The hypocritical cliff

[systemskeptic]

I think what you're really looking to argue is not sources of income, but the distrinction between "earned" and "unearned".

I don't think that is true, I think you are misunderstanding my words because you are adding your own interpretation to them as opposed to reading them for what they are.  IMHO it seems you are claiming that tax-free compounding is a single tax, and taxed-compounding is a double/triple/infinite tax -- are you not? 

E.G.

$1000 capital + $500 gains - 10% tax = $1400
$1400 capital + $500 gains - 10% tax = $1800

Via your logic, this is a "double tax" is it not?  I am saying this is not what double taxation means.

[Pointedstick]

systemskeptic, why is it so important that we define "double taxation" to mean "the same dollars are taxed multiple times?" I agree with MG that that is not common usage. The combination of income tax and capital gains tax is what most people would describe as "double taxation."

Let's use a contrived example. If I earn income (and pay income tax), put it in a taxable brokerage, earn a capital gain and sell (and pay capital gains tax), use that money to buy a yacht (and pay sales tax), then die and leave it to my heirs (and pay inheritance tax), how many times would you say that income has been taxed? Most people will say four. Are you saying that it's only one since each transaction involves a different sum of money or asset being subject to a different tax? If so, that seems like an awfully strange way of looking at things.

[Xan]

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 has been doing an admirable job of demonstrating that capital gains taxes are double taxation.  The hordes of us who agree with his logic haven't needed to comment.

[systemskeptic]

systemskeptic, why is it so important that we define "double taxation" to mean "the same dollars are taxed multiple times?" I agree with MG that that is not common usage. The combination of income tax and capital gains tax is what most people would describe as "double taxation."

Let's use a contrived example. If I earn income (and pay income tax), put it in a taxable brokerage, earn a capital gain and sell (and pay capital gains tax), use that money to buy a yacht (and pay sales tax), then die and leave it to my heirs (and pay inheritance tax), how many times would you say that income has been taxed? Most people will say four. Are you saying that it's only one since each transaction involves a different sum of money or asset being subject to a different tax? If so, that seems like an awfully strange way of looking at things.

Yes, and what Moda/D1984/Myself and perhaps MediumTex are trying to show you is that this commonly held belief is FALSE.

[systemskeptic]

Let's start from the beginning.  Everyone starts life with the same capital: their body and their mind.  From here you can make capital gains.  If you lend your Human Capital (Body + Mind) to a Job that pays you $1000 for a project, you have just used your initial capital to create a capital gain.

Is this true?  I say yes.

You still have your basis (Body + Mind) this is never taxed because the government does not tax the basis.  However you previously had $0 and now you have $1000.  This is a "capital gain" is it not?  The government calls this income and taxes it at the income tax rate.

Ok so you have been taxed some amount and now you have your original Human Capital (Body + Mind) + the new capital of say $900 (after income taxes).  This is your new basis is it not?

Okay now you decide to take a break with your body and invest your $900 capital in a businesses.  It goes well and your money grows to $2000.  This is a $1100 capital gain on top of a $900 basis is it not?  Currently the $1100 gain is taxed at a different rate (capital gains rate).  The $900 basis is never taxed again. 

Is this a double tax?  You are saying yes I am saying no.  Where is your logic to justify it?

[Pointedstick]

All right, let me use an example from my business. I received a business permit which allows me to avoid paying sales tax on goods I resell. If I did not have this privilege, I would be paying taxes on my business income, then using that taxed pot of money to buy goods and pay sales tax on them, and then selling the goods to customers who themselves also pay sales tax. A single good would have had two parties paying sales tax on it. Double taxation, or no?

[Pointedstick]

systemskeptic, your example implies that double taxation does not exist. Can you show me a current government policy that imposes double taxation, according to your definition?

[systemskeptic]

systemskeptic, your example implies that double taxation does not exist. Can you show me a current government policy that imposes double taxation, according to your definition?

I don't understand why you are asking that of me.  I was merely refuting an illogical statement with a counter-example.  Do you accept my counter-example?  If so we can get back to discussing why there are three different "capital gains" rates and why they are unfair.

capital gains on Human Capital (Body + Mind): 61.8%+
capital gains on Real Estate Capital: 0% up to $250,000
capital gains on Investment Capital: 15%

The poor by definition do not have access to Real Estate/Investment, yet they are subject to the highest tax rates.  Again, there is nothing wrong with inequality because we are all inherently unequal (different levels of Body+Mind).  However, why would you want to aggravate the inequality differences by taxing the rich at much lower rates?  To me that is illogical and unfair.

[Pointedstick]

I was asking that you show an instance of "double taxation" because your example implied that no such thing existed. If that's true, what good is the term? We should retire it and replace it with a more precise term.

You seem to want to define everything as a capital gain. Okay, sure, I guess. Again, you're redefining terms in common use according to your very narrow and technical definition. Whatever. I actually agree that it's not fair that what we call income is taxed at a higher rate than what we call capital gains, and the sale of a house is taxed at a still lower rate. I have an idea to make everything fair: eliminate all the taxes! If your only purpose here is to not aggravate the natural distribution of inequality, than in principle you should accept any level of taxation as long as it's consistent, no? I suggest we start with 0%.

[systemskeptic]

I have stated in other threads that my personal solution would be to have 0% tax on income (all sources) and a 5% property tax on net assets above a threshold (say $1M).  The reasoning is this:

1.  Lets the world economy grow at the greatest pace (everyone's standard of living improves)
2.  Attempts to address the ethical issues of usury / unproductive capital hoarding by individuals.  This also helps address the issue of inter-generational "blood money" which was sourced via slavery/wars.
3.  Re-iterates the notion that the earth is a shared resource and there is not a strong justification for one person to own a large portion of it.  If you can earn a > 5% rate on your excessive capital then you are probably contributing to the economy, if not then it may be better served in someone else's hands.

At the very least I think those three sources of capital gain (human, land, business) should be taxed at the same rates.

[Pointedstick]

I'd want the threshold to be fairly high and indexed to inflation, but I could get behind that. It's certainly a hell of a lot better than the nonsensical mess we have now.

[systemskeptic]

I'd want the threshold to be fairly high and indexed to inflation, but I could get behind that. It's certainly a hell of a lot better than the nonsensical mess we have now.

I would say one calculation could be the Nationwide Average Salary  * 25.  So if the average salary is $50,000 the threshold would be set at roughly $1.25M. 

[systemskeptic]

Here is a real world example which shows just how ridiculous capital gains tax laws are.  Using TurboTax's tax estimator here are two 2012 scenarios:

$50,000 in "Annual Income" results in:
$6099 Federal Tax Owed (12.1%)
$3400 Payroll Tax Owed (6.8%)

$50,000 in "Long Term Capital Gains" results in:
$735 Federal Tax Owed (1.2%)

That is almost a 2000% increase in taxes because of this classification!

[Xan]

That's because the basis was already taxed when it was earned.

[systemskeptic]

That's because the basis was already taxed when it was earned.

A basis is never taxed.  That is the definition of a "basis."  Only gains are taxed.  Did you not follow the previous comments?

[Xan]

A basis is never taxed.

Was the brokerage account funded by the money fairy?  Or was it by income which was earned, with a huge chunk taken out for taxes?  If (say) 35% of the money earned was taken out, then the investment income earned was 35% less than it should have been.  It has already all been taxed.

[Pointedstick]

Systemskeptic, your insistence on treating all income as a capital gain and needlessly nit-picking on definitions is detracting from our ability communicate here, not adding to it.

Xan understands that the basis is not taxed. He's saying that the basis is smaller than it would have been but for income taxes. And he's right. And we've already agreed that the income that forms the basis for capital gains should be totally untaxed in an ideal world.

[Benko]

Was the brokerage account funded by the money fairy?  Or was it by income which was earned, with a huge chunk taken out for taxes?  If (say) 35% of the money earned was taken out, then the investment income earned was 35% less than it should have been. It has already all been taxed.

This is the way most people feel.

[systemskeptic]

This idea of a double taxation creates a chicken and the egg problem.  In your viewpoint:

1. Should there be taxes on "Income"?

2. Should there be taxes on "Capital gains"?

How can you answer these two questions without knowing the answer to the other?  If that doesn't indicate to you that this is a logical fallacy, I'm not sure what else can...

[systemskeptic]

This is the way most people feel.

Unfortunately, most peoples "feelings" are wrong about 90% of the time. 

[systemskeptic]

Xan understands that the basis is not taxed. He's saying that the basis is smaller than it would have been but for income taxes. And he's right. And we've already agreed that the income that forms the basis for capital gains should be totally untaxed in an ideal world.

I've already addressed this above.  Imagine Capital Gains tax of 15% is the only tax in the world.  The statement  "the [future] basis is smaller than it would have been but for [capital gains] incometaxes" is talking only about tax compounding, not the concept of double-taxation. 

Do you believe tax-compounding is a double tax?  Because logically that is what your statements are asserting!

[Pointedstick]

systemskeptic, I don't know what you're trying to prove, but all you're really doing is annoying people with unnecessary pickiness about terms. I'm going to bow out now because we're not getting anywhere.

[systemskeptic]

systemskeptic, I don't know what you're trying to prove, but all you're really doing is annoying people with unnecessary pickiness about terms. I'm going to bow out now because we're not getting anywhere.

My initial thrust was that the new fiscal cliff deal misses the point by raising the marginal rates to 40% and capital gains rates to 20% because the root of the issue is the massive discrepancy across the tax rates on various income sources.    It sucks we got bogged down in these elementary discussions on what I thought were pretty self-evident truths...

[doodle]

I follow your logic, SS. This can be a great forum for discussions, but in my experience talking about certain ideas and expecting to make headway can at times be frustrated by the fact that some participants here are arguing from a set of fundamental and unshakeable beliefs that are beyond discussion. Certain ideas here will be met with the same reception as if one were to walk into a church gathering and start to dispute the idea that Christ is the son of God. You probably arent going to meet too many people in that gathering that are recptive to discussing that. I guess the fundamental take away point that I have learned when delving into what would be considered a challenge to the particular strain of libertarianism that exists here, is that ultimately there might be deeper fundamental philosophical divides underlying the issue being debated. These philosophical differences often mean that discussions here return to the basic roots of philosophy like metaphysics or even the denotational meaning of the words themselves. It can be a frustrating exercise for all parties involved to say the least 

[moda0306]

System's making good points...

What if you have an owner of a factory?  He works 60 hours per week and makes millions every year?  How do you separate his human capital from his investment capital?  Why should one be taxable and the other not?

Also, this idea that consumption should be a taxable event instead of income seems a bit arbitrary.  Capital, labor and Income is simply the other side of consumption.  No matter the basis of taxation, we're still faced with the dilemma of what counts as taxable income or what counts as a taxable sale. This isn't as easy as some would assume. For instance, when a rich dad pays his trust fund baby for not snorting coke, somehow that's not taxable income to the kid.  However, if that same kid works a 9-5 job that is taxable income.

Sorry in advance for my brashness about rich kids .