax rate. During the ’70’s when the inflation rate was high, the effective tax rate was sometimes over 100%
The difference is that long term gains get taxed at a lower level to maximize the stability and attractiveness of the market, short term gains and labor get taxed because they are an immediate gain.
This is an argument for taxing long-term gains at lower rates than short-term gains. It really doesn’t bear on the relationship between capital gains and labor income.
No Russell, if you sign an agreement to provide your labor for three years without getting paid, get a lump sum at the end I belive you could structure that as an investment and pay long term gains on it, probably. But if you take your money out of the company every two weeks it is a short term investment.
If I invest capital and get my return in the form of a dividend, I’m getting my return in less than three years. The dividend is money that isn’t retained by the company, isn’t invested in future company growth. From the point of view of the company, that money is gone. It’s been “taken out” of the company.
Dividends are taxed at 15%.
And the kind of arrangement you describe actually exists, it’s called deferred compensation.
If I’m not mistaken, non-ERISA deferred compensation is taxed as income, at normal labor income rates, when the money is paid out.
One reason for taxing capital at a lower rate than labor is that it is a lot easier for capital to pack up and leave the country than it is for labor.
Which is why all the credit card call centers are located in Wichita, KS.
One reason for taxing capital at a lower rate than labor is that it is a lot easier for capital to pack up and leave the country than it is for labor.
The “they’ll take their bat and ball and go home” argument.
Generally employees get paid wages as they go along and can’t lose money on the proposition.
Though when they do (e.g. someone defaults on a contract, as has happened to me), there’s no deduction for the uncompensated labor. Why is that?
The problem with the idea that an increase in the capital gains tax will induce capital flight is that differences in the risk-adjusted return on investment are much more significant than differences in the tax rate. “Risk-adjusted return” is the key phrase here; essentially no other country on the planet offers the same combination of “potential for scalable growth” (in a market of 300 million people) and “relatively low-risk” (because of the comparative political and economic stability of the US, strong law-enforcement, strong patent, copyright, and trade secret enforcement, and stable investment markets). There are countries with one or the other of those – much of Europe is low-risk, China is huge – but no others with both. (Even the Eurozone is still divided by language and nationality when it comes to scaling.)
This is also why there is SO MUCH DAMN MONEY floating around in the US looking for something productive to invest in. This is why every other country buys American stocks and bonds as a stable investment. Yeah, if you want to open a labor-intensive factory making plastic crap that can be made in China by workers paid 1/10th as much, it’s not so appealing, and that’s a problem. But the problem is not the capital gains tax. It’s that expected returns on that kind of investment are nil or negative because of competition.
A worked example of the difference that a mere couple of percentage points in risk-adjusted return makes:
An investor has $1,000 to invest. He has a choice between country A, with a 35% capital gains tax rate and a 6% risk-adjusted return, country B, with a 15% capital gains tax rate and a risk-adjusted return of 4%. He wants to invest his money for 10 years.
In country A, 10 years of compounded 6% returns leaves him with $1,791. With his gains taxed at 35%, he’s left with gains of $514.
In country B, 10 years of compounded 4% returns leaves him with $1,480. With his gains taxed at 15%, he’s left with gains of $408.
Pretty simple. It’s better to be in a place where you can compound at a higher rate and pay a higher rate of tax in the end than to compound at a lower rate and pay a lower rate of tax at the end.
I’m not saying that a 1-2% difference in risk-adjusted return is peanuts, it’s not, but to hear the way it’s talked about by anti-tax crusaders, bumping the capital gains tax would induce mass capital flight and chaos. Even if there was some capital flight, the outcome might just be an increase in risk-adjusted return on investment here. (Cheaper investments with the same earnings potential mean a higher return.)
Which is why all the credit card call centers are located in Wichita, KS.
I think you forget about the call centers in Omaha, NE and Sioux Falls, SD.
I hate when you people have contentious tax discussions when I can’t actively participate. **pouts**
Some points:
The (maximum) capital gains tax rate since 1986 has ranged between 28% and 15%. I don’t think there has been a variance of capital investment in the U.S. that comes anywhere near to the variance in rates (and why would there be? Do you know what the rate on capital gains will be in, say, 2020?).
The rate on capital gains as signed into law by St. Ronaldus Maximus Reagonomicus was 28%. The ordinary income tax rate signed into law by the same pen was…28%. Communist.
The current maximum rate on ordinary income earned by C corporations is 35%. The current rate on capital gains earned by those corporations is…35%. So much for incentives.
The current capital gains rate on investments in U.S. capital gain property (other than real estate) by foreigners is 0%. Incentives are primarily for foreigners, I guess.
Some other points:
There are plenty of people who want to make a fncking lot of money. They will want to do this no matter the marginal tax rate (absent confiscation).
If money is all there is to work for why do we see CEOs of Goldman Sachs leave to be Treasury Secretary?
If you have surplus income, are you really going to buy tchotchkes instead of bonds due to the marginal rate on investment income?
The lower rate on capital gains is useless to those who own stocks in tax deferred accounts (401k, IRAs, Pensions). Which is, like, most of us.
Explain to me how jobs are created when I buy raw land in 1970 and sell it at a huge gain in 2010, and pay tax at the capital gain rate.
Feh. I’m cranky. Do marginal tax rates affect behaviour, e.g., willingness to invest in capital/labor/pokemon? Yes. How big of an impact is it? Minimal, in fact it’s swamped by other considerations from just about everything I’ve ever read.
How big of an impact is it? Minimal, in fact it’s swamped by other considerations from just about everything I’ve ever read.
This is, I think, the biggest obstacle in common understanding of economics- it’s often easy to get the sign right, but not to understand the magnitude of the effect or if it’s swamped by other, higher-order effects.
Thus, Kyl is right- unemployment insurance is a disincentive to find work. But my best guess is that it’s a tiny effect and can be effectively ignored in weighing the policy. And it may well be swamped by beneficial second-order effects eg a higher willingness to work for small or startup companies that might go under.
Usually it is thought that the investor invests in the company which employs people, which is a good thing.
And doctors cure cancer, which is also a good thing. Labor is a good thing. Capital is a good thing.
I dont know why defenders of low cap gains continue to point out that “investment is good”, as if that answered the question “why is investment income being privileged over labor income?”
Risk is also not a good answer- the market rewards risk-taking with additional returns. There are low-risk investments and high-risk ones. We reward both with the same lower cap gains rate. When someone takes high risks for high yields, they are already being rewarded with the high yields, we do not need to provide additional incentives.
One reason for taxing capital at a lower rate than labor is that it is a lot easier for capital to pack up and leave the country than it is for labor.
I dont think that’s quite right. We’re talking about individual cap gains- so we’re talking about people emigrating and giving up their citizenship, not just investing in Morocco or something.
From wikipedia:
The United States is unlike other countries in that its citizens are subject to U.S. tax regardless of where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise[who?] as tax havens, U.S. law requires reporting of income from those accounts and failure to do so constitutes tax evasion.
I am not a wealthy man, but I come from four generations of small-business entrepeneurs, and my own career in computer engineering pays me well.
russell can speak for me on this topic; I am grateful for his eloquence.
“What I do not see is why folks whose contribution to the economy is making their cash available for other folks to use should, uniformly and in all cases, have their gains treated more favorably than the folks who *do the thing that the enterprise gets paid for*.
I’m still waiting to hear a good argument.”
For the most part, you can’t lose money in employment. If you work for a month at a company, you get a month’s worth of negotiated wages. And you’ll get that pretty much every month unless the business goes under, and then you have a very high priority claim against the assets. You have essentially zero chance of working for a year on something and losing a year’s worth of wages. That just can’t happen to your typical employee.
That happens to capital investment *all the time*.
And really, I’m surprised you bother with the dividend argument. Dividends haven’t been a major part of capital investment profit since about two major changes to the tax code ago. (Whether or not that was a wise shift–and that the government deincentivizing dividends may have contributed a huge amount to the short term horizon of modern capital markets is something for another day probably).
Also, neary all ‘capital’ income gets taxed as ‘labor’ income somewhere before it gets invested. So it isn’ as if the government is somehow getting cheated out of its cut.
Will increased capital gains taxes discourage investment and inhibit economic growth?
No:
[…]
To attain a balanced economy, all forms of income, Capital, rent, interest and wages, should be taxed at the same rate, preferably as low as possible. This will remove the “tax incentive” for investments and leave everyone to make economic decisions based on economic conditions rather than the bottom line on their tax forms. A beneficial side effect would be simplification of the income tax form. Perhaps, the greatest hindrance to this concept coming to fruition, is also its greatest benefit; it is a simple solution that would advantage no particular group but would level the playing field for all. As good for “business” that a more equitable income tax rate would be, it certainly isn’t the way we are used to “doing business”!
Yes:
[…]
Many experts and average citizens are critical of capital gains taxes because they represent dual and triple taxation on the same money. If someone earns and income and pays income tax, any savings they accrue have already been taxed. If the savings gain value through investment during a given year, those gains are taxed during the year they occur. At the end of holding the asset, capital gains taxes are levied again on the difference between the original purchase price and the sales price. So the dollar that started out in savings and grew over time through investment has been taxed multiple times. Since the individual who invests bears the chance of risk, there should be some incentive for taking that risk. Decreasing that incentive through taxes simply causes some people not to take the risk with investing the money and this affects the ability to grow our economy. In the short run, this collection of tax seems like a great idea, but over the long term it harms the country.
For the most part, you can’t lose money in employment.
You keep explaining how they’re *different*, not why they should be taxed a different rates. No one is saying that labor and capital are identical.
And, again- investments that have higher risks are rewarded by higher returns. We don’t need to attach additional rewards for them, and we don’t attach any extra tax benefits for taking risks as opposed to making safe investments.
If the savings gain value through investment during a given year, those gains are taxed during the year they occur. At the end of holding the asset, capital gains taxes are levied again on the difference between the original purchase price and the sales price.
That’s not how cap gains works on my tax forms- you pay the tax once, based on the change in price. Have you ever paid cap gains?
So the dollar that started out in savings and grew over time through investment has been taxed multiple times.
Also incorrect; the original earnings are not taxed again, since they are the initial investment and cap gains are only levied on the profits. If you earn $100, put it in a stock, and then sell the stock for 200$, you’ll have paid income tax on the first $100, and cap gains on the second $100.
Decreasing that incentive through taxes simply causes some people not to take the risk with investing the money and this affects the ability to grow our economy.
I addressed this when pointing out that much economic illiteracy comes from understanding the direction of a force without understanding its magnitude. Cap gains might push a small amount of money from investments to consumption, but I don’t see how it could have a large effect given that 1)most middle-class investors are already using tax-sheltered accounts and 2)very wealthy investors presumably already have all of their appetites satisfied.
And on the third hand, the alternative to taxing cap gains is taxing labor, which is also a negative incentive and theoretically harmful to the economy. It’s not like we’re deciding on whether to punish investors for the hell of it (McKinney nonwithstanding), it’s that we’re deciding how to raise money fairly from the society at large. Keeping cap gains low means borrowing money or taxing it elsewhere or cutting spending.
That happens to capital investment *all the time*.
Yes, so what does that have to do with the government? Investors have to negotiate their own terms for return on an investment – interest payments, equity stakes in a venture, royalties – just like employees have to negotiate terms for compensation for work. Investors who don’t like the terms they’re offered can invest it in Treasuries. Again, what does the tax rate have to do with any of that?
You want to say that keeping the capital gains rate low encourages risk-taking. But it doesn’t, because investors have a whole range of investments ranging from very risky to very safe, returns from which are also covered by capital gains tax*, so all that the low tax rate does is proportionately increase the gains from any kind of investment, and does not change the ranking of risk-adjusted investment returns, although it may compress the ranking. But Treasuries will still set the benchmark for risk-adjusted return, and riskier investments promising higher returns will still be ranked the way they would be with a higher tax.
* Not sure where those bond types (muni?) that are tax-exempt fit in, but I think it’s not important to this point.
So as a lever for encouraging riskier investments, it’s an extremely poor one. It doesn’t change the relative desirability of safer or riskier investments because it affects them all proportionately.
Luckily, there is a lever for encouraging riskier investments, and it’s called “the Federal funds rate”. When you decrease the funds rate, you increase the relative desirability of riskier investments. A venture with a risk-adjusted return of 2% looks pretty crappy when you can buy Treasuries yielding 2%. If Treasuries yield 0.1%, 2% starts to sound pretty good.
Now oddly enough, conservatives tend to freak out when the funds rate is low, and start yelling about hyperinflation and starving fixed-income pensioners, which kinda gives the lie to the idea that you are all about encouraging risky investments, doesn’t it? Sounds a hell of a lot more like a class of people who get a lot of their income from investments and want to protect their ability to get a risk-free return on Treasuries.
And there are limits to how far any government scheme to encourage risk-tolerant investment can work, including the funds rate as we see right now, short of outright insurance of investment losses (which is part of what the tax treatment of investment losses does, actually).
(If I’ve made any glaring errors in regards to the relative tax treatment of safe vs. non-safe investments, please point them out; I am not an expert on capital gains tax treatment since, uh, I seem to have misplaced my enormous inherited family fortune. I’m sure it’ll turn up… maybe under the couch?)
For the most part, you can’t lose money in employment. If you work for a month at a company, you get a month’s worth of negotiated wages. And you’ll get that pretty much every month unless the business goes under, and then you have a very high priority claim against the assets.
It’s astonishing the number of things that Sebastian knows that aren’t true. If your employer misses a payroll, you have two choices: quit, or believe them when they say that it won’t happen again. If you quit, you have to
1. Find another job, with zero notice that you needed to do so. This was never an easy thing and is even harder these days. Until you do, there’s no money coming in.
2. Convince the unemployment office that you’re eligible even though you quit your job.
In the meantime, you can file for a claim against the (former) employer, but you’re behind the government (since in many cases they’ll also be in default on taxes) and the secured creditors. If they go through bankruptcy, you’ll also be behind the bankruptcy lawyers, many of whom are experts in finding issues to raise until there are no assets left.
But there’s no way to lose money in employment. That was asserted with no supporting evidence, so it must be true.
I couldn’t even reply to that statement. I’ve known so many friends working low-end jobs who have been screwed by employers who don’t pay them even the miserable amounts they were supposed to be getting paid, I just don’t have words to describe someone who thinks that workers have “no risk” compared to someone with enough money in the bank that they can think of investing it.
You may have “first claim” on recovering money, but good luck actually doing so. Small employers know that low-end workers don’t have the time or resources to pursue wage claims, so they do this kind of thing all the time. Do you know how much work is involved in trying to recover owed funds from a small business? Just getting the judgment can take months, and that’s if the employer doesn’t flat-out lie about what happened – “Oh yeah, we laid him off on the 14th, he never showed up for the last two weeks of the month” – and cause you to lose your claim. Once you have a judgment, actually collecting is extremely difficult. It took a friend of mine who got stiffed out of a month’s pay more than a year just to get the judgment, and in order to collect she spent money on a P.I. to try to get the bank details for the firm, and eventually only found out by tricking them into giving her their account details by posing as a potential customer. (Which, to be fair, was awesome.) Even then she only recovered a portion of what they originally owed her, not the triple damages she was awarded. As I say, that kind of thing happens all the time, and most of the time the unpaid workers don’t even pursue the claim, being a little busy with looking for a new job and all.
This doesn’t happen much at the professional level unless you’re an independent contractor, but it still happens. One place I worked at ran out of money and laid me off and didn’t pay about a month of accrued vacation. What was I going to do, sue a bankrupt company? Guess I should’ve taken it earlier, huh? So much for “risk-free”…
You can lose a year’s worth of pay periods that way Mike? I think you’re a bit too loyal of an employee if you’re willing to go along without the payroll or a year or two.
And in California, you’ll get automatic penalty pay if it happens just once. And you’ll have no trouble with the unemployment office because they have a whole category just for that very purpose. Now I know that CA isn’t the WHOLE country. But it is in fact about 1/6th of it so it isn’t a minor point.
Remeber, I said “For the most part, you can’t lose money in employment. If you work for a month at a company, you get a month’s worth of negotiated wages. And you’ll get that pretty much every month unless the business goes under, and then you have a very high priority claim against the assets. You have essentially zero chance of working for a year on something and losing a year’s worth of wages. That just can’t happen to your typical employee.”
Your characterization of that as “But there’s no way to lose money in employment” can be left to other readers to judge if it was fair.
Sorry.
Carleton:
This is the same economic mistake as saying that if half the payroll tax is levied on the employer, that it doesn’t cost the employee anything. An employer will negotiate up to a certain amount to hire an employee. The payroll tax the employer will owe is part of that negotiated amount. Similarly, the risk/return level that an investor is willing to live with factors in the captial gains tax treatment.
This ignores the corporate tax of 35% (which is as high as income tax gets). And while every now and then $100 of stock goes to $200 without any profits being made, it really isn’t very common.
[For the most part fortunes aren’t made on that kind of profitless trading. One major exception is hedge fund managers. They have obtained a really weird ruling that their pay somehow counts as investment. I don’t buy that. But unfortunately, the last time it was proposed that the government clarify that loophole away, Democrats were the ones who shot it down.]
I’m actually open to the idea that we should tax all profits at income rates when they actually get to people. If you want to get rid of corporate tax and treat all profit pass through as income, I’m ok with that. Incidentally the US government probably wouldn’t lose any money under that treatment, (corporate taxes aren’t actually a huge part of the whole–and you’d get increased amounts from captial gain). This would have two further positive effects: it would be hard to game (the money has to come out in dividends or pay or something at some point) and would be auditable at the corporate level (if you are misusing perqs to avoid tax treatment it will show up, especially under modern rule on them).
Ah, so now the argument is that corporate taxes mean that capital gains taxes are double-taxation. I see we’ve moved on from “principle”, and “pragmatism”, at least.
That would be a better argument if it weren’t for the fact that 2/3 of US corporations don’t pay any income taxes.
And of course the income of a corporation is only part of the fuel for expansion and therefore capital gains; the other part is what they pay employees. And guess what? The pay for employees? Also taxed! I’m sure a company could grow much faster if it could pay its workers in tax-exempt dollars, but that’s not how it works.
“That would be a better argument if it weren’t for the fact that 2/3 of US corporations don’t pay any income taxes.”
Nope, it is still an excellent argument, because most corporations that don’t pay income taxes don’t pay because they aren’t making profits. I’m not sure what you think you want to do about that. Mandate profit making?
It isn’t as if the money escapes the system. Pay to employees, taxed. Pay to the CEO, taxed. Most perks, taxed. Dividends (which pretty much don’t exist without profits) taxed. If all of that is why the don’t have profits, it is still being taxed elsewhere in the system.
“Ah, so now the argument is that corporate taxes mean that capital gains taxes are double-taxation. I see we’ve moved on from “principle”, and “pragmatism”, at least.”
You make your distinction sound like it carries a lot of freight, but i’m not sure what non-emotional thing you are trying to get at. If we are talking about JUST the capital gains tax, I’d say that screwing around with it (especially when we want to encourage growth coming out of a recession [we hope]) is really really dumb. If we are talking about *taxation schemes in general* it would probably be fine to equalize the capital gains rate and eliminate the corporate tax rate. It isn’t ‘principle’ vs ‘pragmatic’. It is “how much of the tax structure are we talking about at once”.
“I’m sure a company could grow much faster if it could pay its workers in tax-exempt dollars, but that’s not how it works.”
I’m not sure what this sentence means. What mechanism are you imagining? I don’t see the economics of how paying employees tax-exempt dollars does anything for the company. (I see how employees would be thrilled). Employees aren’t tying up their money in the company, nor do they have a very big chance of losin their money if the company goes under. Right?
“I addressed this when pointing out that much economic illiteracy comes from understanding the direction of a force without understanding its magnitude. ”
Yes you have said this twice, stop please. In deciding on investments the tax implications are large enough to impact choices.
Both sides of this discussion have good points, but “the taxes aren’t enough to matter” isn’t one of them.
“I’m not sure what this sentence means. What mechanism are you imagining? I don’t see the economics of how paying employees tax-exempt dollars does anything for the company.”
I suppose if we imagine they would work for the same take home pay it would save the company a little money?
Seb,
I am willing to second your suggestion that we dispense with corporate income taxes, but only on this condition: every cent of operating profit gets paid out to the shareholders, who must report it as ordinary income.
If the corporation wants to invest in R&D, or buy another company, or build a new wafer fab, it can sell more shares of stock. The existing shareholders would be free to buy those new shares, with their after-tax dollars, just like anybody else.
What I can’t agree to is something like this: a corporation buys $1 billion worth of goods and services this year; it sells $1.2 billion worth of goods and services this year; it spends its $200 million operating profit on new equipment or physical plant or technology or Treasury bills rather than paying it out as dividends; and doesn’t get taxed on that $200 million.
I’ve worked for two large corporations in my life, and both had a “no dividends” policy. Their explicit argument was that it was “tax efficient” for the shareholders, that way. The shareholders, said these companies, obviously think their money will get better returns if it’s invested in our business than if it’s invested elsewhere. If we pay dividends to them, they must pay tax on the money before they can invest it back in us. They are better off if we use the money to “grow the business” instead of paying dividends. Their return will be in the form of a higher stock price.
Well, that’s fine by me. Corporations and their shareholders can strike that sort of bargain between themselves if they want to. But the bargain involves the rest of us — i.e. the non-shareholder taxpayers. That $200 million of “added value” accruing to the shareholders tax-free would not be in our interest. So we treat the corporation as a “person”, and tax its income as it gets earned.
Are you against corporate personhood, all of a sudden?
–TP
“But the bargain involves the rest of us — i.e. the non-shareholder taxpayers. That $200 million of “added value” accruing to the shareholders tax-free would not be in our interest.”
But under the tax policy we are discussing, they will get taxed at full income rate upon sale, so why would it be necessary to bar investment in the business? What problem are you worried about? That isn’t gaming the system, that is just deferring the tax until it actually becomes useable income. It seems like you are worried that the government won’t get its cut, but it will at some point–when the investor sells the stock, when dividends are paid on the stock, when money is paid to the CEO or whomever, or when the company is sold. And if money is made, the tax total will be even higher at the end.
Yes you have said this twice, stop please. In deciding on investments the tax implications are large enough to impact choices.
They are large enough to cause people to shift choices in investment, but I doubt very much that they cause a significant shift from investment to consumption. Cap gains rates have changed significantly in the past without causing such a shift, and this makes perfect sense- when you have a lot of money, you don’t need to defer consumption. It’d be a rare case where a small change in the cap gains rate would eg push a multimillionaire into buying a yacht instead of a competitor’s company. At the rates we’re talking about, anyway. At punitive rates, things change.
But under the tax policy we are discussing, they will get taxed at full income rate upon sale, so why would it be necessary to bar investment in the business?
Who or what is “they” in your sentence? I’m inclined to think you mean “the 200 million dollars”, but I could be wrong.
As for deferring taxes, that would be no problem if we could also defer the costs that taxes pay for. To the extent we cannot defer those costs, those of us who don’t get to defer our income have to take up the slack.
–TP
This is the same economic mistake as saying that if half the payroll tax is levied on the employer, that it doesn’t cost the employee anything. An employer will negotiate up to a certain amount to hire an employee. The payroll tax the employer will owe is part of that negotiated amount. Similarly, the risk/return level that an investor is willing to live with factors in the captial gains tax treatment.
That’s not what I said at all. What I said was that:
1)if low cap gains is supposed to encourage risky investments, it’s very badly tuned since it also encourages relatively safe ones
2)the idea that low cap gains are necessary to support risky investments is belied by the existence of those relatively safe investments. The reward for risk is higher returns compared to those investments, so we don’t need to add additional incentives. Or, if we do, you haven’t explained why.
And while every now and then $100 of stock goes to $200 without any profits being made, it really isn’t very common.
That is a legitimate problem with cap gains; they should be indexed to inflation. But it’s sort of beside the point.
Sebastian’s apparent conviction that employment compensation is risk-free is belied by the experience of everyone who ever worked for sweat equitey at a Silicon Valley startup that didn’t make it (about 90 % of startups, IIRC). The outside investors put in cash, and the employees put in two or three years of their lives at unspectacular pay and horrific hours — I say again, the employees invest their lives while the money boys put in only money.
When the enterprise folds, the money boys are out their money, and the sweat-equity employees are out two years of eighty hour weeks.
“if low cap gains is supposed to encourage risky investments, it’s very badly tuned since it also encourages relatively safe ones”
I’m not sure this is a good statement of the case. If you formulate it as “low cap gains are supposed to encourage investment/savings over spending/consumption” does it change your analysis?
Marty: I suppose if we imagine they would work for the same take home pay it would save the company a little money?
Quite a lot of money, yes. Employee compensation buys one of the factors of expansion. Another factor of expansion is reinvestment. My point was that employee compensation is taxed even though the corporation might be able to expand faster if it was not. So is corporate income, to the limited degree that corporations pay any. (Sebastian, if you think that at any given time 2/3 of the corporations in the US are genuinely not profitable, I have a bridge, no, several bridges I would like to sell you…) Point is, we don’t tax-advantage everything that might contribute to faster corporate expansion and more jobs, like employee wages, so it’s not a strong point to say that because corporations may sometimes pay some income tax the capital gain is being “double taxed”. The government takes tax revenues out at a lot of different points, there’s nothing very novel about being taxed on something that kinda sorta got taxed once before. (I say “kinda sorta” because, again, most corporations don’t pay much tax; they are heavily focused on increases in stock value through reinvestment that tends to obliterate major profits.)
A lot of these arguments amount to saying “taxes disincentivize people” and “investment is good”. Those are both sometimes true and sometimes not, but they don’t tell us anything very useful. “Work is good” is also true a lot of the time, but workers don’t get to pay 15% total taxes on income.
The problem is, even if you hate taxes and think there shouldn’t be any, that obtaining tax reductions that happen to affect you (or if not you, a class of people you think should be favored) isn’t very nice. It’s understandable, it’s natural, but there’s no reason anyone else should go along with it if there’s nothing in it for them and they end up paying a larger share of taxes to make up for it.
Finally, on whether taxation makes a difference in decision-making, I’m sure it does, but you have to look at what exactly happens. What’s the basis for the claim that reducing tax rates encourages riskier investment, when the ranking of different investment options remains the same no matter the eventual tax rate?
Unlike Carleton, I am not convinced at all that even very high rates of tax would discourage investment vs. consumption. When you’re extremely wealthy, consumption is problematic. You can only acquire so many cars and boats and planes and hookers and blow and whatever; and everything you do acquire tends to come with an ongoing cost. Unless you want to be rapidly broke, a reduction in your likely income from investment is likely to result in a reduction in consumption and an increase in investment to try to maintain the income levels you’re used to. (You don’t stay rich very long if you treat your capital like spending money.)
So yeah, I think tax can have a powerful effect on incentives. Unfortunately, I think it’s frequently a powerful effect in the exact opposite direction from what is claimed by conservatives and supply-siders. I think it’s silly to expect a class of people who personally benefit from higher returns on investments across the board to give an honest account of their own incentives. It’s like the employee who promises to work harder if he gets paid more; generally the opposite effect is observed. (I’m all for paying people more, but not based on the idea that it will make them work harder in any given case.)
Why should someone who earns money by doing the actual valuable thing, the thing that someone will pay good money to have done, have their income taxed at a higher rate than the person whose sole contribution is capital?
Because without that capital, there is no way for the worker to advertise her availability, pay for the equipment needed to do the work prior to paying customers placing and paying for orders or pay the worker to work at an unprofitable rate, until demand crosses over to create profit.
The worker is offering something that may be valued by others, while the investor is offering something that is guaranteed to be valued by others.
“(Sebastian, if you think that at any given time 2/3 of the corporations in the US are genuinely not profitable, I have a bridge, no, several bridges I would like to sell you…)”
Cite where you got the idea that only 2/3 pay corporate tax and then show me that they were making a profit, and then I’ll worry about it.
The closest I can come is GAO study which suggested that 57% of corporations didn’t pay tax in at least one year during the eight year period 1998-2005. And the major reason for that was operating losses.
And if you have trouble believing that 57% of corporations operate at a loss for at least one year out of eight, well I don’t know what to say to that…
The rest of your argument turns on the idea that as a general rule profitable corporations aren’t paying tax, so I’ll wait until you can nail it down a bit better before responding further.
“When the enterprise folds, the money boys are out their money, and the sweat-equity employees are out two years of eighty hour weeks.”
Did they fail to get paid? I’m pretty sure they got their wages for two years while the ‘money boys’ got absolutely nothing for their investment. And in the Silicon Valley case, the employees often got stock options, so they weren’t missing out on the upside either if things went well.
The closest I can come is GAO study which suggested that 57% of corporations didn’t pay tax in at least one year during the eight year period 1998-2005. And the major reason for that was operating losses.
Isn’t that what tax lawyers are for?
the ‘money boys’ got absolutely nothing for their investment.
Assuming that their investment is in just one company and there’s no such thing as managed risk or diversified portfolios. A little harder when you’re a worker.
Isn’t that what tax lawyers are for?
Uh, maybe.
…almost half of the growth of the American economy between 1948 and 1980 was directly attributable to the increase in U.S. capital formation (with most of the rest a result of increases and improvements in the labor force).
[…]
Between 1900 and 2000, real wages in the United States quintupled from around fifteen cents an hour (worth three dollars in 2000 dollars) to more than fifteen dollars an hour. In other words, a worker in 2000 earned as much, adjusted for inflation, in twelve minutes as a worker in 1900 earned in an hour. That surge in the living standard of the American worker is explained, in part, by the increase in capital over that period. The main reason U.S. farmers and manufacturing workers are more productive, and their real wages higher, than those of most other industrial nations is that America has one of the highest ratios of capital to worker in the world. Even Americans working in the service sector are highly paid relative to workers in other nations as a result of the capital they work with…“Because each worker has more capital to work with, his or her marginal product rises. Therefore, the competitive real wage rises as workers become worth more to capitalists and meet with spirited bidding up of their market wage rates.”2 The capital-to-labor ratio explains roughly 95 percent of the fluctuation in wages over the past forty years. When the ratio rises, wages rise; when the ratio stays constant, wages stagnate.
[…]
[F]or all the controversy surrounding the tax treatment of capital gains, that tax brings in surprisingly little revenue for the federal government. From 1990 to 1995, capital gains tax collections were between $25 billion and $40 billion a year, less than 3 percent of federal tax revenues.
[…]
The capital gains tax is different from almost all other forms of federal taxation in that it is relatively easy to avoid. Because people pay the tax only when they sell an asset, they can legally avoid payment by holding on to their assets—a phenomenon known as the “lock-in effect.”
[…]
…capital gains are not indexed for inflation: the seller pays tax not only on the real gain in purchasing power, but also on the illusory gain attributable to inflation. The inflation penalty is one reason that, historically, capital gains have been taxed at lower rates than ordinary income.
[…]
[W]hen taxpayers undertake risky investments, the government taxes fully any gain they realize if the investment has a positive return. But the government allows only partial tax deduction (of up to three thousand dollars per year) if the venture results in a loss. That introduces a bias in the tax code against risk-taking.
[…]
[S]o the $100,000 in profits is taxed twice—when the owners sell their shares of stock and when the company actually earns the income. That is why many tax analysts argue that the most equitable rate of tax on capital gains is zero.
[…]
Past reductions in the capital gains tax rates (e.g., in 1978, 1981, and 1997) stimulated the financing and start-up of new businesses, while new business activity stalled after increases in capital gains taxes (1969 and 1986).
[…]
Venture capital funds are the economic lifeblood of high-technology companies in industries that are critical to U.S. international competitiveness: computer software, biotechnology, computer engineering, electronics, aerospace, pharmaceuticals, and so forth. The high capital gains tax rate appears to have contributed to the drying up of funding sources for those promising new frontier firms following the 1986 tax hike.
[…]
Capital Gains Taxes
Because without that capital, there is no way for the worker to advertise her availability, pay for the equipment needed to do the work prior to paying customers placing and paying for orders or pay the worker to work at an unprofitable rate, until demand crosses over to create profit.
Conversely, without what the worker contributes, nothing happens *at all*. Period.
Nobody is lining up to pay the investor two dollars for the dollar he or she makes available for investment. Nobody.
Don’t think so? Try it sometime. Offer $1,000 of your own money to anyone who will give you $1,100 for it.
You will hear the resounding chirp of crickets.
Somebody has to *do something* with the capital in order for additional value to be created.
Did they fail to get paid? I’m pretty sure they got their wages for two years while the ‘money boys’ got absolutely nothing for their investment.
It’s true, if you invest $100 you can lose the entire $100. If you invest a year of your labor, you’ll probably get paid for at least some of it. Probably most or all of it.
Other ways in which the two are unlike:
In general, folks who invest their money do so with funds that are not essential for keeping them housed, clothed, and fed. In general, folks who work for their income are not doing so with “surplus” or inessential time.
This isn’t always true, folks starting small businesses will often invest funds that put them at significant *personal* risk. But by and large, that’s not true of capital investors. And, sometimes people work when they don’t really need to, just because they enjoy it.
But in general, what I’ve described is true.
It’s also very rare for capital investors to be told that an enterprise they invested in doesn’t need their money anymore, take whatever you’ve earned so far and go home.
I guess a buyback of stock is kind of like that, but it’s the investor’s choice to sell or not.
The equivalent thing happens to working folks every day. Happens to tens or hundreds of thousands of them a month, lately. And when it happens to them, unlike capital investors they can’t just take their remaining time and plug it immediately into some other productive use. Jobs aren’t that easy to come by, these days.
Nobody is arguing that the two are completely alike. They are not. They are quite unlike.
The thing I’m arguing is that there isn’t a reasonable argument for giving income derived from investment — *all* income derived for *all* types of investment, provided that the investment is made for a period longer than one year — significantly better treatment under federal tax law than *all* income derived from *all* types of labor.
The range of tax rates for capital gains goes from 0 to 15%.
The range of tax rates for labor income goes from 10 to 35%.
Period. Across the board. Regardless of risk, the amount of the investment of either money or time, the nature of the thing invested in, etc.
Income from capital gets favorable treatment.
I don’t see that that is either fair or reasonable.
The problem is, even if you hate taxes and think there shouldn’t be any, that obtaining tax reductions that happen to affect you (or if not you, a class of people you think should be favored) isn’t very nice. It’s understandable, it’s natural, but there’s no reason anyone else should go along with it if there’s nothing in it for them and they end up paying a larger share of taxes to make up for it.
Actually, I can understand people who argue for tax cuts for themselves. I have a harder time understanding people who want tax cuts for Warren Buffett, because not even Warren Buffett wants that.
I like the phrase “share of taxes” because it captures the zero-sum nature of tax “fairness”. No matter how small we make the nation’s total tax bill, we still have to divvy it up amongst ourselves. Less tax on Warren Buffett means more tax on people who are not Warren Buffett. Less tax on capital means more tax on labor. Less tax on incomes over $1 million means more tax on incomes under $1 million. However you slice the pie, more for some means less for others.
The conservative mantra is of course that we should make the pie smaller: cut the nation’s total tax bill. Okay, Dubya did that big time. But it’s still a pie.
–TP
“The range of tax rates for capital gains goes from 0 to 15%.”
I am pretty sure that you don’t object to a 0% cap gains rate for those in the 10 and 15% tax brackets. So we should stick to discussing the 15% tax brcket for long term cap gains. Lets also be clear that short term cap gains are taxed exactly as much as earned income (or labor or wages).
So, as reflected in Charles excellent post, we are discussing the value of long term capital investment which very directly drives the creation of jobs.
“It’s also very rare for capital investors to be told that an enterprise they invested in doesn’t need their money anymore, take whatever you’ve earned so far and go home.”
This is not rare at all, it is the goal of most people who build companies on venture capital. Most venture funds have a defined life where they expect to extract their investment and profits from all of the investments they make.
we are discussing the value of long term capital investment which very directly drives the creation of jobs.
And the efforts and contributions of working people generate the value that make investments worth bothering with.
One hand washes the other.
And at the moment, an increase in demand would probably generate way more jobs than a further influx of investment capital.
Most venture funds have a defined life
Most layoffs don’t occur on a scheduled basis, or on the basis of a “defined life”.
Because without that capital, there is no way for the worker to advertise her availability, pay for the equipment needed to do the work prior to paying customers placing and paying for orders or pay the worker to work at an unprofitable rate, until demand crosses over to create profit.
This was in response on a question about tax rates. Did I miss the part where someone suggested we should eliminate capital investment in favor of labor in some sort of capital vacuum?
“And the efforts and contributions of working people generate the value that make investments worth bothering with.”
And they get paid for it, every two weeks, with little or no chance of not ever getting paid. The most fundamental difference here is the one you obfuscate in every comment: Capital investment is a choice, it sometimess requires incentive. Capital can sit on the sidelines for a long time, it cost millions of jobs when it does.
I work every day with individuals who are constantly asked to invest in a myriad of opportunities, they don’t “want to make a lot of money”. They don’t feel obligated to invest in “something” no matter what.
Most of these individuals want to make good investments, all of them could live off 2% interest quite nicely. The assumptions of their motivations are simply wrong.
My point is, everything we can do to convince them that the investments we are asking them to make have less risk OR higher reward positively impacts the likelihood they will make that particular investment. The medium and long term prospects for the very labor force you keep talking about is based on continuing to convince the people with capital to invest it. Taxing the potential upside 20% more would certainly not fall into the category of attracting investment.
As a last note, the discussion of capital flight has completely ignored how much of that investment is from foreign sources who don’t have to emigrate, etc to not pay taxes. They simply have to remove their money.
“Most layoffs don’t occur on a scheduled basis, or on the basis of a “defined life”.”
This is really an argument for maximizing capital investment, finding the next job is a lot easier in an environment when a lot of new businesses are starting.
My comment on this should be considered curiosity, not contentious. Is this really true? It might be true for a majority of capital investment dollars, but are you certain it is true for a majority of capital investors? I think there really are a very large number of people with significant capital investments in small to medium sized operations where if the operation fails, they are F@#$ed because it is their business. I’m not sure how many people these are (as a fraction of the total number of capital investors) but I do know that if their business has trouble, it is very common for them to cut their own salaries while the other employees don’t have their salaries cut. Compared to their employees, if their business goes under, they have normally had a year or years of declining wages (in the sense of what their business has paid them out of the operating budget) *AND* they will often have lost their life savings. Further, they aren’t going to have any easier of a time getting a replacement job than any of their employees. Do we know what percentage of capital investors are like that, as opposed to the percentage of capital investors who are the fat cats that you seem to be thinking they all are?
Marty,
I don’t know how much income you think it takes to live “quite nicely”, but let’s assume a low-ball number: $100K/year. If the people you know “could live off 2% interest quite nicely” then they have $5 million of spare cash, on top of any other assets they might own. Good for them.
Now, suppose we reject your advice. Suppose we DON’T give them tax incentives to “invest” their $5 million. So they park it in 2% deposits. (Interest income gets taxed, so if they really hate paying taxes they keep their $5 million in a mattress. But let’s ignore that option just like they do.) What becomes of money that’s deposited in savings accounts, or CDs, or Treasuries? Does it NOT get lent out to persons, companies, or governments who use it to buy things and hire people — i.e. “create jobs”?
–TP
TP,
Lent and invested are two different and not equally effective things. Yes, that becomes the use of that money.
Lent and invested are two different and not equally effective things.
Yes, they are different, but it’s not really correct to say they are not “equally effective.” Both provide capital, and whether debt or equity financing is preferable depends on the specifics.
Small startups certainly need equity, because they don’t have the cash flow to sevice debt, but in other cases, such as providing working capital financing, which banks do a lot of, debt works better. Similarly, larger corporations will often find long-term debt financing attractive.
So you can’t say one is “better” than the other. Horses for courses.
“So you can’t say one is “better” than the other. Horses for courses”
True enough.
“Study Tallies Corporations Not Paying Income Tax” – 2008 NYT article, the study is from the GAO.
Marty: they get paid for it, every two weeks, with little or no chance of not ever getting paid
I know this horse is already dead, but for a significant number of employees, especially those of small businesses, but also contractors, not getting paid is a significant risk with real consequences. 1/2-2/3 of households with less than $35k in income have no savings at all. (Kinda hard to accumulate savings when you’re that poor and the prices of everything are gauged by and for people with a lot more money…)
Anyway, no savings + a month or even two weeks of unpaid income = disaster for a lot of people. If you’re lucky you can run up some credit card debt. If not, you can avail yourself of the fantastic credit rates at your local pawn shop or payday lender AKA “franchised loan shark operation”. And you may be able to get unemployment, but so far as I know it’s not retroactive for a period when you were working but not getting paid. As I noted above, recovering unpaid wages is really tough in many cases.
Lots of people out there are dependent on getting every paycheck on time and in full to survive. Conservatives might show a little more sympathy for people who are, you know, working to improve their situation, which you guys claim to highly value. (This is another one of those weird little inconsistencies: the claim that working is a moral necessity and so welfare benefits are evil, combined with policies that work to keep unemployment high and a total lack of sympathy for low-income workers; why, it’s almost as if the whole thing is motivated by an interest in maintaining a pool of desperately poor workers whose wage demands will be very limited. Funny how that works.)
Point is, for professional workers missing a month of income sucks but probably isn’t a disaster, and finding a new job is relatively easy. But universalizing one’s own experience in professional-level wage labor to all workers is a mistake.
Most of these individuals want to make good investments, all of them could live off 2% interest quite nicely. The assumptions of their motivations are simply wrong.
So what are their motivations?
Sincere question, I don’t understand. If they are motivated by returns, then since across-the-board changes in capital gains tax rates have no effect on the ranking of returns for different investments, I don’t see how their investment choices would differ. If they are motivated by a noble desire to grow the American economy, what difference does it make whether the eventual returns are taxed at 15% or 35%? I’ll tell you from my experience, I don’t think it makes any difference at all. People with money who are inclined to invest have no real idea what the eventual return might be other than somewhere between “very little” and “a whole bunch”. If you could actually predict the returns from an investment, there wouldn’t be any need for risk-adjusted returns.
For small businesses and entrepreneurs, I agree that some help might be in order, but I’m absolutely unconvinced that the capital gains tax is the right method, or even that it would make much difference at all to most small business owners. If we looked at who pays cap gains I seriously doubt that small business owners were more than a blip; most of the capital gains accrue to the people who own most of the capital, and by definition that isn’t struggling small business owners.
Basically this is a snow job, and I think if you’re genuinely sympathetic to small business owners, and I think you are, you should think about who is really benefiting from this rhetoric of “Keep capital gains tax low for Paris Hilton or we’ll shoot this
dogsmall business owner.”Let me add something to the “no risk in employment” argument.
When your company goes broke, you do lose something. Yes, you got paid for your labor, maybe, but you lose a lot of things like:
1. The skills you acquired that were specific to the company. (Think of a salesperson having to learn a new product line, establish new customer relationships, or a technician with great familiarity with how the products work, etc.)
2. Benefits accrued due to seniority and so on. Those extra two weeks of vacation or sick leave, vesting in 401(k)’s or years of service towards your pension, other things.
3. Personal benefits. There is the comfort of familiarity, an established reputation, relationships with co-workers that make your job easier. Just generally knowing your way around is valuable. You may also have been influenced in housing decisions by the commute. There are lots of ways that the specifics of your job affect your life.
4. In some cases you may lose your pension and continuing health coverage altogether.
5. This doesn’t even measure the various losses due to unemployment.
The idea that the worker doesn’t lose anything depends on the unrealisitic assumption that the weekly paycheck reflects absolutely everything earned. It doesn’t. There really is an investment there.
Who Pays Capital Gains Tax?
“Fewer than one in seven individual taxpayers report taxable capital gains in any year.”
“Many taxpayers with gains had modest incomes — more than half (52 percent) of those with taxable net gains or capital gains distributions
had incomes below $75,000. But high-income taxpayers accounted for the overwhelming share of capital gains. The 3 percent of tax returns with adjusted gross income exceeding $200,000 reported 31 percent of AGI and 83 percent of capital gains. The 0.3 percent of returns with AGI exceeding $1 million reported 15 percent
of AGI and 61 percent of capital gains. Capital gains represented less than 4 percent of AGI for gains recipients with income less than $200,000, but about 40 percent of AGI for those with income exceeding $1 million.”
“Many more Americans accrue capital gains on corporate shares they hold within tax-deferred employer-sponsored retirement saving plans or individual retirement accounts. But capital gains from stock sales within those accounts are not subject to capital gains tax.”
So only 17% of all capital gains accrue to people with AGI under $200,000. And surely not all of those are small business owners. Many are going to be people with small financial investments or property.
As I said, this is a snow job. Capital gains isn’t about small businesses and entrepreneurs putting their own livelihood on the line. It’s about very wealthy individuals with large investment income whose real personal risk from most investments is nil. (“Oh no, honey, we’ll have to sell the seventh house!”)
I suppose I should be insulted by this but I’ll settle for, this has little, if not nothing at all, to do with the topic.
People who are unemployed are key beneficiaries of stimulating the economy to create jobs. I am not sure how all of those nasty conservatives are hurting the working man by trying to ensure there are plenty of jobs.
Well I suspect we are trying to expand the group who are inclined to invest by giving them a tax incentive. The second half of this is absurd. There aren’t wealthy investors who “don’t have any idea what the eventual return might be”, there is an expectation of return that is required to justify any invesstment. (if you really know people with money who fall into this category I would love their email addresses).
Basically this is BS, once again it is a pure class based statement that belittles anyone who has enough capital to invest by comparing them to a caricature.
Under current law, 75 percent of capital gain on qualifying small business stock issued in 2009 (after February 17, 2009) and in 2010 is excluded from tax if the stock is held for at least five years. The other 25 percent of the gain is taxed at a maximum rate of 28 percent. The stimulus bill (the American Recovery and Reinvestment Act of 2009) temporarily raised the exclusion from 50 percent. After 2010, the exclusion is scheduled to return to 50 percent, and 60 percent for businesses in empowerment zones.
[…]
2010 Budget Tax Proposals: Eliminate capital gains taxes on investments in small business stock
Basically this is BS, once again it is a pure class based statement that belittles anyone who has enough capital to invest by comparing them to a caricature.
“Class based” works both ways, Marty. The people who “ha[ve] enough capital to invest” are NOT a “class”?? When they clamor for tax preferences for themselves, they are NOT making “class based statement[s]”??
The notion that only the non-rich engage in class warfare amounts to saying that the rich have no class.
–TP
From JDs link on who pays. Interesting conclusions.
Marty: I suspect we are trying to expand the group who are inclined to invest by giving them a tax incentive
“Inclined to invest” as opposed to what? Taking the money into the back yard and burning it like so many dry leaves? Leaving it in the bank? (I hate to break it to you, but leaving your money in a checking account is investing it, just not a very high rate of return for you – but the bank certainly appreciates it.)
Again, look at the recipients of the largesse from treating capital gains income preferentially: 62% of the whole tax incentive goes to people with incomes over a million dollars. I’m all for encouraging people of more moderate means to become entrepreneurs and start businesses, but if this was a welfare program intended to target a particularly worthy group and yet nearly 2/3 of the benefits paid went to people clearly not in need, I think you’d say it was pretty inefficient.
If you want to suggest a mechanism for risk-compensating small-business entrepreneurs, I’m all ears, speaking as someone falling into that class. I’m just not buying in any way that shifting the tax burden from wealthy investors to workers is an effective way of doing so.
At $1 million levels of income (which implies maybe $10 million in investments), people flat out are not choosing between investment and consumption for the majority of their net worth. At the level of an investor with a few hundred K in the game, yes, it’s a choice, because you could just go buy a Porsche instead – although my own experience suggests that the eventual capital gains tax on any eventual capital gain plays no part whatsoever in making that decision. But at the level where you have millions of dollars in net worth, not investing is just not an option. You said so yourself when you said that the people you were dealing with were choosing between sticking the money in the bank at 2% and actively investing it – both are investments, not consumption.
As for “class-based”, I don’t know what to say. In my experience the only people I hear seriously talking about “class” these days are wealthy Republicans, and it’s generally code for “I’ve got mine, now get lost, you Commie bastard.” Personally, I wouldn’t be so fast to remind people that classes exist and their interests do not always coincide, but the rich have never been very smart about messaging.
Marty quoted an article quoting a conservative analyst: “The notion that there is a large pool of untaxed corporate profits is incorrect.”
Even if this were true – I’m not entirely convinced that it is – it’s irrelevant to the real point I was trying to make, which was that corporate taxes make very little difference to the process of expanding the business of a corporation. The fact that small businesses pay little in corporate taxes is evidence in favor of that idea. If you never paid any corporate taxes when expanding from a 1-man to a 100-man business, there is no “double taxation” involved in taxing your capital gains as income.
“Again, look at the recipients of the largesse from treating capital gains income preferentially: 62% of the whole tax incentive goes to people with incomes over a million dollars.”
I don’t recall anyone in this discussion suggesting that a substantial portion of these incentives would not go to people who have the money to make meaningful capital investments. That does not mean the benefit for others is not valid or the benefit to growing the economy is not worth it.
As for class it permeates the whole discussion. We have a somewhat progressive income tax structure that accounts in great part for the difference in income between the wealthy and the lower middle clas to poor, as they pay practically 0 federal income tax.
The upper middle class basically gets screwed pretty regularly because they make too much for government benefits but not enough to live off of capital gains or savings, so they are just a few more months away from poverty than the lower middle class.
The only group with the accumulated wealth to create investment driven growth is the “rich”, so that is who gets the benefits of incentives to accelerate growth. Why this is such a bad thing is the part that escapes me. It is good for the economy, creates jobs, and supports innovation.
Because some people don’t get the direct tax benefit doesn’t mean it is bad.
The conservative mantra is of course that we should make the pie smaller: cut the nation’s total tax bill. Okay, Dubya did that big time.
But he didn’t. The wars, Medicare Part B, and his “tax cuts” just pushed the tax burden into the future.
By contrast, President Clinton reduced the nation’s total tax bill by reducing the deficit, and by putting a brake on the growth of government.
Bush 43’s policies and decisions increased the total bill that the American public will have to pay in taxes over the next quarter century. He bought his tax cuts on the nation’s credit card.
He bought his tax cuts on the nation’s credit card.
Of course. Which is why I keep suggesting that we split the check.
Notice that the very rich benefit two ways from Dubya’s “tax cuts”. Obviously they got to pay less tax while Dubya piled debt onto the nation’s credit card. Less obviously, their lower rates (to the extent Obama lets them stand) mean that their share of the payments toward the credit card bill in the future will be lower than it otherwise would have been.
Oh, and Marty is right about one thing: the upper middle class is getting screwed, all right. But it’s the very rich (who they often defend in debates like these) that are screwing them.
–TP
When the enterprise folds, the money boys are out their money, and the sweat-equity employees are out two years of eighty hour weeks.
That is, out the opportunity costs of having worked forty-hour weeks with better compensation in a non-startup. If the enterprise is sold for less than the amount that was invested in it, all of this goes to the money boys (who got preferred stock), and zero to the employees, even those who had purchased their stock or already exercised options.
But these employees took no risk: Sebastian has said so, and Sebastian is an honorable man.
“and zero to the employees, even those who had purchased their stock or already exercised options”
Hate to say it but once the employees buy stock they become investors with the associated risks.
If we’re back to “Everyone should support lower capital gains because it leads to higher growth”, while that may be what you really believe, there are pretty good reasons to think it’s not actually true, as has been discussed here at length.
Basically it doesn’t affect invest-vs-consume decisions very much, and it doesn’t affect risky-investment-versus-safe-investment at all. And the truth of that is in the evidence from prior decades when capital gains rates were much higher and the country had plenty of economic growth.
“Reward for virtue” doesn’t hold any water either, since the tax code does not otherwise distinguish between income derived from socially useful activities and socially harmful ones.
“Give me a tax break and I’ll turn it into so much growth you’ll never miss the revenue!” is not exactly a novel line, although it worked surprisingly well for conservatives for a while. But nearly everyone can make a superficially plausible case that a tax break for them would generate more growth for everyone. More evidence is required. So where is it? Where is the convincing argument that decreasing capital gains rates well below other income tax rates actually makes any difference at all?
On the other hand, the effect on tax fairness is incontrovertible. If you derive your income from investments, you pay a vastly lower rate than someone making the same amount from earned income. If we were talking about raising cap gains to 75%, you’d have grounds for some complaints about fairness. When we’re talking about raising it to levels similar to (or the same as) earned income, I don’t think “fairness” is on your side.
People who are unemployed are key beneficiaries of stimulating the economy to create jobs. I am not sure how all of those nasty conservatives are hurting the working man by trying to ensure there are plenty of jobs.
Is that when they’re not standing on the senate floor trying to halt the extension of unemployment benefits?
“Basically it doesn’t affect invest-vs-consume decisions very much, and it doesn’t affect risky-investment-versus-safe-investment at all. ”
Once again, you keep saying this, stop. It isn’t true. You continuously repeating all the things it doesn’t do doesn’t mean you are right. Wasted time reading. No one is back to anything except you, because I never went anywhere else.
You haven’t argued this very well, and that’s not like you. You are the one who keeps asserting things that you don’t back up and calling them words like “incontrovertible”. Can you define “plenty” of growth, for example?
Marty, are you seriously suggesting that the word “incontrovertible” is unsupportable when saying that taxing one form of income less than another has an effect on tax fairness?
We can argue about whether it’s a big effect or a little one or whether the effect is offset by other things, but I really don’t think we can argue about whether there is an effect on fairness. Well, you can, I guess, but I’m not interested in arguing with people who deny things that are true by definition.
Can you define “plenty” of growth, for example?
Sure. Here.
“Arguments that the maximum CGT tax rate affects economic growth are even more tenuous: Capital gains rates display no contemporaneous correlation with real GDP growth during the last 50 years. Although the effect of capital gains on economic growth may occur with a lag, Burman (1999) tests lags of up to five years and finds no statistically significant effect. Moreover, any effect is likely small as capital gains realizations have averaged about 3 percent of GDP since 1960 and have never been more than 7.5 percent.”
“Is that when they’re not standing on the senate floor trying to halt the extension of unemployment benefits?”
(Just for Phil)
Yes, although getting ALL of the conservatives standing in front of the Senate blocking unemployment was really difficult so they just had one guy do it, trying to get the Senate to pay for it. Not a bad idea to try it really, before you unblock it and allow the bill, you vote for, to pass.
Hate to say it but once the employees buy stock they become investors with the associated risks.
Precisely, and with fewer of the associated rewards.
“Marty, are you seriously suggesting that the word “incontrovertible” is unsupportable when saying that taxing one form of income less than another has an effect on tax fairness?
We can argue about whether it’s a big effect or a little one or whether the effect is offset by other things, but I really don’t think we can argue about whether there is an effect on fairness. Well, you can, I guess, but I’m not interested in arguing with people who deny things that are true by definition.”
So taxing things at different rates has an impact on tax fairness? Thats all you said? Thats all you meant by that statement? I would submit that, in context of the paragraph you led with it, you were stating that it waas incontrovertibly unfair.
If not mea culpa, and you are still wrong, the graph in your latest link completely disagrees with the words in the article.
“Precisely, and with fewer of the associated rewards.”
No, with all of the same rewards, exactly the same by law, SEC regulation, etc.
I would submit that, in context of the paragraph you led with it, you were stating that it was incontrovertibly unfair.
I apologize if I was unclear, but no, I was saying that the fact that it has an effect on tax fairness is incontrovertible in the same way that the progressive income tax has an effect on tax fairness, that it’s possible to compare pre- and post-tax incomes of different types and assess their relative tax treatment.
An assessment of “fair” or “unfair” is a judgment rendered after we look at the consequences of changes in tax fairness, and I’m not saying that’s just a matter of definition, no. That’s a question of assessing what the consequences of the tax treatment are.
I am saying, though, that when a policy has a definite “cost” – in tax fairness – and an uncertain, debatable “benefit”, the burden of proof is quite high. There is a definite cost, there may or may not be a benefit, I don’t want handwaving or discussions of the noble risk-taking investor, I want to see a real benefit for the 6/7 people who lose out on the deal.
I’m not sure why you think the graph in the article disagrees with the text of it. The point is that there is no correlation between changes in capital gains taxes and stock price growth or between capital gains taxes and economic growth. Being uncorrelated does not mean there are no times when the two move in the same direction at the same time; it just requires that there be just as many times when they move in opposite directions or one changes and the other doesn’t.
Between 1976 and 1983 the capital gains tax rate drops from 40% to 20%; stock price growth is just about zero. Stock prices start rising modestly and the rate jumps from 20% to 35% around 1987; stock prices keep rising anyway.
The point about a statistical analysis is that we’re drawn to those points on the graph that support our idea. I look at the point where it drops from 40% to 20% and nothing happens; you look at the big jump in stock price around the same time as the rate drops back to 20% in the 90s. Statistical analysis says it doesn’t matter if you can pick a story you like; the two variables are uncorrelated, you might as well be looking at hemlines versus potato futures. Which makes a pretty poor case for the “benefit” exceeding the “cost” in fairness.
Marty, earlier: We have a somewhat progressive income tax structure that accounts in great part for the difference in income between the wealthy and the lower middle class to poor, as they pay practically 0 federal income tax.
No, it doesn’t account for the difference in income between those groups at all, in any way.
The only way it could do so is if marginal rates exceeded 100% and pretty quickly at that. Otherwise what accounts for the difference in income is … the difference in income. $1 more you get paid is still more income whether you pay 25c or 75c in taxes.
I can only think I’m misreading you. What is it you’re trying to say?
“I am saying, though, that when a policy has a definite “cost” – in tax fairness – and an uncertain, debatable “benefit”, the burden of proof is quite high. There is a definite cost, there may or may not be a benefit, I don’t want handwaving or discussions of the noble risk-taking investor, I want to see a real benefit for the 6/7 people who lose out on the deal.”
So despite your objection, you were saying it was unfair.
“Statistical analysis says it doesn’t matter if you can pick a story you like; the two variables are uncorrelated, you might as well be looking at hemlines versus potato futures. Which makes a pretty poor case for the “benefit” exceeding the “cost” in fairness.”
The assessment of correlation is actually pretty good based on the graph. It also has been the position of every administrations economic team since at least Kennedy, including the current one.
If you can’t follow the inverse relationship in that graph, which is NOT hemlines or potatos, it is because you don’t want to, not because it doesn’t statistically exist. BTW, I wouldn’t accept the results of that graph or that analysis because it doesn’t seem to account for any other factors.
However, if jack could get that graph for his climate data he would tell us what day and time the world will end.
I am willing to discuss this as a fairness issue or some other principled position, I would disagree but respect the position.
But questioning whether lowering (or, in the current case, not raising)cap gains rates has a positive impact on investment is beating a dead horse. So if it’s lack of benefit is necessary for your fairness argument, I won’t be swayed.
“I can only think I’m misreading you. What is it you’re trying to say?”
Purely from a fairness perspective. The rich pay xx% of income taxes, the lower middle class and poor pay, practically, 0%.
That creates a baseline for tax fairness.
No, with all of the same rewards, exactly the same by law, SEC regulation, etc.
C’mon, Marty, you know the difference between preferred stock and common stock.
“C’mon, Marty, you know the difference between preferred stock and common stock”
Which has nothing to do with the difference between investors and employees, which is what we were discussing.
you were saying it was unfair
Er… in what sense is raising taxes for 6/7 people in a group (otherwise undistinguished) and reducing them for the 7th not definitionally “unfair”? Progressive income tax rates are “unfair” in the exact same sense; however, since they both benefit a majority of people – you can decrease taxes for the poorer 4/7 of a group and raise them on the other 3 and still raise more revenue – and have good utilitarian justifications (a marginal dollar of income is worth less to a wealthy person than to a poor person) most people accept them as “fair” in the final analysis.
The question of whether lower capital gains taxes are unfair in the basic sense is definitional – “tax fairness” in this case being a comparison of how much of identical gross incomes are taken in taxes, and “fair” being identical rates. What possible other baseline can you suggest?
The final analysis of fairness is whether the claimed benefits compensate for the basic unfairness. That’s a matter of opinion, data, and analysis, not definition.
“The question of whether lower capital gains taxes are unfair in the basic sense is definitional – “tax fairness” in this case being a comparison of how much of identical gross incomes are taken in taxes, and “fair” being identical rates. What possible other baseline can you suggest?”
I would suggest you are using words that aren’t accurate. You aren’t comparing “identical” gross incomes. Nor are you comparing how much of “equal” gross incomes are taken in taxes. In fact, the cap gains taxes are also progressive, just not as progressive. (0 in the two lowest tax brackets).
We already allow everybody to protect a baseline of capital gains by putting pretax earnings into 401k’s etc. so you aren’t comparing equal much of anything.
There are lots of variables here rather than a dollar is a dollar. Earned income is taxed progressively, unearned income is taxed progressively, just because some of the forms of income are more likely to be earned by one group rather than another it doesn’t create an unfair tax advantage if all are taxed progressively.
Most important, it is ludicrous to cry foul when the bottom 47% of people pay no income tax at all, on ANY kind of income. The next tier begins to have actual cap gains so they don’t want the rates raised either. In fact, most people who pay income taxes wouldn’t want their cap gains taxed at a higher rate.
Jacob, I can see where you got your corporate tax number, but the NYT grossly misreported that.
The underlying report is here at the GAO
First of all, it includes S-corps, which represent nearly half of all corporations, and almost always use pass-through taxation. These are of course taxed at the full income rate and we wouldn’t expect them to be paying the corporate tax. (That is why they are S corps and not C corps, so they can do simplified taxation.)
The study also shows that the large majority aren’t paying tax because they don’t have profit. Worrying about them is like worrying that welfare mothers aren’t paying their fair share.
Rueters reported only the large corporations from the report (which means almost no S-corps). That shows that in any given year, 35-50 percent of the companies weren’t paying tax, and the enormous majority of those (about 80%) had no profit income to tax.
Which suggests to me that the upper bound for ‘problem corporations’ (ones that are making at least some small bit of profit but aren’t paying tax) is about 8% of what you think of as regular corporations. (Non S-corps). (Number derived from 40% [approximate number reporting no tax in a given year] multiplied by 20% [those that have at least $1 of profit].
Which you may or may not think of as important, but isn’t as shocking as the 2/3 number you brought to the table. (To be clear, I’m not blaming you, the reporting in the article you linked was awful. Like “Doesn’t the author know anything about tax at all” kind of awful.)
You aren’t comparing “identical” gross incomes. Nor are you comparing how much of “equal” gross incomes are taken in taxes
Oh for god’s sake, yes I am.
If you make $100,000 a year in capital gains income you pay a tax rate of 15%.
If you make $100,000 a year in wage income you pay a tax rate of about 22%.
If you make $1m a year in capital gains income you pay a tax rate of 15%.
If you make $1m a year in wage income you pay a tax rate of about 32%.
As for the lie-by-omission that is the statement that 47% of the population pay no income tax and by implication is getting something for nothing, very nearly everyone who works pays payroll taxes, which account for 36% of federal government revenues compared to 45% for the income tax.
Further, of the “next tier” – the 53% of the population paying income tax by your numbers – a majority certainly do not pay capital gains tax, since only 1/7 people pays capital gains tax, and last time I checked 0.53 > (2 * 0.14)
“C’mon, Marty, you know the difference between preferred stock and common stock”
Which has nothing to do with the difference between investors and employees, which is what we were discussing.
Sure, the difference between preferred stock, which the investors who put capital in get vs. common stock, which the investors who put labor in get, has no bearing whatsoever on the way in which capital and labor are treated differently. Whatever could I have been thinking of?
The study also shows that the large majority aren’t paying tax because they don’t have profit.
If I could deduct all my expenses, I’d have much less taxable income too. In fact, I could live pretty damned well and show no profit. Unfortunately, I’m a flesh-and-blood person instead of a corporate person, which means I get to pay more tax and vote. (Though if the Roberts court has its way, the second distinction will go away any time now.)
JD,
And now I am through, call someone else a liar and assume someone elses implications. I said EXACTLY what I meant and implied nothing. We were talking about comparing income taxes my description was 100% accurate and appropriate to the discussion,
Sebastian, someone more expert than me is going to have to answer the point about S-corps. From what I understand they have significant tax advantages of their own which is part of why so many of them are, on-paper, unprofitable.
The point is really that much of the expansion of an enterprise (of whichever sort) is totally unaffected by any income tax, because it comes in the form of items that appear in the cost side of the ledger before operating loss or profit is calculated. A business can lose money on paper every year by spending everything it earns and more on expanding, and still generate a large capital gain in the end, having never paid any corporate taxes. From what I understand this is a significant factor in why many businesses consistently show no net profit year after year. I have no real problem with that, but I don’t think that at the end of 10 years of reinvestment the resulting income from capital gains should be treated differently to wage income.
Earned income is taxed progressively, unearned income is taxed progressively, just because some of the forms of income are more likely to be earned by one group rather than another it doesn’t create an unfair tax advantage if all are taxed progressively.
Are you serious when you say that so long as both are taxed progressively, it doesn’t matter what the actual rates are? If so, I’m happy to propose a maximum 75% rate for capital gains after the first $10,000. That’s still progressive, so it’s fair, right?
No Mike, I was just getting tired of the debate. It really is a philosophical discussion that is being framed as facts and graphs etc. Either you believe that it encourages investment AND that investment is a good thing for the overall economy, or you don’t. If you don’t believe both of those things that are a matter of economic discussion ad infinitum by experts, then it is just the rich getting over again.
Marty, I’m generally interested in reading what you have to say and have found this discussion worthwhile. While I found your comment misleading and irrelevant, “lie” was too strong of a word, and I apologize.
If you’ll accept that apology, I say that “47% of people pay no income taxes” is misleading because it implies – implications being unavoidable consequences of all statements – that 47% of people pay no taxes, which is untrue.
I think you want to restrict the conversation to income tax rates, because if you bring in payroll taxes the difference in tax treatment between earned income and capital gains becomes even more stark at moderate income levels. I’m willing to let that go, because at the levels that matter – above $1m a year – payroll taxes are irrelevant to the comparison between earned and capital gains taxation. So I’m willing to ignore payroll taxes for simplicity, right up until the point where you bring that line about 47% of people not paying income taxes as if it was relevant. It’s not relevant because in that 47% the treatment of earned income vs. capital gains is still skewed towards capital gains, and because the large majority of capital gains tax is paid by the top 14% of the income distribution, and so comparisons between the top marginal income tax rate and the capital gains rate are the most relevant to discussions of fairness.
Sebastian,
Looking at a corporate tax return really is not a very good way to determine whether a corporation made a profit or not. Sounds odd, but, as I suspect you know, it’s true. The tax code has all sorts of funny stuff in it (yes – endless complications, but generally put there at the behest of corporations, so their complaints don’t carry much weight).
I’d rather look at their reports to investors, which would provide a much rosier picture of corporate profitability than their tax returns. In fact, one of my favorite tax reforms is to require publicly held corporations to calculate their taxes using the same figures they report to investors. Think of the benefits just in simplification – only one set of books to keep. Alas, I doubt it will happen.
I said “the large majority of capital gains tax is paid by the top 14% of the income distribution”, I should have said, “the large majority of capital gains tax is paid by the top 0.3% of the income distribution (those with incomes over $1m).”
The assessment of correlation is actually pretty good based on the graph….
If you can’t follow the inverse relationship in that graph, which is NOT hemlines or potatos, it is because you don’t want to, not because it doesn’t statistically exist.
You’re using the word “statistically” to mean “what I guess at when I see the graph”. That’s why they folks at that link used *actual* statistics, and they found no correlation.
As for your eyeballing- the rates get cut in the early 80s, then raised in the late 80s/early 90s, and then there’s a boom in the late 90s, and then the rates get cut again, the boom peaks and crashes. Only someone already committed to the idea could see correlation there.
Occasionally they move in the same direction. And just as frequently, they move in the opposite direction.
No Mike, I was just getting tired of the debate. It really is a philosophical discussion that is being framed as facts and graphs etc. Either you believe that it encourages investment AND that investment is a good thing for the overall economy, or you don’t.
This isn’t f&%^ing Peter Pan. I have not seen a more explicit endorsement of innumeracy and fantasy when faced with bare facts in my life, I think.
Seriously, this is like arguing that whether the Colts won or lost the Super Bowl is just a philosophical discussion, you can believe whatever you want.
“Looking at a corporate tax return really is not a very good way to determine whether a corporation made a profit or not.”
hmmmm, kinda. I strongly suspect that a majority of those corporations that don’t have profits, really don’t have profits. I’m not saying that loopholes aren’t a problem, because they are–all over the tax code. But If you get to zero profit, you probably really don’t have any. (In a huge majority of the cases).
You know what I hate?
I hate it when I’m in a publicly-funded restroom alongside the highway and I have to wait while a crystal statue of a little boy pees champagne into the urinal.
I suggest the following to test the relative incentives and disincentives of various taxation regimens on public urination.
Have one toilet charge the capital gains rate for those who live on capital gains. Have a second one charge the lowest marginal tax rate for those who live on nominal wages. Have a third charge the highest marginal tax rate for those whose wages push them into the highest bracket.
I wonder what it would be like to fly on the European airline that wants to charge to use the toilet and then land in Arizona and have to drive several hundred miles across toilet-less highway to reach home.
I haven’t yet seen the private sector suggest ways (not enough incentives, I spose)to ameliorate this problem — may I suggest dashboard catheters with a reservoir beneath the seat to collect urine, which then could be emptied in J.D. Hayworth’s front yard — or perhaps astronaut diapers for all beleaguered, whining taxpayers who find themselves without a pot to pee in.
I’ve got it: ropes, hung from saguaros, to piss up.
And in any case, whatever you think of the whole thing, there isn’t call to exaggerate wildly into “2/3 don’t pay taxes”.
well carleton. I know actual flesh and blood people who make decisions on how and where to invest their money who have and would make different decisions if the capital gains tax was raised to 35%, and i know many of these people.
So if you think it is an endorsement of fantasy to let folks who don’t believe what they want, it’s ok with me.
And in any case, whatever you think of the whole thing, there isn’t call to exaggerate wildly into “2/3 don’t pay taxes”.
For a second there, I wasn’t sure whether Seb is talking about low-income corporations or low-income persons 🙂
–TP
For a second there, I wasn’t sure whether Seb is talking about low-income corporations or low-income persons 🙂
Low-income corporations deserve our sympathy and respect and ought not to have to pay taxes because of all the other contributions they make.
Low-income persons are “lucky duckies”, parasitic leeches who exploit the country by working low-income jobs and not paying income tax.
I’m sure Sebastian is clear on the difference between them. (Plus, corporate persons never have abortions! So that’s another way in which they’re morally superior.)
Yes, although getting ALL of the conservatives standing in front of the Senate blocking unemployment was really difficult so they just had one guy do it, trying to get the Senate to pay for it. Not a bad idea to try it really, before you unblock it and allow the bill, you vote for, to pass.
This claim ignores that those same conservatives voted en bloc against pay-go shortly before that.
But the current philosophy is “I proposed this very law in [time not too long ago] but if the enemy party likes it, it must be fatally flawed, so I have to vote against it.” Holy Joe* even made that claim explicitly.
*not a con (yet), just scum
Tom Tomorrow has a good comic up, about Corporate Americans.
“From what I understand this is a significant factor in why many businesses consistently show no net profit year after year. I have no real problem with that, but I don’t think that at the end of 10 years of reinvestment the resulting income from capital gains should be treated differently to wage income.”
Where do you get this understanding? And by ‘many’ do you mean “a large sounding number” or “a significant fraction of corporations”
And you realize that if they expand too fast they could lose everything, right? And then not get the 10 years of wages that an employee gets.
And I don’t understand your point about S-corps at all. If an S-corp is passing income to its owner (which is what S-corps do) that income is taxed at the full personal income tax rate. S-corps aren’t magically escaping the tax man by funelling money to their owners. They are doing what S-corps are designed to do, make taxes easy to file for relatively small and usually owner operated corporations. And that is ht makes the NYT quote such a crock. The included in their statistic the almost 50% of corporations which would never pay the “corporate tax” and they insinuated that this was because they were somehow avoiding taxation. But they don’t. They pay personal taxes (not captial gains) every year. And that isn’t a dodge, that is how it is designed. That is why the classification exists.
One good point I thought was made and seems to be been ignored: capital gains tax doesn’t account for inflation. Investing 100k and selling 25 years later at $150k is not the same as investing 100k and cashing out $150k 2 years later. The short-term/long-term capital gains rates don’t address this particularly well.
My proposal would be to bring capital gains taxation in line with income taxation, but have a more finely-tuned adjustment (rather than just the two rates) to account for how long you’ve been invested. The rate of return should matter, shouldn’t it?
I also think additional income tax brackets make sense. I don’t see how someone making a few hundred thousand a year should be taxed at the same rate as someone making a few million a year.
More brackets, less deductions, kill the AMT (which is what, a ~45 year old patch aimed at rich people with lots of deductions?).
And don’t even get me started on the “death tax” issue. What a joke that is.
I guess that means I’m a self-hating upper-middle-class guy. I must hate people (like my wife & I) who make good money, save and invest. Yup, yessiree, that’s it exactly…
“This claim ignores that those same conservatives voted en bloc against pay-go shortly before that.”
How did it ignore that? I would like to know so that I can be sure to do it the next time I am commenting on something completely unrelated to it.
I actually don’t understand why we need tax ‘brackets’ at all. Why not a nice gentle but continuous curve which maxes out at 35-40% point?
Sebastian, as I said, I don’t know enough about S-corps to comment on those so I should probably stop. I’m happy to drop the headline 2/3 number. My point is really regarding recycling of earnings into reinvestment, and that no taxes come into play in that event, right? Money that leaves the business is taxed, but that money isn’t a factor of the expansion of the business anyway.
S-corps were designed to provide a single layer of corporate tax for federal income tax purposes to small businesses, rather the two layers of tax that are imposed on C-corporations (on the corporate income and then again when dividends are distributed), along with limited liability (before there were LLPs and LLCs). Their use is, in fact, much more complicated for tax purposes than using a C-corp.
Now, nobody sets them up anymore because everyone uses LLCs.
I think I lost my comment, my apologies if this shows up twice.
Reading over this thread, what I take away is this: the reason it’s good to tax investment income at a lower rate is that investing is optional. Without the incentive of a lower tax rate, folks will do something else with their money. The economy will starve for capital, and jobs will be lost.
People who work for a living generally don’t have a similar ability to keep their labor out of the economy. They need to eat.
There’s a kind of “root hog or die” aspect to the labor side of this that is perhaps unfair, but if so that unfairness is more or less baked into the situation, and should probable not be accounted for in public tax policy.
That appears to be the argument.
A couple of thoughts.
First, can someone show me a solid, credible correlation between historical capital gains rates and the unemployment rate? If the argument above holds, it should be reflected in the historical record.
Next: is capital insufficiently available to the small and medium sized businesses that drive job creation? That could easily be so.
If it is so, is that because people aren’t making their money available for use? That doesn’t seem likely, especially at today’s capital gains rates.
Perhaps there are other reasons that capital isn’t making its way to small businesses.
Next: what other factors drive job growth?
One that comes right to mind is demand. It doesn’t matter if it’s an employer’s market for labor if there isn’t something productive for new hires to do.
The bottom 40% of the population pays 5% of income taxes. The bottom 60% pays 15%.
How about an absolute income tax holiday for the bottom 50% of income earners? It would cost us maybe 10% of current revenue. All or damned close to all of that money would be spent, creating consumer demand. Inventories would be cleared, new goods would need to be created, jobs would result.
But nobody is proposing that version of “forgo revenue to create jobs”. The only comment on the topic are complaints that the lower quintiles are already getting too much of a free ride.
What else creates jobs?
Infrastructure. Education. Investment in R&D. All of that generally calls for public money. Spend the money, prime the pump, grow the economy.
The rising tide floats investor’s boats as well as workers.
But that’s socialism.
I have no resentment of wealthy people, I have no quarrel with the argument that capital is necessary to make things happen. All of that is fine with me.
But the federal tax regime in the US favors capital investors over every other stakeholder in the economy. I’m not sure that’s reasonable, or fair, or necessary, or right. I’m not even sure it achieves the result folks claim for it.
The top 400 income earners in the US have an average income of $345 million, and an effective tax rate of 16%. And the citizens of Arizona can go piss in the sand, because the state of Arizona is broke.
That doesn’t seem right to me.
If an S-corp is passing income to its owner (which is what S-corps do) that income is taxed at the full personal income tax rate. S-corps aren’t magically escaping the tax man by funelling money to their owners.
i have an S-corp. and, there are two main ways i get money out of it. the first is standard W-2 pay. on that, i pay the full set of taxes, including both the employee and the employer’s 1/2 of the FICA tax.
i also take money out as dividends. on that, i don’t pay the FICA tax.
my accountant encourages me to keep the split in salary / dividends at roughly 60/40.
so, yes, there is a way to escape the tax man, but it’s not a huge amount, and it’s only on a portion of the money.
Seconding Ugh, the LLC is the preferred vehicle in most circumstances nowadays.
I guess the relative lack of inflation in recent years has obscured part of the original justification for lower capital gains rates. If you hold an asset over a period of moderate to high inflation, a lot of the “capital gain” you nominally get when you sell is really a return of your (inflated) principal, not actual profit. Having a lower capital gains rate helps to compensate for this difference, although not perfectly. For example, if you buy an asset for $10,000, and sell it for $22,000 after seven years of 10% inflation, you would get taxed on a $12,000 capital gain – but that $22,000 is only worth $11,289 of goods and services measured in year 0 dollars. Adjusted for inflation, you had a modest 13% profit in real dollars after 7 years, not the 120% that you pay taxes on.
I actually don’t understand why we need tax ‘brackets’ at all. Why not a nice gentle but continuous curve which maxes out at 35-40% point?
If you plot tax due versus AGI under out current bracket structure you get something like “a nice gentle curve”. Not a staircase, at any rate. Marginal rates, remember?
I have absolutely no problem with a “continuous curve”. I don’t see much point in it, however, since ALL the fuss and bother of doing tax returns lives in the additions and subtractions required to compute AGI in the first place. Computing the tax after that is trivial, whether you use a printed table, or a piece-wise linear function, or some scary-looking exponential function.
In the context of this thread, you’re probably not concerned with simplifying tax returns so much as with reducing “distortion” of incentives — specifically in the neighborhoods of the bracket boundaries. Two things about that:
First, even if we believe in the existence of a subspecies we might call homo economicus marginaltaxus, a subspecies defined by its sensitivity to marginal tax effects, the fact that AGI — not “income” — is what gets taxed means that this poor creature must spend its economic life in a total tizzy. “Is it worth earning this extra dollar of income? Not if it pushes my AGI into the next bracket. Wait: what’s my AGI without this dollar?” The poor creature must be doing its tax returns real-time in its head every day of its life.
Much more important: if you plot the tax versus AGI graph over its whole range, you notice that after about $350K of AGI the curve quickly approaches a dead-straight line. That’s the smoothest, gentlest “curve” you can have. No distortions there at all. The truly “productive” individuals of the species homo economicus marginaltaxus live in a flat tax world already.
Now, a truly clever member of the species might notice that there’s a connection between his own tax rate and the tax rates of those farther out on the income axis. If he and they live in the same nation, and the nation needs to collect a certain total amount of tax, the lower their rate is the higher his own must be. If he nevertheless believes that people who make ten or a hundred times the income he makes ought to pay no higher a marginal rate than he does, then he’s not so terribly sensitive to his own marginal rate, is he?
–TP
well carleton. I know actual flesh and blood people who make decisions on how and where to invest their money who have and would make different decisions if the capital gains tax was raised to 35%, and i know many of these people.
The plural of anecdote is not data.
Even if your assertion is true and your friends’ behavior would change, the data presented suggest that their changes in behavior wouldn’t affect the growth of the economy. Which isn’t surprising- they weren’t going to keep their money under the mattress. They’ll put it into the world where they can get a return, and that means it’ll be available for growing businesses.
Dave W. – it sounds like an inflation-compensated capital gains tax would be a good idea, where the each year the basis is inflated by the CPI, and the gain is measured and taxed against the inflated basis.
Wouldn’t be too complex to calculate, I think.
Sebastian,
I actually don’t understand why we need tax ‘brackets’ at all. Why not a nice gentle but continuous curve which maxes out at 35-40% point?
Good idea. We’ll give you the job of explaining to everyone that their income tax liability is just the integral from zero to their income of the tax curve.
Good idea. We’ll give you the job of explaining to everyone that their income tax liability is just the integral from zero to their income of the tax curve.
No need for sarcasm. Afaik that’s exactly how it works over here. And the integral can be solved leading to a calculable tax formula.
For those that do not understand the math (i.e. most public officials/employees) the results are printed in table form. This will soon end though because tax returns will have to be filed online in the future with comrade computer doing the calculations for you.
Meanwhile, since we were talking about tax disincentives to business formation, let me share my experience with unemployment. I started my own tutoring business after I lost my job last August. The problem is that unemployment reduces my benefit by 75% of whatever I gross, before I get to deduct expenses. Since my expenses have been running at around 50% of my gross (using IRS mileage rates), that means I have been losing around 25 cents on every dollar I take in, once you take the effect on unemployment into account. And that’s before you take stuff like the self-employment tax and local business tax into account.
To take my most extreme example, one of my first clients was a 140-mile round trip from me. The client paid $120 for a two-hour session once a week, which was a premium rate in view of the distance. My cut of that ranged from 60-70%, which counted as my gross (the rest went to the brokerage service that found me the client and handled the billing, etc.). So, assuming the highest rate, my gross was $84. Unemployment took $63 of that, leaving me with $21, out of which I paid a $4 bridge toll and 3 gallons of gas at $3/gallon. So even just looking at the immediate cash flow, I was netting $8 for a two-hour lesson, three hours of unpaid travel, and a couple hours of unpaid prep per week. If you then account for indirect car expenses that the IRS mileage rate tries to include, like depreciation, insurance, and repairs, this was clearly a net loss financially. If I could have that $63 back, it would be a rather different story.
I still justify doing this to grow the business and provide myself with a sustainable income source (unemployment won’t last forever), but it’s a pretty big disincentive to the newly unemployed starting new businesses. As a society, it might be more valuable to look at fixing that problem first before worrying about the effects of small changes in the capital gains rates. It would also have the advantage of giving most of the benefit to the currently unemployed and underemployed, rather than well-off investors (which admittedly, are not completely exclusive categories).
Hartmut,
No need for sarcasm.
No doubt it can be simplified, but I find the notion amusing nonetheless.
I have a friend who is a chemistry professor, and he told me the following tale:
Teaching freshman chemistry, he was trying to explain, without resorting to calculus, how some quantity could be calculated. Terms like “integral” tend to panic freshmen here, if not in the land of Leibniz.
He went through a spiel about ever-narrowing rectangles, and made the point well enough, as he thought. After class one of the students approached him and said, “You know, Professor, there’s an easier way to calculate that. Let me show you.”
Two mathematicians are eating lunch out. One, in the middle of grousing about the appalling ignorance of the general population, excuses himself and goes to the bathroom. The other calls the waitress over.
“Here, take this ten dollars. Now, when my friend comes back, I’m going to wave to you. Come over, and whatever I ask you, say ‘X squared’. Have you got that? ‘X squared’. Say it for me? Good, now scoot.”
When the first one comes back, he says, “I think you’re much too pessimistic. I’ll bet you fifty dollars that even our waitress could do a simple integral. Miss, can you come here? Now, what’s the integral of 2x? What’s that? ‘X squared?’ Yes, exactly, thank you.”
And as he accepts the fifty bucks, the waitress walks off, muttering under her breath “Plus a constant”.
“Good idea. We’ll give you the job of explaining to everyone that their income tax liability is just the integral from zero to their income of the tax curve.”
You’re overcomplicating. 99% of people will just look up their owed tax on a chart.
You’re overcomplicating. 99% of people will just look up their owed tax on a chart.
Yes, I am and they will. (Though if the curve is really continuous the chart will have to be quite large, I think.)
It would still be fun to hear someone explain it, maybe in Congress while they’re debating the bill.
Ah, there’s the rub. The tax tables are currently how most people compute taxes, so why on Earth would they need a tax function whose first derivative is continuous, when a piecewise-continuous function serves as well?
“Brackets” as a descriptor for the tax-rate breakpoints is a misnomer, I think.
Like Bernard, I think it would be very amusing indeed to hear the tax-rate debate shifted to coefficients and polynomial orders. Imagine bills of attainder represented by the addition of a 1/(Income we don’t like) term in the tax equation, or similar.
Should I march out my inverse tangent proposal again? The shape of that curve just seems so right to me. Plus it would give people an incentive to learn trig! (Like they should need one. What’s more fun than trigonometry? I mean, seriously! Right?)
Complex variables. It’s the font from which all trig identities flow.
Oh man, I remember one of my last math exams at school where the old German income tax formula was the topic. The equation for each bracket became a variable in the equation for next higher bracket and all of it was in written out text. The result, when written using normal mathematical notation was quite a complicated rational function. I think some tax laws would also need a clarification that of all solutions the equations have, only the positive and real ones are to be considered. “You owe us (3482 + 925i)€ would make things slightly complex 😉
“You owe us (3482 + 925i)€ would make things slightly complex 😉
Sometimes it seems like some of my money is imaginary.
Oh, I would totally write a check out for that amount.
Oh, I would totally write a check out for that amount.
I’ll give you e^(i*pi)+1 dollars if you do.
Complex variables. It’s the font from which all trig identities flow.
True, but that’s like skipping plane geometry and going straight to analytic geometry. So many of the really beautiful proofs are replaced by dead simple calculations.
I’ve had too many other people give me that much, hsh.