
Capital vs. labor: who risks more? - luu
http://yosefk.com/blog/capital-vs-labor-who-risks-more.html
======
dreamdu5t
"One justification for this is that investors risk losing much or all of their
capital."

Huh? Whose justification?

It is naive to think that our tax code is based on how much people risk
(ignoring how ridiculous quantifying that is). Is this what schools teach or
something? Where does the author even get such a notion?

------
FLUX-YOU
Practical side point:

If I have a lot of capital, I may be able to convert to cash and just go
retire to a beach somewhere. If I lose everything and can't convert (even to
scrap metal), then I'm about as well off as low skill labor when low skill
labor loses work / can't find more (surely I've made a wealthy friend or two
while having lots of capital that can help out though).

High skill labor might have some savings and capital if they lose work / can't
find more, and the benefits might include severance. That can buy you time to
pivot and then replenish your savings.

Low skill labor just has very few options if they lose work / can't find more.

So IMO, capital has the best options depending how nicely you can exit the
market.

~~~
aragot
I always wonder why we tax things that we otherwise want to encourage. It's a
human bias, we tax what everyone does because we think it's "fair", in the
sense that everyone supports it. If you've studied micro-economy, you know
that a tax discourages demand and diminishes the offer.

What if we taxed what we wanted to discourage? We already have high taxes on
alcohol, which is good because there are many side-effects that society has to
support: Car accidents, busy hospitals on Saturday evening, violence at home,
and just the loss of people who would be valuable to society. In that sense,
high taxes on alcohol are a mere compensation for the cost of alcohol to
society.

Let's have no tax on labour and high tax on pollution. You may say it would be
unfair because the poor would pay higher total taxes. I don't think that's
proven. If you could however demonstrate that poor people pollute more (eg.
"Poor people commute a lot, using cheap cars, therefore consume more petrol"),
we should re-adjust our minimum wage, our whole society, maybe our whole real
estate assignment, because we'd be doing it real wrong.

Actually, that's the point: With tax on labour, we create a lot of incentives
that are contrary to organizing a world which pollute less.

So the whole debate about "which one of tax on capital gains or tax on labour
should be higher" is flawed. None of those should be high. Tax on pollution
(and more generally things which create a cost for society) should be higher.

It's called "externalities".

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dkfmn
This isn't really an ideal article to kick off a series of debates that could
be very interesting. It's trying to relate too many concepts from taxation
theory to economic stimulation to labor management, etc, etc.

If the main point is to ask if capital or labor risks more the answer is
trivial: capital. There is a -100% downside for investment and minimum
positive earnings for labor. On the other hand capital has an unlimited
upside, while labor does not.

A more interesting question would be how to you optimize the opportunity
between capital and labor?

~~~
guelo
You ignore the article's point about the risk of choosing a proffession. For
example, what's the return on investment for the worker that trained to be a
professional car welder in Detroit? I don't know if "-100%" captures the loss.

~~~
dkfmn
This is an apples to oranges comparison. You're bringing up losing a job and
comparing it to losing an investment. In this case the investment is gone, and
the FUTURE earnings of the worker from that specific job are gone. The worker
already received compensation for past work.

However, there is a point to be made about how the loss of livelihood, or a
reduced standard of living can be devastating. It's just not the same
economically.

~~~
guelo
You're discounting the time it takes to learn the skill. That training is
worthless to the worker now. It's an investment that is gone.

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Htsthbjig
What I see is that in taxes there is never enough. The always want to raise it
higher and higher, until politicians confiscate all the wealth for their
selves.

In Spain we have 21% VAT taxes,and progressive over 53% maximum income taxes.
If you have a house they add property taxes, and this year capital gains have
been considered as income taxes.

It is not enough, politicians want at least 23% VAT, and the left party wants
to raise the income taxes as it is "fair". They want to remove inflation
coefficients so they could confiscate 50% of the value of everything you have
when you sell it.

In the new year, people that sell old houses will have to pay more than 30% in
taxes(30% of the principal, not the benefit).

Meanwhile we discover that they took the public money of the public
banks(cajas) to basically pay themselves luxury life, each one expending half
a million dollars in credit card expenses OVER their multimillionaire
salaries.

Parties like the socialist party(PSOE),PSOE accepted checks of 50 million
euros dollars from the cajas that never paid back.

They took loans from the European Union to help nonworking population, over
1000 million euros and gave it to their friends and family.

They destroyed all the wealth they could touch and you tell me that higher
taxes are necessary?

~~~
badsock
You seem to be unnecessarily conflating taxation with corruption. There are
plenty of places that collect high taxes that don't have that sort of routine
unethical behaviour.

~~~
adventured
Which countries collect high taxes that don't have economic stagnation as a
result of it?

I can think of only a few out of ~195 countries in the last decade that have
seen good economic growth with high taxation. Most of which have some other
prop, such as oil in Norway.

~~~
badsock
I was talking about corruption, not economic growth. I'll bite, though.

The corrolation between high tax rates and economic growth is an incredibly
partisan issue. There are lots of people saying that they are connected, but
there are just as many saying that stagnation is much better corrolated to
inequality (e.g.):

[http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf](http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf)

I will say that if you look at the "quality of life for the average person"
indicators (health and longevity, infant mortality, leisure time), the high-
tax countries smoke the rest. So my argument is: even if your country's GDP is
growing a little faster, why would you care if it doesn't make your life any
better?

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pastProlog
_investors risk losing much or all of their capital_

This of course implicitly assumes that the economy is an unplanned one. Yet
the investor class is who fights tooth and nail with political donations and
so forth to keep the economy unplanned. They fight tooth and nail to keep an
unplanned economy, and then say they are deserving because they have to suffer
the vicissitudes of an unplanned economy.

~~~
vdaniuk
There is no such thing as "investor class". Also there is no collective "they"
who comment on the economy, planned or not. It is not possible to generalize
all or majority of investors into one box.

~~~
pastProlog
_It is not possible to generalize all or majority of investors into one box_

This entire discussion is about that class of people that fill out their tax
form in the income tax box, not the capital gains one. You seem oblivious to
that particular discrete distinction which is the whole point of this article.

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rdlecler1
Who risks more: capital or entrepreneurs? Entrepreneurs may not contribute
upfront capital but they are contributing market value of their labor to the
enterprise which may be substantial over the first 6-24 months as a venture
tries to get off the ground. Entrepreneurs are also expected to go down with
the ship. They can't easily pick up and leave if they're burned out or if an
attractive opportunity arises. Furthermore, the odds of a return are low
without an opportunity for diversification. Capital can make a bet and if the
deal is structured right they can dollar cost average into their position to
avoid dilution, whereas the entrepreneur will typically face significant
dilution. For some unicorns like Facebook or Google there was very little
downside risk after the first 6-12 months and they clearly made out better
than their investors.

------
robomartin
Hmmm. I have over half a million dollars in electronic components and custom
assemblies sitting in storage pretty much rotting away. A market shift made
the project and the product almost impossible to sell.

All employees were paid on exit, including generous severance pay, etc. All of
them found employment relatively quickly. A number of them were able to parlay
the experience gained during the couple of years they worked for me to gain
higher level jobs. One particular individual came in with very little
experience in the field. I spent over a year tutoring him. He was able to get
a VP position at a competing company within a week after we closed the shop.

My? I nearly lost everything. Probably took a million dollar hit (don't know
exactly how much yet) and have components and supplies in storage that I paid
half a million dollars for that you might be able to sell for less than five
cents on the dollar.

Be careful making assumptions about who risks more based on silly examples
like some guy flipping burgers at a fast food joint. Things often aren't that
simple. I know one entrepreneur who died due to the stress of his business
tanking during the economic collapse of 2008. His employees moved on just
fine.

Yes, these are extremes. And, yes, these cases might not compare well when we
are talking about billionaires. Don't know. From my perspective few people are
willing to do the kinds of things I do: Put it all on the line. All. Take a
huge risk. And if it pays off you reap the rewards and live to have someone
call you a greedy bastard. If you fail miserably nobody gives a crap. They
might even call you an idiot and malign you for firing a bunch of people
without much notice.

Walk in someone else's shoes before being opinionated. Reading about something
on the net is very different from living it. Don't think so? Go SCUBA diving
with sharks. I've done it. Pissed myself. Multiple times. Easy to read and
sound really smart about on the 'net. Not so when you are 100 feet under water
with five of them surrounding you.

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briantakita
Capital Gains simply affects the monetary value of a the capital. It has no
real value increase. No physical good or novelty is created from capital
gains. Thus, it's rent.

Labor & Capital tends to create physical goods and/or novelty. Thus labor,
when applied toward sustainable pursuits, makes our lives, as a civilization,
better.

Capital gains, providing "incentive" to invest, may or may not improve
sustainability & global health. Global warming, resource depletion, poverty,
hunger despite enough food being produced, & innefficient allocation of
resources due to profit motive, corruption, rampant war, etc. indicate that
the "incentive" is detrimental to sustainability & global health.

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polynomial
Why is it "vs."?

Is it necessary for Capital and Labor to be so opposed? It doesn't seem like
the optimal arrangement. Wouldn't increased cooperation between these 2 sides
reduce risk for both?

~~~
pastProlog
Where does the wealth in those dividend checks sent off quarterly to the type
of idle class heirs you can watch in documentaries like "Born Rich" come from?
It comes from the wealth created by Labor. Workers work and create wealth, and
get to keep the first few hours worth of wealth they create. The last few
hours of the day, they are made to work for free, with the dividend checks and
profits sent off to these heirs and such.

Why should labor cooperate with these parasite heirs who suck off of their
wealth-creating ability? Labor hasn't historically, and doubtless will in the
future. Capitalism is the fourth major economic system the world has seen, and
a rather unstable one. Marx said crises like 2008's $700 billion TARP bailout
were harbingers of an eventual total economic collapse, and I for one believe
that - one day the economy will go into the ditch and no bailout, New Deal or
libertarian type solution will get it going again.

~~~
adventured
No they're not made to work for free. That dividend check does not belong to
them. They take a job, with a paycheck, and that's all there is to the
arrangement, and they know that going into it. Those are the terms.

Labor should not get compensated for that which they are not owed and did not
agree to.

It's that simple.

If they don't like the terms, they can go create their own wealth elsewhere,
like so many millions of people before them have had to.

Your theory is that labor deserves to be paid something they didn't bargain
for, and that does not in fact belong to them. You're arguing in favor of
violent theft, because that's the only way such a system can ever be
implemented, through extreme violence; there is no other way to give labor
money that isn't owed to them, and does not belong to them, you have to steal
it with guns.

Here's your scenario: so I have $1,000 to my name. You have $50,000. I don't
like that you have what I consider to be capital, and I don't think you
deserve it. I think that capital should be taken from you, because you're a
rich person compared to me. I think you should have to give me most of your
money.

It's a spiral to oblivion, because there's always someone richer and better
off, and someone claiming that someone else doesn't deserve what they have.
It's a system of envy and violence.

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lindig
The article uses the argument that an investor risks losing the investment and
still the investment is taxed. Maybe there are national differences but where
I live only gains from capital that are realised (dividends paid or when an
asset is sold) are taxed, not the investment itself.

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yummyfajitas
This article is quite odd:

 _income appears to be taxed "more progressively"...One justification for this
is that investors risk losing much or all of their capital. Workers, on the
other hand, are guaranteed their wages_

This is not the primary justification at all, and I'd be rather surprised to
see many economists arguing it.

The actual reason capital should be taxed less than income (specifically, at
0%) is because there is no reason to tax savings. If you tax income only, you
tax a person who earns $100 and spends it today the same as you tax a person
who earns $100, saves it and spends it tomorrow. When you tax capital, you
charge the second person a higher tax rate.

This is doubly true in the presence of inflation - if a person earns a 1%
nominal return in a 1% inflationary economy, then they break even. If you
impose a capital gains tax, suddenly their rate of return needs to exceed
(inflation + cap gains) just to break even.

~~~
unchocked
Your argument is circular. Essentially, you say that capital should be untaxed
because it was already taxed as income. But that's a value judgement that
assumes your conclusion.

There is a good case for taxing capital (savings). See Picketty.

~~~
yummyfajitas
The actual detailed argument is that only two things can be taxed -
consumption and investment. Consumption is the right thing to tax, since it
measures the benefits a person receives from society. My argument isn't
circular, however - it merely shows that once you have an income tax you don't
need a savings tax.

Piketty's argument, near as I can tell, is merely that we might live in a
world where the best way to create wealth is to allow super smart uber rich
people to direct nearly all investment [1]. Further, if we allow wealthy
people to do this, they won't actually consume the fruits of their labor -
they'll allow the rest of us to. Why that's an argument for taxing capital I
have no idea.

[1] His book doesn't justify this at all, it merely assumes it.
[http://www.chrisstucchio.com/blog/2014/piketty_and_inequalit...](http://www.chrisstucchio.com/blog/2014/piketty_and_inequality.html)
But he has a couple of academic papers with models that I haven't fully read
yet.

~~~
gamblor956
No, the correct argument is that many things can be taxed: creation, value
enhancement, consumption, disposition, investment, wealth, transfers,
transfers across borders, etc. (You're also still confusing savings taxes with
investment taxes, which are not even remotely the same thing.)Which of these
is taxed is a function of political ideology.

If you tax consumption, you might also tax wealth, if a large portion of the
income of the economy is concentrated in the hands of those who consume very
little. Indeed, that is the _entire point_ of having a wealth tax--to force
consumption which can then be taxed.

You have misstated Piketty's argument, as has Chris Stucchio. Piketty's
argument is that allowing wealth to concentrate in the hands of a few is the
biggest threat to the stability of modern economic systems because it
ultimately means that less money is available to everyone else, which
restricts growth. He is very much _in favor_ of wealth taxes to force the
distribution of this wealth to a wider range of the economy precisely to keep
the cash flowing. He's not arguing for capital gains taxes--indeed, he opposes
them, and has argued that capital gains should be taxed no differently from
ordinary income.

~~~
ScottBurson
> He's not arguing for capital gains taxes--indeed, he opposes them, and has
> argued that capital gains should be taxed no differently from ordinary
> income.

Please clarify. Up to the comma I thought you were saying that he thinks the
capital gains tax rate should be zero, but the rest of the sentence says
something quite different.

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z3t4
One side of taxing work is that it creates an incentive for automation.

~~~
spinchange
In time, this is going to become an increasingly important political
consideration for those who are interested in low unemployment. To my mind,
the business incentives for automation are inherent to the degree such that
automation is basically inevitable. The same can't be said for human labor in
a multitude of vocations.

I fully expect someone to come along and tell me government shouldn't give tax
preference to obsolete jobs, but if you don't like that, you probably like the
idea of paying displaced workers basic income assistance for no labor output
even less.

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autokad
first and most importantly, taxes has little to do with risk unless for some
reason the government wants to encourage or discourage risk.

i wont go into capital gains being double taxed, thats covered bellow. what i
will go into is how completely wrong the writer is on risk of labor vs
capital.

its VERY easy to loose money in the market. unless you want to pay the same
taxes on capital gains as your tax bracket (labor presumably), you have to
dump money into a company and hope a year from then that after fees, taxes,
and inflation that you broke even. even at the worst of our resession, the
unemployment rate was around 8.1%, lets call it 10%. that means 90% of people
were still working - in pretty much the 2nd worst time in US history for them.
meanwhile investors lost about 50% of their capital.

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merrillii
One thing to keep in mind is that capital has already been taxed once when it
was first generated. Sure, you can bring up tax loopholes and inequality but
generally it's true that the remaining capital is after taxes. So an investor
risks losing 100% of their after-tax money. Labor risks their pre-tax money
only and it is very likely they ca "re-invest" by moving to another job. Once
capital is gone it is gone forever.

~~~
jjoonathan
Oh really? My understanding was that due to loopholes corporate taxes are
practically nothing compared to the numbers that people keep plugging into
their "look, capital actually has a higher tax rate than labor!" calculations.

~~~
merrillii
They are not practically nothing. After loopholes the average corporate tax
rate is something like 17% [1]. This is far lower than the often stated 35%
but it is not nothing.

This whole blog post seems to neglect the point that Labor generates Capital.
Whether that money is invested or spent it has already been taxed once. Now if
the capital generates more money as an investment it will get taxed again on
the profits. Likewise if Labor continues to work the income will get taxed as
well. The Capital investment has the risk of going to absolute zero. The
potential Labor investment cannot go to zero unless the person dies.

[1] [http://economix.blogs.nytimes.com/2013/11/26/effective-
corpo...](http://economix.blogs.nytimes.com/2013/11/26/effective-corporate-
tax-rates/?_php=true&_type=blogs&_r=0)

