Thursday, October 1, 2015

What is the Best Capital Gains Rate?

To continue Sean and my discussion regarding capital gains rates.

"Is preventing "excessive" wealth inequality the goal? Or is it to encourage people to save and invest in America?" G2A
"Perhaps it might be possible to do both..." Sean
So what is the magic policy???  Thoughts?

Wiki Capital Gains History 
Tax Foundation Gains Rate History

46 comments:

Laurie said...

preventing wealth inequity? are you suggesting that one of the goals under consideration is that all citizens have equal levels of wealth? that doesn't sound very realistic to me.

John said...

Everything is relative, I think the level of wealth inequality today is fine. However many on the Left think it should be much much less. So I guess "eliminate" may be open for discussion.

Or I could reword it to say "eliminate excessive"... Of course then the Liberals here will need to decide what is a reasonable differential and what is excessive?

And how much American investment are you willing to sacrifice in the name of wealth equality?

John said...

Updated question per your feedback.

Anonymous said...

I think the purpose of tax policy is to raise money for government expenditures.

--Hiram

Anonymous said...

Here is a question: Why are capital gains taxed a lower rate than earned income?

--Hiram

John said...

Yahoo Why Lower
Reuters Why the Same

John said...

If it is just to fund government expenditures, this will be a short discussion...

And it is the Liberals who want the even more progressive tax rate so things are "fair".

Sean said...

You can only determine an appropriate capital gains rate when looking at it in context with the rest of the tax code. My point, philosophically, is that a dollar of income is a dollar of income and should -- with limited exceptions -- be treated the same way. I would prefer to see a tax code with far fewer deductions/credits/nonsense and lower rates that applied to more income across-the-board.

There's always going to be some "natural" income inequality in the system. Some folks want to be CEOs, some want to be teachers, some want to stay at home with their kids. I would argue that the tax code shouldn't punish or reward those choices by saying that someone who can afford to live off of investment income should pay a lower tax rate than someone who earns wages.

Anonymous said...

And it is the Liberals who want the even more progressive tax rate so things are "fair".

Rich people pay more in taxes, because they are the ones with the money. Fairness, or lack of fairness has little to do with it.

I have never understood about the way we talk about progressive taxation in the way we do. The first thing to understand is that what matters economically to an individual is how much that person pays in taxes. How the governments divide up that payment, whether it is taxed as income or from sales, whether it goes to the feds or the state, is economically irrelevant. A dollar in taxes, just like any other dollar, is fungible. It is generally accepted that rich people should pay more in taxes than poor people. Isn't that inherently a progressive form of taxation? Yet we seem to think that progressivity in taxation is dependent on progressivity of rates. But tax rates on income have little relationship to the rate people are actually taxed. And it's the taxes people pay that matter, not the various theoretical rates that come into play at various stated in the computation of taxes.

--Hiram

Anonymous said...

The other thing I have never understood and which has come in for some comment recently, is the notion that we can simplify the tax code by reducing the number of brackets. It's hard to imagine that this makes any sense at all to anyone who does anything approaching his own taxes. You don't have to know what bracket you are in to compute your taxes, you simply consult that table in the instructions. In terms of simplification, nothing could be simpler which, by the way, is why it's so easy to propose. And the fact is, the multiplicity of tax brackets has a lot more to do with politics than economics or sound tax policy. Politicians find it easy to fool around with tax brackets because they know it doesn't matter much.

Here is the deal. Taxes have a tendency to become more complicated, because complications are almost always tax breaks. Given a choice between simple and high taxes vs. complex and low taxes, individuals will always choose the latter. That's why tax simplification campaigns always fail.

--Hiram

John said...

I guess my point is that the current policy encourages to buy and hold assets for at least one year, and it still taxes the income at a rate higher than most Americans pay on their work income.

Sean said...

You're only talking about income taxes, though. When you add in payroll tax on wage income, it's not so clear-cut.

That's why you can't just focus on income taxes, you have to look at all federal taxes together.

John said...

I am not sure why folks continually want to complicate things by considering Payroll Tax a tax when everyone insists that they deserve those benefits due to their having paid into it for their whole working life.

I know what SCOTUS ruled, however are we willing to say that everyone who receives benefits from SS, SS Disability and/or Medicare are on a program like Welfare?

Or do people want to feel they deserve those benefits because they paid in to the mandatory retirement savings and insurance programs?

Below, I am going to copy a few related comments from MP.

John said...

"2 more thoughts. Maybe we could fund SS and Medicare off some other tax, but profits and payroll is how it was set up. My wife is self employed and therefore pays the full 15.5% herself. Also, since one's benefits are tied to one's contribution it seems fair the way it is. These were supposed to be pay in and receive back programs, not welfare / wealth transfer programs.

Often folks complain that long term capital gains and dividends are not taxed at a high enough rate. Yet as noted in the link the wealthy are paying ~23% which is much higher than most working people pay for an effective income tax rate." G2A

"You are incorrect. SS and Medicare were not intended to be savings accounts, but safety nets. They were initially intended to reduce poverty of the aged as a result of savings being destroyed by the Great Depression. However, by the time they were implemented, they were warped into very racially and sexually discriminatory institutions. That's somewhat changed, but one can argue that what SS and Medicare were intended to be and what they were originally enacted as are very different. I don't think we should hang our hats on what we believe the original intent was. It's more important that they provide social security. If they don't, then they don't work. And, if we keep assuming that they should be savings accounts, they won't work. We live in a society, and we all rely on its stability, so we should all contribute to its stability. Whether or not we directly benefit from our contributions is irrelevant because we all directly benefit from a stable society.

Also, 23% isn't terribly high. I presume you're talking about the effective tax rate on the top 1% of earners. Keep in mind that 23% is what they paid on taxable income, and does not consider tax-exempt income, like municipal bonds. You know, the things that poor people don't have the spare cash to protect from taxes." Rachel

John said...

"If they are not supposed to be government forced savings / insurance programs, then I recommend we get rid of social security and medicare. Then we will not have to hear about how payroll taxes are too high for the low income folks, and the old / poor can use welfare / medicaid.

23% is pretty high given that many citizens pay 0 income taxes, or get more back in credits / medicaid / welfare / food stamps / etc than they pay in income taxes. PEW Link" G2A

"I didn't find that link all that interesting. I was well aware of the general numbers. But I can't agree that 23% is a lot (I am at the lower end of those paying at that rate--I'm doing just fine, thanks). Nor can I agree that we should get rid of SS and Medicare. They have completely different purposes than welfare and medicaid, and just how would we fund the extra burden on welfare and medicaid if we got rid of SS and Medicare???? Oh, wait...is this how we get the death panels that the GOP actually wanted instead of the ones that never materialized out of Obamacare? Or are you claiming that magic will happen if we defund SS and Medicare? The magical thinking bit is the curtain behind which the real death panels exist." Rachel

John said...

""They were initially intended to reduce poverty of the aged as a result of savings being destroyed by the Great Depression." Isn't that in essence the definition of welfare and medicaid? To help those who are experiencing poverty.

If you don't like 23%, what do you think is a good number that encourages people to invest their money in America while adequately charging them a surcharge for having been financially successful?

As for how to fund the program without payroll taxes... Just like many liberals would like to do now, just make the wealthier pay more. (ie remove cap...)" G2A

Anonymous said...

Why not tax capital gains at the rate of income? Why should capaital gains be favored over income generated by working for a living? Isn't the latter what's to be encouraged and rewarded?

--Hiram

John said...

Per the Yahoo link.

"McBride says it is unfair to tax income more than once, and capital gains are taxed multiple times. If you got the original investment from wages, that money was taxed. If the stock you own gains value because the company you invested in makes a profit, those profits are taxed through the corporate tax. And if that company issues dividends, those are taxed as well."

"Congress started taxing capital gains at a lower rate than wages following World War I. The concern then was that high taxes on capital gains actually reduced revenue because people would simply hold onto their investments and restrict the flow of capital, according to the Encyclopedia of Taxation and Tax Policy.

At the time, however, the top tax rate on wages was a whopping 73 percent. In 1922, Congress lowered the top capital gains rate to 12.5 percent, a rate that lasted until 1934.

For much of the next 70 years, the top tax rate on long-term capital gains hovered between 20 percent and 30 percent, going as high as 39.9 percent in the 1970s but never falling below 20 percent until 2003, when Congress passed a gradual reduction to the current rate."

John said...

My simple argument is: Capital can flow across borders much easier than labor.

If folks want the money invested in the USA, the taxes need to be globally competitive or the funds will move elsewhere.

Anonymous said...

My simple argument is: Capital can flow across borders much easier than labor.

I don't know about that. Many more migrants seem to be flowing into Germany than car plants.

==Hiram

Laurie said...

I believe the goal is slightly decreasing wealth inequality by increasing wealth at the bottom. It seems to have an intelligent discussion about this topic one should know how great the wealth inequality is and how it has changed in the last 20, 50, or 100 years.

Wealth inequality in America: It's worse than you think

Anonymous said...

Conservatives are not totally wrong when they say we should resist picking winners and losers. I think this applies to taxing and investment decisions. I am hesitant to tell people as a matter of policy that they should hold on or not to hold on to stocks, to prefer bonds over stocks or stocks over bonds. As a practical matter there isn't any right choice in these along with a myriad of other choices, and as a result it's difficult to know which choice it makes sense to favor with incentives.

--Hiram

John said...

Laurie,

Good link. I like this part.

"They argue that the drastic rise in wealth inequality has occurred for the same reasons as income inequality; namely, the trend of making taxes less progressive since the 1970s, and a changing job market that has forced many blue collar workers to compete with cheaper labor abroad. But wealth inequality specifically is affected by a lack of saving by the middle class. Stagnant wage growth makes it difficult for middle and lower class workers to set aside money, but Saez and Zucman argue that the trend could also be a product of the ease at which people are able to get into debt,"

Of course you like to focus on the "make taxes more progressive" part. And I want to focus on the "Buy American", live cheaper, save/invest more solution.

Laurie said...

actually in addition to makes taxes more progressive I would expand the earned income tax credit. many people need greater income to be able to save any of it.

If we are considering wealth redistribution to lesson wealth inequality I did a quick math calcualtion based on facts from forbes:

Everything To Know About The Forbes 400 In 14 Tweets

if 50% of the wealth of the top 400 richest people was distributed to the rest of us we could all increase our wealth by $3,900 ($1.17 trillion / 300,000,000) While we are at it it would only be fair to go deeper into the richest people list and take a smaller percentage of their wealth. I wonder what percent of wealth actually goes to the govt through the estate tax when a rich person dies. I think the official rate is 40%. I did some quick research and found this:

"Among the few estates nationwide that owed any estate tax in 2013, the effective tax rate — that is, the share of the estate’s value paid in taxes — was 16.6 percent, on average, according to the Urban-Brookings Tax Policy Center (TPC).[5] That is far below the top statutory rate of 40 percent. (See Figure 2.) Claims by repeal proponents that the estate tax consumes nearly half of an estate’s value are therefore false."

John said...

It is fascinating how your mind thinks, or does not think in this case.

Where do you think these people keep this money?
What would need to happen to turn these assets into cash that can be distributed?
How do you think that would impact all of our retirement accounts?
What do you think the recipients would do with $3,900?

My answers are:
- they are in stocks, bonds, real estate, precious metals, etc
- they would need to be sold
- thus the price of these typical investment tools would fall
- they would spend it... much of it to the benefit of people overseas.

John said...

Now back to the primary question. By what moral or value do you and whoever else would receive this "wealth redistribution windfall" claim that it is fair to take money from another person's wallet and move it to yours?

If you saw that Bill Gates had dropped his wallet with $10,000 in it. Would you pick it up and keep it? Somehow rationalizing that he had too much and you had too little. So it was not really stealing.

If a modern day Robinhood setup shop and started robbing the rich and giving to the not rich, would you cheer them on? Or would you acknowledge them as a criminal?

John said...

On the other hand, at least you acknowledge a tendency to be Democratic Socialist in nature.
And remember what they believe... "Wealth is a social creation and should be controlled by society as a whole." DSA

Of course I believe differently... Though it is necessary to have Law, Order, Stability and a Modern Infrastructure, most wealth is created and should be controlled by those who are smart, responsible, disciplined, take some risk, work hard, continually improve, save and invest. And the folks who do not do the above have no right to the Private Wealth of those who have it.

Laurie said...

I didn't actually propose taking the wealth of the 400 richest people and sharing it with everyone, I was just playing with the numbers as billions and trillions of dollars are hard to fathom. Actually, if I was in charge of everything I would have a high estate tax and use the money to shore up social security, so there would be no benefit cuts for anyone down the road. Even if half their assets were taken in estate taxes, on average they would still have 5 billion dollars to pass on to their heirs. That sounds like plenty of money to me. Do heirs really deserve tens of billions of dollars? Bill Gates doesn't think that his kids do.

John said...

"Do heirs really deserve tens of billions of dollars?"

I think that is up to the Parents. It is their money and their children.

As for Buffet and Gates, please remember that 2 of the smartest people in the world are not writing extra checks to the government to dump their excess billions. They understand perfectly well how wasteful that would be.

So let's change your question: Do people who failed in school, did not make good work decisions, did not make good spending / saving / investing choices, likely propagated these life choices/beliefs to their kids, etc deserve tens of billions of dollars that is forcefully taken from private citizens and their families.

Back to my question what moral / value justifies taking from one citizen to give to another in the name of equalizing wealth to an "acceptable level".

Laurie said...

I don't think shoring up social security to keep senior citizens out of poverty is wasteful.

What moral / value justifies one person acquiring 1,000,000 times more annual income than another person earns?

Also, I didn't propose equalizing wealth. Under my suggestion senior citizens might continue to afford both food and medication in the future.

John said...

Then let's change eliminate social security and medicare, and revise welfare and medicaid to take care of old poor people.

The story is that social security and medicare are self funding programs. And the benefits are well deserved rewards for having worked and paid into the system during one's life. And this is pretty accurate.

Yet Liberals want to turn them into welfare and medicaid without actually acknowledging that they are doing it. I mean they already reduce and tax the benefits of those who paid the the most into the program (ie paid the max for part of their career) and are wealthy. And now you would like to take even more money from those same folks to make up for everyone having paid too low of a payroll tax rate for the benefit they want out of the program.

I have no problem taking some more money from the wealthy to ensure the elderly have a small safe apartment, food, medical care, etc... But then let's call it what it is... Welfare and Medicaid. Don't corrupt the good intent of social security and medicare by misusing it as a wealth transfer tool.

John said...

"1,000,000 times more annual income than another person earns"

What do you think a young adult who squandered their K-12 education, makes a baby they can not afford, is unreliable in their job, likes pot a little too much, etc is worth income wise?

What do you think a young adult who worked /excelled in K-12, did well in college, got married, is reliable at work, etc is worth income wise?

What do you think Bill Gates is worth after changing the world with the technology I am typing on?

My point is that this is why we have an open market that rewards good choices and punishes bad choices. What you support is taxing people who make good choices even more so people who make bad choices can live happier lives. It just seems punishing desirable behavior and rewarding undesirable behavior.

John said...

My wife and I are good examples, we both come from small rural towns. We did good in K-12, went on to college, found jobs, lived well below our means, saved, invested, said no to big houses, said no to changing cars often, were do it your selfers, etc and now we are worth some significant money.

And your solution is that now that we are earning more and have more, it is right and fair that we should be taxed at higher rates so that people who made other choices can receive freebies and pay no income tax.

Now I know you are thinking about that top 400 list, not relatively low net worth fruit like me. Yet the concept is the same.

Anonymous said...

"And your solution is that now that we are earning more and have more, it is right and fair that we should be taxed at higher rates so that people who made other choices can receive freebies and pay no income tax."

More precisely, or at least the question I have is, should you be taxed more than people who earn less than you do?

--Hiram

John said...

That does come back to the definition of "FAIR" that we discuss often. We all live in the same communities, are protected by the same laws, protected by the same military, etc.

Yet some folks demand that some healthy people be net recipients of the system while others pay millions of dollars per year into the system to make this possible. And then they have the nerve to say that those who are paying are selfish and not paying enough.

I am fine with roughly a flat tax like we have in this country, it is this desire for an aggressive progressive tax that frustrates me.

Laurie said...

Do you understand the difference between million and billion? I made an analogy for you. Let say a relatively poor person has a net worth of $10,000 and represent this amount by one square centimeter. A fairly well off person's wealth could be represented by a paper a little bigger than a post it note (half million to million d0llars wealth.) The billionaire's graph paper would cover the whole floor of a room, what size room would depend on how many billions of course (by my calculation the Gates room would be 27x27 meters) Feel free to check my math I did not double check it.

Then there is this to think about:

The 1 Easy Way Donald Trump Could Have Been Even Richer: Doing Nothing

My son and I had a disagreement on how much tax Trump should pay on money he (could have) acquired by doing nothing. My son was a strong proponent of don't raise the capital gains tax and was even going to search for a paper he wrote on this topic for college. I argued that Trump shold pay a higher tax rate on than I do on my salary.

As for Gates, he relied on the work of others to invent the computer and had he not written the software someone else would have ( I believe there were competitors in getting similar software to market.) As for most of his billions that comes from smart investing, again relying on the advice of others) though, like Trump, he would have done very well even with average returns on his money.

John said...

It looks like your areas are about correct.

1 Billion is 100,000 times 10,000. Now what is your point?

Something like... Those 500 families have so much wealth that we should rob them and distribute it to the poor?

Do you live in the same country as them?
Do you have police, fire, etc protection like them?
Are you safe from foreign terrorists, etc like them?
Do you have clean water, clean air, good roads, etc like them?
Are your bank accounts secure like theirs?

Then why should they pay a higher rate than you?

I mean they are already paying a huge amount more in dollars. Which may make sense since they have more assets being protected and served? Though those buildings and companies pay their own property and profit taxes.

Laurie said...

my point is no one deserves to acquire that much money. Capitalism is a deeply flawed, immoral system.

John said...

I know...

"Wealth is a social creation and should be controlled by society as a whole."

And in your frame of morality, society would reward and enable...

"a young adult who squandered their free K-12 education, makes a baby(or babies) they can not afford, is unreliable in their job, likes pot a little too much, etc"

By giving them free housing, food, healthcare, etc.

And this would be paid for from the "excessive wealth" that the successful people have currently invested all across our society.

In your mind, how does your model that rewards sloth and irresponsibility end well for our society? When much of the rest of the world is more capitalistic and competitive than ourselves? They really really want what we have and are willing to work for it. Many would love to be a "poor American" with the social programs and opportunities our country offers.

Laurie said...

Rather than reward sloth and irresponsibility, I believe our variation of capitalism mostly rewards people for being rich by allowing them to grow much, much richer by doing very little. Maybe you should find some homeless people to talk with about how easy their lives are.

Also, which countries are you referring to that are more capitalistic and competitive than ourselves. I think our level of inequality is about the highest in the developed world. Doesn't that imply that other countries are more socialistic than us?

I read an article a day or two ago that hinted at the fundamental difference between our viewpoints. As I middle class person I identify much more with the poor than the rich and hate the rich (so to speak.) While you identify much more with the rich and hate the poor (so to speak.) I think it even slightly explains the differences between liberals and conservatives in general.

My earlier representation of wealth with an area model was meant to show how small your post it level wealth is compared to the the large room size wealth of the mega rich.

John said...

Who I mostly have in mind is China, they may have a Communist government but their economy and social structure are incredibly capitalistic. Then of course there is India, however they have some significant problems of their own.

As for how I feel about the poor, I have no dislike for them or anger at them at all. Mostly I feel empathy for them and hope they will learn the value of continual education, hard work, a positive attitude, saving, investing, etc.

You seem to believe that somehow they will turn their lives and those of their children around if we just give them more money, food, housing, etc. Unfortunately the war on poverty proved that this method does not work. In fact it seems to have contributed to a total breakdown of the two parent family system within certain population groups.

John said...

As for "my area" vs "Bill Gate's", I am 100% indifferent that Bill Gates has ~64,000 times the wealth that I do. (he deserves it) It would be nice to have his freedom to work on anything he wants and to be able to help anyone he wants to, but otherwise I am good with my family, home, toys, job, etc.

If I had been money hungry I would have been more willing to change jobs and relocate often. Instead I chose being close to family and stability for my kids. I have no regrets.

I have to wonder, is your anger towards rich people based on jealousy or something else?

Laurie said...

I am about the least angry person that can be found anywhere. I just think no one deserves billions of dollars and my solution is high taxes. I wouldn't describe myself as jealous, either, as I have zero desire to be rich. If I could double my small salary I would be able to afford everything I want and save a little $.

With higher taxes schools could be funded at a higher level and I could be paid more, as I deserve about a 50% raise. My school currently has 4 teaching positions open, for which no one has even applied. Also, there is no shortage of other worthwhile ways in which to spend additional tax revenue.

As for your attitude towards the poor, contempt is probably a better description than hatred.

As for China, I am a little confused as communism seems to me to be sort of the opposite of capitalism (doesn't that mean something like state ownership of the means of production.)

John said...

Then why did you write this? "I identify much more with the poor than the rich and hate the rich (so to speak.)"

Contempt: "the feeling that a person or a thing is beneath consideration, worthless, or deserving scorn."

Nope, that's not it either. Otherwise I would not give as much as I do to charities that try to help those who are really trying to improve their situation. Maybe one or more of these words

I think your solution to just give away other people's money to poor folks while expecting nothing from them is one of those good intentions paved paths that lead to hell. (at least for those poor folks who become dependent)

John said...

The most frustrating thing about having low income friends is that sometimes it looks like they have changed their attitudes, beliefs, habits, behaviors, etc and that they are going to start getting ahead. So you get your hopes up and are happy for them.

Then they piss off their boss and get fired, start spending more than they can afford, get divorced, take up smoking again, etc, etc, etc. And any extra freedom / reduced debt / extra cash they had started to build up goes down the toilet again. So contempt is the incorrect word, I care deeply for these people and want them to succeed.

Sometimes I have even given money to them to help them out. Needless to say most of the time that money never comes back home. Well I will keep praying for them in hopes that some day they sanction the greatest lessons and start living by them.

R-Five said...

If maximum economic growth was the sole criterion, then yes, zero is the ideal Capital Gains tax rate. In fact, zero is the ideal corporate tax other than property taxes directly related such as police, pavement, plowing, and plumbing. (And not welfare or education.) But for individual returns, all income should be taxed equally. Which should mean no exclusions for mortgage interest, employee benefits, pensions/IRAs, tuition, charity, or taxes paid to other authorities. And no more death taxes, which is bare naked double taxation.

What is unique about Capital Gains is the time factor, that the basis (price paid) should be indexed to inflation or say 5% a year (thinking like a liberal!) to reflect the true value of the gain.