The hypocritical cliff

[Storm]

Storm,

Just because the principal has been taxed doesn't mean income derived from the borrowing of that principal to others should not be taxed.  I've wrestled with this one, but let's pretend it's not money for a second.

Let's say you purchase land.  You can't depreciate land, so you've used after-tax money.  If you borrow that land to some guy to put a trailer park on and he pays you rent, should that rent not be taxable income?

That's a fair point, Moda.  I'm not arguing for no capital gains tax... I'm just not quite to the point where I think we should tax it the same as normal income.  I like how long term capital gains being lower encourages long term saving and investing rather than day trading.

[systemskeptic]

If you borrow that land to some guy to put a trailer park on and he pays you rent, should that rent not be taxable income?

Exactly.  Yet that rent on a trailer park is taxed at income rates, not capital gains rates.  The tax laws make no sense because the concept is the same -- income via interest in capital, whether that capital is labor, land, business, etc.

Bottom line: all income is sourced from capital.

[Storm]

At the federal level, discussions of who should pay what tax on which income always turn silly because the government doesn't actually need the money anyway. Taxes are just a tool to reduce inflation and create a demand for the currency. But right now, inflation is incredibly low and demand for dollars is ensured by all sorts of other things we're fond of discussing, such as a big military and having the world's reserve currency. I posit that federal taxes could drop to 0% on everyone without any real problem.

Wouldn't it be cool if, instead of fixed tax rates, we just had a flat tax rate that applied to everyone and was based on a combination of inflation and employment?  In other words, if inflation was low and unemployment was high, the tax rate would be 0% to stimulate the economy, and the tax rate would gradually rise as inflation rose and unemployment fell, to cool off the economy.

It would be awesome because the changing tax rate would effectively stimulate the economy better than QE ever could.  I think what you would need would be quarterly tax rate changes indexed to inflation and unemployment so that it changes more rapidly, but it could really encourage economic growth if done properly.

[systemskeptic]

Combining the ideas from everyone together, it should be clear why most wealthy people got rich by owning real estate or owning businesses -- they are greatly subsidized by the poor who are paying tax rates 300-400% higher on their only available source of income (their labor).

[those with money] Real Estate Capital - 0% taxes on up to $250,000 profit!
[those with money] Business Capital - 15% tax only when (if) you sell  - which many never do, or use tax shelters
[those without money] Labor Capital - up to 40-50% in income/payroll taxes

Disgusting really, when you think about it...

[MachineGhost]

Its not disgusting because the wealthy are the job creators that employ the poor.  Otherwise, the poor would have no income!

Capital gains taxes are lower because it is double taxation on the job creators.  If you consume your wage income as the poor do instead of sacrificially investing it, you only pay the tax once.

Who cares if Buffett claims he would pay only 15% on his 50 billion when he doesn't sell any to consume anything in the first place?  He's just talking out of his ass.  Theory vs reality.  I guarantee you the 15% on what he would sell would more than triumph the 20% max effective tax rate his secretary is paying in $ terms.

If anything, we need even higher tax rates on consumption and lower tax rates on investment.  This can be done by setting the tax rate to a flat 0% on all earned income and then some kind of moderate flat tax thereafter so only conspicious consumption by rich people is taxed.  There should be no capital gains taxes at all.

[systemskeptic]

Its not disgusting because the wealthy are the job creators that employ the poor.  Otherwise, the poor would have no income!

Capital gains taxes are lower because it is double taxation on the job creators.  If you consume your wage income as the poor do instead of sacrificially investing it, you only pay the tax once.

So Job creators shouldn't pay tax?  I can't tell if you are being sarcastic because this comes off as borderline ridiculous.

Moda already refuted your point #2

[systemskeptic]

I guess I should say this:  this is the tax culture we live in because the tax laws are a reflection of the culture.  You live in this culture so I don't expect your views to differ from anyone else because your views were formed by, well, everyone else.  Unless you have spent a lot of time developing your own ideas or challenging what you have heard, there won't be anything unique about your beliefs.

And yes, ideas that do not match your culture's ideas will sound like B.S when you first encounter them. 

[systemskeptic]

There should be no capital gains taxes at all.

All profit stems from capital (human, natural, business).  Logically if you believe the above statement you have to maintain that there should be no taxes on any gains -- regardless of income source.  That's certainly fine, then we just have a sales tax.  But it is different from the argument that different income sources should be taxed differently.

A analogy with sales tax in place of income tax would be a 50% tax on milk and bread and a 0% tax on Aston Martins and Catamarans.  If you are okay with that, fine, that is your morality... but I do not think that is a proper way to design a society.

[MachineGhost]

So Job creators shouldn't pay tax?  I can't tell if you are being sarcastic because this comes off as borderline ridiculous.

Moda already refuted your point #2

All consumers should pay taxes because consuming uses up scarce resources.  Whether they are poor, rich or job creators is irrelevant.  The source of their income shouldn't really matter.

Moda's talking about a special situation (rentier income ala feudal England) than what I had in mind.  If you don't believe that the "rich" should be compensated with a lower tax rate for being double taxed vs the singularly taxed "poor", it just seems to me you don't care about fairness, job creation or social progress, but just want to act on emotions over reason.

There's also a third layer of taxes known as the corporate tax, but I digress.

Why is it yours or the government's business to punish people twice or thrice?  Isn't once enough?

[MachineGhost]

All profit stems from capital (human, natural, business).  Logically if you believe the above statement you have to maintain that there should be no taxes on any gains -- regardless of income source.  That's certainly fine, then we just have a sales tax.  But it is different from the argument that different income sources should be taxed differently.

A analogy with sales tax in place of income tax would be a 50% tax on milk and bread and a 0% tax on Aston Martins and Catamarans.  If you are okay with that, fine, that is your morality... but I do not think that is a proper way to design a society.

Well, treating income from different sources differently is a red herring.  All we should be concerned about is taxing consumption and not taxing investment.  Envy is about what people actually acquire, not about what they can potentially acquire.  The income tax system used to be quite like your sales tax analogy, in fact.  If you propose jacking up capital gains taxes to 50% on chicken or egg farmers, what do you think that will do to the price of those foodstuffs that the "poor" must survive on?  Job creators don't pay taxes, consumers do.

The government should not be in the picking winners game.  Whether that is funding green businesses or deciding which sources of income should be taxed or not.  We tried luxury taxes once and it almost wiped out those industries.  True fairness is butting out of the equation and not presupposing you know better than the end consumer on what to do with their own money.

[systemskeptic]

All we should be concerned about is taxing consumption and not taxing investment. 

Now you are talking about the merits of income vs. sales tax.  Which is fine, maybe that is better for the environment, which may be your personal goal for society.  However, with a sales tax are you suggesting a flat sales tax or a sales tax depending on the item?  AKA a very high tax for items purchased by the poor and a very low tax for items purchased by the rich?  Because my point is that is what we have with income/capital gains taxes today.  AKA very high tax for income sources of the poor and very low taxes for income sources of the rich.

Each person has different ideals, some may prioritize "the economy" or "the environment" or "wealth equality."  My point is only that the current split between gains on labor and gains on investment is illogical and leads to wealth inequality.  Wealth inequality leads to economic instability and conflict, besides just being plain unfair.

[RuralEngineer]

And the truth comes out. We have to slay the beast known as wealth inequality...that has worked well in the past, Comrade.

Did I miss where anyone pointed out the risk associated with capital investment? Shit happens that can wipe out my principal all the time that can be difficult to avoid. By utilizing my human capital all I risk is eye strain. My human capital is less risky to invest than monetary capital.

[Pointedstick]

And the truth comes out. We have to slay the beast known as wealth inequality...that has worked well in the past, Comrade.

What are you complaining about? All we need to do is confiscate all the wealth above the average level of wealth, then recalculate the average and do it all again! Oh, and kill anyone who resists, of course. Better confiscate their guns first for the safety of our agents.



Wealth inequality will always exist. Surely you must understand that any group of people whose wealth is perfectly equal will quickly diverse in the individuals' wealth levels, no? What I believe you're talking about, systemskeptic, is not wealth inequality in and of itself, but the degree of inequality.

The problem is, how much is "too much?"

[D1984]

There have been several posts suggesting taxes on capital gains are "double taxation." How is this so? There is this little thing called "basis" and no one pays tax on basis. If I earn $200, duly pay my taxes on it (let's say and 25% ) and thus have $150 left over. I take this $150 and buy a stock for $150; I sell it a few years down the road for $500; I will pay tax on the $350 gain but the $150 basis will be untaxed. Once I have paid taxes on the gain the post-tax gain (plus the original basis) becomes my new basis when I buy another stock, and so ad infinitum.

Also, IIRC most of the inheritance tax is paid on previously untaxed gains (i.e. gains that were never realized during the owner's lifetime) on real estate and equities (publicly traded or private) and the heirs receive a step up in basis once this is done (so that if they sold the inherited asset right at that moment they would owe no additional tax). I could understand exempting basis from the inheritance tax (then again we already have a $5 million exemption on estate taxes which is far more generous than almost any other level of exemption granted to any other type of income) but to let previously untaxed gains pass to someone and then stepping-up the basis as well? That would mean that taxes would NEVER be paid on those assets (assuming no cap gains or dividend taxes otherwise which is what has been proposed at least in part in this thread) while those of us whose major source of income is from work (whether it's a McD's employee making $8 an hour or a CEO making $8 million a year) get the privilege of paying taxes at much higher rates than 0% or 15% PLUS paying payroll taxes (and since payroll taxes cannot be deducted from employee income THAT to me is "double taxation"...and perhaps even "triple taxation" since SS income is taxed again when received if you have a high enough income otherwise).

As far as the "risk associated with investment" argument: One, that's why capital losses are deductible (although I would add that in all fairness the pre-86 deductibility limits should be put back in place....a $3,000 per year limit on cap loss deductions against other income is ridiculously unfair...all the more so since it hasn't been indexed for inflation since then); two, risking one's "human capital" i.e. working has its unique risks as well (that risking your "money capital" does not); how many people die or are injured on the job (or suffer medical conditions from cumulative stress from working years at a job they hate just because they need the money) vs how many die or are injured from making investments (whether that be the ten-year old putting his lemonade stand money in the bank or the venture capitalist deciding which companies would be most profitable to fund)? No one ever died from buying stocks, t-bills, or gold.

[moda0306]

Is anyone arguing for anything even close to complete wealth equality? 

I mean I know I throw a sarcastic straw man out there from time-to-time, but...

[MediumTex]

At the federal level, discussions of who should pay what tax on which income always turn silly because the government doesn't actually need the money anyway. Taxes are just a tool to reduce inflation and create a demand for the currency. But right now, inflation is incredibly low and demand for dollars is ensured by all sorts of other things we're fond of discussing, such as a big military and having the world's reserve currency. I posit that federal taxes could drop to 0% on everyone without any real problem.

Wouldn't it be cool if, instead of fixed tax rates, we just had a flat tax rate that applied to everyone and was based on a combination of inflation and employment?  In other words, if inflation was low and unemployment was high, the tax rate would be 0% to stimulate the economy, and the tax rate would gradually rise as inflation rose and unemployment fell, to cool off the economy.

It would be awesome because the changing tax rate would effectively stimulate the economy better than QE ever could.  I think what you would need would be quarterly tax rate changes indexed to inflation and unemployment so that it changes more rapidly, but it could really encourage economic growth if done properly.

We could also do this with gas taxes to dampen the economic effects of oil price fluctuations.

When gas prices are high, gas taxes would automatically be lowered.

When gas prices are low, gas taxes would automatically be increased.

The government could provide a "target" tax adjusted gas price of, say $3.50 or $4.00 a gallon and build fuel tax policy around this goal.

[RuralEngineer]

As far as the "risk associated with investment" argument: One, that's why capital losses are deductible (although I would add that in all fairness the pre-86 deductibility limits should be put back in place....a $3,000 per year limit on cap loss deductions against other income is ridiculously unfair...all the more so since it hasn't been indexed for inflation since then); two, risking one's "human capital" i.e. working has its unique risks as well (that risking your "money capital" does not); how many people die or are injured on the job (or suffer medical conditions from cumulative stress from working years at a job they hate just because they need the money) vs how many die or are injured from making investments (whether that be the ten-year old putting his lemonade stand money in the bank or the venture capitalist deciding which companies would be most profitable to fund)? No one ever died from buying stocks, t-bills, or gold.

There are around 8.8 million people on disability as of 2012. http://www.ssa.gov/oact/STATS/dibStat.html

36% of the people on disability are as a result of a workplace injury. http://www.ssa.gov/policy/docs/ssb/v65n4/v65n4p31.html

That means there are in total about 3.18 million people receiving disability payments as a result of a workplace injury.  That's about 1.6% of the total U.S. working age population (18 to 65).  Given the number of people who took substantial capital loses in the recent recession, I believe it is clear which method is more risky.

[moda0306]

It's extremely difficult to get SSDI.  Also, people have immense risk in choosing a career and skillset that will one-day be obsolete. 

About 25% of people will have a long-term disability event in their lifetime.

Involuntary unemployment is also a risk.

[MachineGhost]

There have been several posts suggesting taxes on capital gains are "double taxation." How is this so? There is this little thing called "basis" and no one pays tax on basis. If I earn $200, duly pay my taxes on it (let's say and 25% ) and thus have $150 left over. I take this $150 and buy a stock for $150; I sell it a few years down the road for $500; I will pay tax on the $350 gain but the $150 basis will be untaxed. Once I have paid taxes on the gain the post-tax gain (plus the original basis) becomes my new basis when I buy another stock, and so ad infinitum.

It's because your basis is first reduced by the first layer of taxes, the income tax.  So you are investing with a lesser amount of capital than if you had no income taxes to pay; and your subsequent return is also lower before you owe the second layer of capital gains taxes.  Throw in a corporate structure and you've got a third layer of 35% taxes.

No Income Tax: $200 * 6% return = $212 - 15% capgain = $210.20.
    Income Tax: $150 * 6% return = $209 - 15% capgain = $207.65.

Basically, the problem is we are taxed for exchanging our labor for Federal Reserve Notes.  There is no profit on an exchange and in the beginning of our country, this was widely understood, but as usual, it became corrupted by the Progressive movement.

[systemskeptic]

MachineGhost,

I think you need to think it through from a different perspective to try to determine where your logic may be misfiring.  You've had 3-4 people come out refuting that claim so that should be an indication that you need to re-evaluate your thought process behind it.

[MachineGhost]

I think you need to think it through from a different perspective to try to determine where your logic may be misfiring.  You've had 3-4 people come out refuting that claim so that should be an indication that you need to re-evaluate your thought process behind it.

What 3-4 people?  Other than moda with a rentier example, I think my double and triple taxation logic is perfectly fine.  If you disagree, then why?

I'm starting to think you are trolling.  You've ignored many of the questions I've asked of you, even if they are largely rhetorical.

[systemskeptic]

What 3-4 people?  Other than moda with a rentier example, I think my double and triple taxation logic is perfectly fine.  If you disagree, then why?

Myself, Moda, and D1984.  How would you define double taxation?  I would define double taxation as the same source of income being taxed twice.  In your example you have two sources of income (income gain and capital gain) and two sources of tax (income tax and capital gain tax).  Where is the "double" taxation?  If by double you mean two taxes because there are two sources, then I guess that is true...but I don't think that is what is meant by "double taxation."

If you want I can explain it further, but in the interest of brevity hopefully that is enough to trigger the realization of error.

[MachineGhost]

If by double you mean two taxes because there are two sources, then I guess that is true...but I don't think that is what is meant by "double taxation."

That is what "double taxation" means in common usage: Two taxes, two sources, same capital.  You seem really obsessed with sources rather than effects. 

If you're such a "systemskeptic" why is your agenda sounding like the usual left-wing liberal progressive ideology that best represents our system currently?  Do you have a different perspective of the system?

[systemskeptic]

MachineGhost, 

You said "So you are investing with a lesser amount of capital than if you had no income taxes to pay; and your subsequent return is also lower before you owe the second layer of capital gains taxes."

If this statement was true, than even if you only had a single tax (capital gains) that is a double/triple/infinite tax because

"So you are investing with a lesser amount of capital than if you had no capital gains taxes to pay; and your subsequent return is also lower before you owe the second layer of capital gains taxes."

It should be clear why that statement is not a proof of double taxation but merely a product of new income being taxed... In the first case it is two types of sources (income and capital gains) in the second it is the same type of source but different instances (capital gains and capital gains).  Is that a double tax? No that is just a tax on new income...

[MachineGhost]

It should be clear why that statement is not a proof of double taxation but merely a product of new income being taxed... In the first case it is two types of sources (income and capital gains) in the second it is the same type of source but different instances (capital gains and capital gains).  Is that a double tax? No that is just a tax on new income...

Everyone first earns income by exchanging their labor (which should not be taxed, but is).  So all original income is already taxed.  Every tax thereafter is adding insult to injury.  It is unfair and unjust except for unique situations like moda brought up.

I think what you're really looking to argue is not sources of income, but the distinction between "earned" and "unearned".  Many people get away with earning unearned income and not being taxed accordingly.  But unless segregation is made between job creators and the idle rich, the former will be penalized by higher capital gains taxes.  No one wants that.