
The 15% Tax Rate - Swizec
http://www.avc.com/a_vc/2012/01/the-15-tax-rate.html
======
cynicalkane
Most economists feel it's correct to tax consumption, not income. Taxing
income has the effect of compound-taxing investment, which is A Bad Thing.
This is why the capital gains tax rate is 15%, since capital gains usually
come from money put down that was already taxed.

So we get unfair situations, where a business founder is taxed once on his
initial investment, again on his company's income tax, and finally on capital
gains; whereas someone like Romney is taxed much less.

One obvious way to fix this is to protect investment accounts. You know how a
traditional IRA is tax deductible when you invest, and taxed when you
withdraw? Open up more tax-advantaged investment accounts like that[1]. Money
isn't taxed until it's withdrawn, presumably to be spent. With such a system
in place it will also become reasonable to tax the rich at a very high rate,
without inefficiencies like over-taxing transient income or "destroying jobs".

The argument the author presents is strange to me. He says, essentially, that
for economic reasons it's fine to tax capital gains at a lower rate. But then
in the next paragraph he calls it "unfair". So... he proposes an unsustainably
low flat tax rate, which he just implied would be bad, but _feel_ fair...
doesn't seem like sound economic thinking to me.

[1] Greg Mankiw mentions this idea in a NYT op-ed:
[https://www.nytimes.com/2012/01/22/business/four-keys-to-
a-b...](https://www.nytimes.com/2012/01/22/business/four-keys-to-a-better-tax-
system-economic-view.html?_r=1) . I've seen a few other economists also toss
around this idea also.

~~~
mgkimsal
"You know how a traditional IRA is tax deductible when you invest, and taxed
when you withdraw? Just open that up. Money isn't taxed until it's withdrawn,
presumably to be spent."

Huh?

You just wrote that money is taxed when withdrawn, then suggested taxing money
when it's withdrawn.

Roth IRAs allow you to deduct tax free, because you pay tax on the money
before you invest it, generally a good deal for most people, as you don't know
what tax policy will be in effect when you come to withdraw it later, but you
do know today's tax policies.

~~~
ceejayoz
> Roth IRAs allow you to deduct tax free, because you pay tax on the money
> before you invest it, generally a good deal for most people, as you don't
> know what tax policy will be in effect when you come to withdraw it later,
> but you do know today's tax policies.

Is there really anything preventing them from changing the way Roth IRAs work,
though?

~~~
mgkimsal
Technically no. I suspect it's been around long enough that it may be
'untouchable' like mortgage interest deduction, but I wouldn't be surprised if
there's some change in the future which re-taxes x% over your initial base
contributions.

------
llambda
> I've heard a number of arguments over the years against a flat tax. One is
> that a flat tax is regressive meaning that it penalizes lower income earners
> by taxing them at the same rate as higher earners. But I think we are all
> coming to realize that the current system may be even more regressive since
> most wealthy people find ways to pay lower tax rates.

Let me preface this by saying, I don't necessarily disagree with the ideas
presented in this article, however that quoted bit is a very weak argument.
Essentially the author is arguing that because the current system is
regressive that justifies moving to a flat tax rate. However this does not
actually provide an argument for why a flat tax rate is less regressive,
rather he only asserts that the current system is not ideal.

If you're going to sell people on the idea, you've definitely got to come up
with some strong arguments for your proposal and not just arguments against
the current implementation. I think such arguments exist, but this isn't a
great presentation of them.

~~~
drblast
I can attempt that one. "Regressive" is bad only in the sense where it's
disproportionately affecting the quality of life of lower-income people.

So if I have a flat tax that only affects incomes over a certain income level,
and that income level is set high enough so that a reasonable person's food,
shelter, and clothing needs are met, it's a lot harder to argue that the tax
is unfairly regressive, especially when you consider the flat tax above a
certain income level is actually the same progressive tax we have now but with
a single rung on the ladder.

The flat tax proposals, being simple and loophole free, make it more difficult
(and more financially burdensome) to game, whereas the current system seems to
be designed to allow people to gain by paying accountants to find loopholes.
The benefits of a simplified version of the current progressive tax we have
seem self-evident.

The idea is to reduce or eliminate the incentive to cheat. Fairness really
doesn't factor into it much, although it could be seen as a nice side benefit.
End of argument.

Personally, I'd posit that the only truly fair tax is a fixed rate, like
"everyone pays $2000 annually." Everyone is entitled to the same protection
under the law, and therefore should owe the same amount. Laws which don't meet
the criteria that they apply to all people equally should therefore be
stricken.

The next closest "fair" thing to me is a retail sales tax, provided that
everyone is provided a stipend to cover the tax paid on basic living expenses.
That prevents the negative effects of the regressive nature of the tax.

~~~
cluda01
My personal problem with regressive policies is not that it effects peoples
quality of life, rather that it affects the lives of their children. People
that did not have a choice about which family they are born into.

Consider my own personal story. I come from an upper-middle class family.
During high school I wasn't particularly motivated to excel academically and
as a consequence didn't get particularly good grades in courses that I should
have if I had invested the appropriate time and effort into studying. My
parents response to this situation was to hire a tutor and force me to sit
down with said tutor and study several hours a week. As a consequence I ended
up getting better grades than I should have simply because my parents had the
disposable income to spend on tutors. People from disadvantaged backgrounds do
not get this same benefit. As a consequence I go on to university and end up
getting a higher position on the totem pole because of my parents wealth. The
kid who comes from a disadvantaged background and is in the same academic
position as me does not get that kind of second chance.

>The next closest "fair" thing to me is a retail sales tax, provided that
everyone is provided a stipend to cover the tax paid on basic living expenses.

Consumption taxes are regressive because they penalize the spenders. Bill
Gates doesn't spend nearly as much money as he earns and as such pays a lower
effective tax rate than someone who makes $30,000 a year and spends it all to
support their family.

~~~
rmrm
>Consumption taxes are regressive because they penalize the spenders. Bill
Gates doesn't spend nearly as much money as he earns and as such pays a lower
effective tax rate than someone who makes $30,000 a year and spends it all to
support their family.

You are ignoring the part he put in about the stipend to cover tax on basic
living expenses. With that included, the $30K spender will pay a much lower
effective tax rate than Bill Gates.

Making a flat consumption tax progressive in practice is a very simple solved
problem --- there might be other arguments against a flat consumption tax but
it being regressive is not really one of them. A rebate or prebate that covers
the tax up to a certain dollar amount per person solves it nicely.

------
dimitar
When a 10% corporate tax and 10% income taxes for individuals were introduced
in Bulgaria, government ministries and agencies started increasing their
indirect taxes to balance their budgets. Suddenly if you are running a
business you'll have to pay weird registration fees and if you are fined the
fine will be huge too.

Also, If everyone paid 15% (in total) I doubt it would appear fair. Wealthier
people may benefit more from government policy, why should they pay the same
amount?

A low flat tax rate isn't realistic. Maybe if it was higher it might have
worked, but you'll have to have welfare spending to offset taxing people into
poverty. Which practically the same as having a progressive tax rate in the
end.

~~~
bjornsing
> Also, If everyone paid 15% (in total) I doubt it would appear fair.
> Wealthier people may benefit more from government policy, why should they
> pay the same amount?

They wouldn't pay the same amount. They would pay the same proportion of their
income.

------
meric
How about replacing income tax with a consumption tax?

The current tax system encourages speculative investment for capital gain and
discourages investment for passive income due to lower tax rates on capital
gain. Just look at the dismal amount of dividends paid out by companies in the
US compared to Australia, where many companies pay out over 50% of their
profits in dividends.

A person who earns a $10m a year but only spends $20,000 pays close to the
same tax as a person who earns $10m and spends all $10m.

Both contributed lots to society to earn that $10m, but since the first person
only spends $20,000 he only claims back a tiny amount from society resources
due to him for his contribution. The second person claims back everything,
equal in value to his contribution, resulting in no net gain to society.
[correction: less net gain, because earning $10m would likely have provided
several times that in benefits to society]

Replacing income taxes with only consumption taxes will further increase
incentive for production, while discouraging unnecessary consumption. You'd
get more people like the first person than the second person, and society will
reap more of the rewards of more productive individuals, who use up less
resources.

It'll be like society giving out pieces of paper that is put in a building
called a bank in return for real goods and services, that are carefully
allocated because no one wants to waste anything.

An example of a consumption tax is the VAT.

~~~
Aloisius
Consumption taxes in practice are _incredibly_ regressive. Someone who earns
$20,000 must spend the majority of their money in order to live. Someone who
earns $1.2 million will probably spend a small fraction of it.

~~~
meric
You can lower the tax on goods that lower income individuals are likely to
spend on, while increasing tax on goods higher income individuals are likely
to spend on, to make it more progressive.

~~~
Aloisius
Most of the rich don't go around buying stupidly expensive things. They don't
get rich by spending. They get rich by saving.

There are billionaires that live in modest homes and don't particularly act or
spend like their rich, but they enjoy all of societies benefits that created
an environment that enabled them to become rich. They should pay for it so
that future billionaires and millionaires can be made.

~~~
estevez
Or they could just kill the estate ("death") tax, ensuring that those future
billionaires are their descendants.

~~~
Aloisius
The goal is not to create billionaires, but to create an environment where
people try to become billionaires. Simply spawning them serves no benefit.

------
yummyfajitas
Fred Wilson chooses non representative numbers to make his point: _But there
is a bigger issue here and that is whether it is good policy for someone of
Mitt Romney's or my wealth to pay a lower tax rate than the average hard
working american citizen._

Mitt Romney and Fred Wilson are atypical cases.

The bottom quintile pays 4.3% of income in tax, assuming they have any income.
The middle quintile pays 14.2%, the nation as a whole pays 20.7%, and the top
quintile pays 25.8%. The top 1% pays 31.2% [1].

The difference between the CBO and Fred Wilson's analysis is corporate income
taxes.

Suppose Fred Wilson buys 1 share of twitter worth $100. Twitter then makes $10
of profits, which it does not distributed as dividends [2]. This is taxed at
the rate of 15-35%, so twitters balance sheet expands by $8.5/share, i.e. Fred
Wilson's 1 share is now worth $108.5. He then sells, and pays 15% cap gains,
earning back $107.22. To me that looks like a 27.8% tax rate.

So yeah, go ahead and tax cap gains at individual income rates. But eliminate
the corporate income tax while you are at it.

[1]
[http://www.cbo.gov/ftpdocs/100xx/doc10068/effective_tax_rate...](http://www.cbo.gov/ftpdocs/100xx/doc10068/effective_tax_rates_2006.pdf)

[http://www.cbo.gov/publications/collections/tax/2010/graphic...](http://www.cbo.gov/publications/collections/tax/2010/graphics.cfm)
(Graphs are for 2007 data, not 2006 data. Not much difference though.)

[2] Dividends are taxed at individual income tax rates, except sometimes.

~~~
Retric
Your ignoring 1/2 of Social Security and Medicare taxes. And also not plotting
the tax rate of the top 1% or 0.1% both of which are dramatically lower due to
not paying Social Security on income over 120k or Medicare on investment
income.

The bottom quintile pays over 20% if they have a job. Medicare alone is 15.3%.

Also, corporate income taxes only apply to US investments, which is rarely
100% of any sane persons investments. To top that off if you actually buy
stock from a large company their tax rate is often below 5%.

~~~
orangecat
_Your ignoring 1/2 of Social Security and Medicare taxes._

Well, defenders of the current SS and Medicare system keep insisting that
they're not really taxes, they're "contributions" for "insurance" that
everybody pays into for the purpose of receiving benefits later. I'm all for
abolishing those taxes and funding means-testing benefits out of general
revenues, but the left hates that idea because they don't want SS and Medicare
to be thought of as welfare.

 _The bottom quintile pays over 20% if they have a job. Medicare alone is
15.3%._

That's Social Security, Medicare is only a few percent. But the rate is
correct; "your employer pays half" is a legal fiction.

~~~
anamax
> Well, defenders of the current SS and Medicare system keep insisting that
> they're not really taxes, they're "contributions" for "insurance" that
> everybody pays into for the purpose of receiving benefits later.

Note that the benefits payouts are incredibly progressive. Folks who don't put
much money into SS get a much better return on their money than folks who
"contribute" the max each year.

~~~
Retric
Except married people receive dramatically better benefits than single people.

~~~
anamax
> Except married people receive dramatically better benefits than single
> people.

"better benefits" depends on their income distribution. There are folks who
don't marry because that would result in smaller social security benefits.

~~~
Retric
It's true that the benefits from marriage A can decrease after marriage B.
But, they are still higher than if everyone had been single the whole time.

AKA the only time where X and Y getting married lowers their combined benefits
if X or Y was married to someone else z before this and where receiving
marriage benefits from this.

~~~
anamax
I'm pretty sure that my wife and I reduced our (future) SS benefits by getting
married, and neither of us have been married before. (We definitely increased
our income taxes significantly - welcome to AMT.)

We both have decent incomes, so there's no "he'd have benefited from the low-
income subsidy".

~~~
Retric
No, it does not work like that. The math on benefits are really simple you can
take either your SS benefit or 50% of your living spouses or 100% of your dead
spouses. Taking 50% of your spouses is a proxy for the 'low-income' subsidy
where a single worker is supporting 2 people. There is a minor 'penalty' for
taking SS early which is supposed to even out the expected benefit but this is
calculated for each benefit separately.

So, let's say you decide to retire at 62 and not wait till 68. You have 2
choices you can take your normal befit and gain nothing, or you can take your
50% your spouses benefit at 62 wait until 68 take your benefit calculated as
if you had revived zero benefits. Net result your ahead.

PS: Feel free to use there calculators to check this out:
<http://www.ssa.gov/planners/benefitcalculators.htm>

------
ck2
Income is income is income.

If you make over six digits I don't care what the source is, no-one should get
a special rate. Because once you hit that level, there is no way you could
convince anyone you are "suffering" even if you decided to work 12 hours a
day. At that level work is a choice, where the millions making 4 or 5 digits
have no choice.

~~~
mahyarm
A person with a 6 figure income supporting a wife and children and the bills
that come with supporting a household vs a single person is very different.
Also the rent adjusted difference in places where you can make 6 figures can
add 30'000 in before tax income needed to just break even between two regions.

~~~
phamilton
Assuming a family of 4, a 3 bedroom apartment, and living in the valley, your
monthly expenses are going to be in the range of 6k/month. A post tax income
of 72k a year is essentially a 6 figure pretax salary. I don't see that as an
extravagant lifestyle at all.

~~~
mahyarm
Exactly. It's equivalent to someone having half that income in many regions of
the USA. Most people who make 6 figures make it in regions where it's about
worth half typically than it would be in let's say Reno, NV.

------
corin_
_"One is that a flat tax is regressive meaning that it penalizes lower income
earners by taxing them at the same rate as higher earners. But I think we are
all coming to realize that the current system may be even more regressive
since most wealthy people find ways to pay lower tax rates."_

So change the current system to prevent wealthy people from paying lower
rates, don't just move the goalposts and call it a goal.

The fact that more money often means you can pay lower tax rates doesn't mean
those people shouldn't be paying higher tax rates, just that the current laws
aren't doing a good enough job at getting them to pay higher rates.

------
chrisbennet
The ability to give tax breaks is one of the most powerful things a
congressman can do. Take that away and the congressman will have a hard time
justifying (or attracting) bribes/campaign donations. I really don't see
congress voting to reduce their own power.

------
sunsu
I would much rather see a completely consumption based tax system. The
mortgage interest and charity reductions could easily be left in.

~~~
nkohari
If you replaced all taxes with a simple sales tax, it'd be even more
regressive, since a gallon of milk (for example) has a higher relative cost to
someone who makes $20,000 than someone who makes $2,000,000.

Also, it could have an unintentionally bad effect on our (now very consumer-
driven) economy. You don't want to discourage people from spending money.

~~~
yummyfajitas
On the other hand, a consumption tax taxes people proportionally to the
benefits they receive from society. It might be less progressive w.r.t. income
than our current system, but it is arguably more fair.

It's also hardly clear that the tax burden is even felt by the rich. Consider
an investor with millions in investments who only consumes $50k/year. He would
like to invest in his new venture, a medical search engine. But because of the
taxation, he has less money for this investment. Think: who is forced to
consume less as a result of taxation? The rich man continues to consume
$50k/year. Instead, goods and services have been redistributed from the
medical search engine to government uses.

The real question about taxing investors: do we believe the government will
spend the money better than Fred Wilson would?

See also: [http://www.thebigquestions.com/2011/04/18/the-man-who-
cant-b...](http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-
taxed/)

~~~
notahacker
The ability to choose when to work and on what terms is a _vastly_ greater
benefit than mere consumption goods.

Your link is really unhelpful to the idea of consumption taxes and I'm
actually surprised to see you post a line of reasoning that suggests
allocation of fiat money is zero sum in the medium term, especially in
response to someone making a point about the economy being driven by
consumption.

The $84 million belonging to Mr Kendrick _might_ have been invested in US
businesses providing valuable services (although if his private wealth
managers are competent, he'd have been better off investing in foreign
companies or shorting the housing market in the last few years. Earlier on,
maybe, or maybe he'd have done fine placing speculative bets on asset bubbles
that create nothing except liquidity for malinvestment and problems
afterwards). But given the existence of fiat money created by the fractional
reserve system, taxing Mr Kendrick's wealth shouldn't result in a reduction in
the supply of bank loans unless the banks are running low on reserves. The
government has a whole host of non-fiscal policy instruments to encourage more
loans if that's the problem.

It's not a straight opportunity cost decision since the government isn't
consuming the money out of existence, even if their spending is utterly devoid
of foresight. Welfare check recipients and pointless bureaucrats consume much
greater proportions of their income, which ultimately returns via a flows back
into the hands of private investors via the mechanism of people actually
buying products. Investors, especially passive ones apparently indifferent to
returns, don't create profit; consumers buying things do. Shifting the burden
from income to consumption taxes discourages that spending, especially if the
government has to recoup the revenues Mr Kendrick's $84 million from people
that actually get put off by higher prices. If consumers buy less, even Fred
Wilson isn't going to get good returns from his investments.

~~~
yummyfajitas
_The ability to choose when to work and on what terms is a vastly greater
benefit than mere consumption goods._

The "ability to choose when to work and on what terms" is nothing but the
ability to purchase goods.

The issue is not allocation of green pieces of paper at all. Moving numbers
around in computers somewhere at the Fed or BankAm's data center doesn't
affect the world at all.

The issue is spending. Real resources are allocated based on where the money
is spent. If Fred Wilson spends the money, then real resources will be
allocated towards a social network/gaming platform for people trying to get in
shape. If the government spends the money, those resources will instead be
devoted to making bling bling for welfare recipients.

If you want to argue that the latter case is a good thing, then go ahead and
argue it. But the issue is whether the money should be spent on Fred Wilson's
venture rather than Obama's venture, not whether to increase or decrease Fred
Wilson's consumption.

Incidentally, if you are concerned by investors putting money into foreign
companies (note: I'm not), why are you not concerned by welfare recipients
consuming goods that are made in China?

~~~
notahacker
_The "ability to choose when to work and on what terms" is nothing but the
ability to purchase goods._

And the ability to be able to enjoy more of that wonderful tax-free benefit:
leisure. A person living a life of leisure off the proceeds of their lottery
win benefits more from society than a person who works 4000 hours a year to
fund exactly the same consumption habits. That advantage accrues to the
lottery winner _from the day they receive the income_.

 _The issue is not allocation of green pieces of paper at all. Moving numbers
around in computers somewhere at the Fed or BankAm's data center doesn't
affect the world at all._

On the contrary, numbers moving around in computers makes a huge difference. I
don't think we disagree with the basic intuition that taxing the supply of
cash going into Fred's fund will reduce the real resources allocated by his
fund. But the dynamics of the economy overall are a little more complicated,
especially when instead of the investor actively allocating to new ventures a
la Fred Wilson, investments are fed into the world of finance where the
inherited real resources of Schlage Lock Company have the same purchasing
power as newly-created credit to most market participants.

As several of the comments in your linked article pointed out, it's not a true
representation of reality to suggest that taking $84 million out of the bank
will result in the cancellation of $84 million in business loans, unless the
US were to switch to a 100% reserve system. Instead, banks have a large degree
of choice in the quantity of money they loan out, which is ultimately based on
whether they anticipate earning enough real interest to repay the loans:
they've already allocated a multiple of Mr Kendrick's money to real resources
and if the government wants to start consuming it that's fine and dandy until
the reserves look a little low. If the recent upswing in the bling market is
looking sustainable, and the demand for yachts remains resilient they may even
decide to extend _more_ credit than they were previously so more people can
get to work creating resources.

Sure, the government isn't omnipotent and clumsy fiscal stimuli might boost
little more than inflation and do more damage to the economy than good. But
moving numbers around and multiplying them does a lot more for the economy,
especially when it's not doing too well. And Mr Kendrick would doubtless
greatly appreciate being taxed less even if his bank manager notices the
difference less than him.

-

Most of the profit in selling Chinese-made goods is made by US companies (or
multinationals employing sizeable US workforces). Selling and distributing
foreign-made goods to US consumers is always going to generate incomes in the
US, even if its creatively destroying domestic manufacturing industries at the
same time. On the other hand, US investors can invest the untaxed portion of
their income anywhere in the world with a few strokes of a keyboard. In the
event of the US government offering the investment stimulus of income tax cuts
but balancing them with domestic-demand-depressing consumption taxes, it's a
fair bet a sizeable portion of that investment stimulus might find its way to
London, Frankfurt or Tokyo.

~~~
yummyfajitas
_...it's not a true representation of reality to suggest that taking $84
million out of the bank will result in the cancellation of $84 million in
business loans..._

Again, the issue is spending, not loans. Consider two possible uses for the
money:

a) You can hire a programmer to do maintenance on the welfare administration
system.

b) You can hire a programmer to build Fred Wilson's new venture.

By taxing the money, you devote it to welfare admin apps. By leaving it
untaxed, you devote that programmer's labor to Fred Wilson's venture.

The relevant question: is purpose a) or b) a more valuable use of that
programmer's labor?

~~~
notahacker
My point is that contrary to intuition debiting (and spending) $84 million
from a bank account or invested in the stock market _doesn't_ necessarily
correspond to an $84 million short term decrease in the spending power of
companies spending revenues generated by borrowing from that bank or floating
on that market.

Because of the amount of credit in the system, that $84 million can be
simultaneously spent by many people anyway; the government joining the
spending party might crowd out rather less or rather more private sector
investment expenditure than they collect through tax revenues.

The only certain loser is the rich person.

------
cnorgate
I love the idead of a flat tax. I think H&R Block might not be so excited by
something like that though... imagine if we could all file our taxes in under
5 minutes??? The accounting industry would certainly take a hit...

This is perhaps another reason there is such opposition to removing tax
deductions and simplifying the code. There are tonnes of people who need a
complex tax code to make their current jobs relevant. So much inertia holds us
back from getting to a better place.

------
tzs
> And so lately I've been more and more attracted to the idea of a flat tax
> where everyone pays the same tax rate on income above a minimum amount

That's not a flat tax. It is a progressive tax with two brackets. People who
reach the second bracket pay a variable overall percentage that rises the more
they make. I have never heard anyone make a convincing argument that this is
better that a progressive tax with multiple brackets.

In fact, a progressive rate with multiple brackets is what you get if you
apply a two bracket "flat" tax serially. What I mean by that is suppose that
for each major department or function of the government you had a separate tax
specifically to fund that department or function, with a two bracket
structure. You get a separate tax bill for each of these in some specified
order, with the taxes on each being deductible when computing the taxes for
the ones that follow.

If you take this to a limit, imagining a separate small two bracket tax for
every single thing the government does that needs money, and then replace the
thousands of very small brackets with a smooth marginal tax rate curve, you'd
get a monotonically increasing curve.

------
pwg
> And then I often think of my two brothers who probably pay 40-50% of their
> income each year in federal, state, and local taxes. It just seems so
> unfair.

If the author really thinks his 28% tax rate is very unfair in light of his
two brothers paying 40-50% taxes, he could donate the difference between 28%
and 40-50% for himself to the Treasury each year, and effectively be paying a
40-50% rate.

~~~
Aloisius
It isn't just unfair that _he_ is paying a lower rate. It is unfair that
everyone like him is paying a lower rate. Him donating money will have no
effect on the unfairness, only on his guilt.

That said, while I benefit personally from the low long term capital gains
tax, carried interest is ridiculous.

~~~
dmd149
It seems as if people that consider the system unfair always want others to
pay more. This includes wealthy people who want their own tax rates increased
(Warren Buffett). They never willingly donate their own money to the
government.

In fact, I don't know anyone from any income group willing to donate money to
the government.

What is fundamentally unfair is that the government is terrible at 99% of
things it tries to do. This affects everyone regardless of their tax rate.

------
jpdoctor
Requests for startups: Kill the IRS.

------
tomjohnson3
> The theory in taxing capital gains at a lower rate than ordinary income is
> that the wealth that was invested that produced the capital gains has
> already been taxed once when it was earned.

Whenever someone argues this point (not fw, in this case) and alludes to being
double-taxed, I like to remind them that only the _gain_ (minus any loss) is
taxed...so there is no double-tax. ...and why someone would invest in stocks
or startups vs bonds is that the rate of return is potentially much greater. I
don't think there needs to be an extra incentive (in the form of lower tax
rates) for investors. ... That argument seems to be a smokescreen.

On another note: I'd love to see a tax rate (or fair analysis) based on
_discretionary income_.

A progressive tax system addresses this a bit...and, in my opinion, this is
why moving to a flat tax would benefit the rich and hurt the poor.

------
Geekette
A good precursor to the tax discussion would be heightened transparency via
public access to all tax returns. E.g. Since 2002, all Norwegian citizens'
salaries and net worth has been accessible to all.

Amongst other things, it would give a better picture of political candidates'
motivations as they propose various tax "reforms".

------
DanielBMarkham
I think the key takeaway here is that complexity is a completely different
thing than policy.

We've had all sorts of politicians make all kinds of great speeches about
various policies to implement with the tax code.

All that got us was a complex mess. Inside that mess was a lot of corruption
paid for by lobbiests. You can hide a lot of cronyism in a tax code. I think
no matter what you want the tax system to do, as technologists we can ask you
to make it do that in a very simple, understandable way. So I support a flat
tax, but not because it's "fair." I care about structure, I don't care about
fair. Make it understandable, and then we can all decide whether it's fair or
not. We'll vote people in and out of office depending on whether it's fair or
not. Make it complex and we're stuck just voting on tax code depending on how
emotionally somebody's speech appeals to us. We've found that while this will
work for a few decades, it's not scalable over longer periods of time.

~~~
tzs
A flat tax is completely independent of whether or not the tax system is
complicated. There are basically two issues when designing an income tax:

1\. For a given taxable income, what is the tax?

2\. What is taxable income?

To make a flat tax you fiddle with item #1. This involves changing a page of
the tax code.

To make a less complicated tax, you fiddle with item #2. This involves
changing the other 71000 pages of the code.

------
mseebach
So when an investor pays 15% "income" tax, it's on money that his company
already paid 28% tax on (for a total of 39.8% tax). But as it's capital gains,
there's a capital investment - money which again had to be earned, taxed and
subjected to a risky investment.

It seems to me that if the benchmark tax rate is 40% (AVC says his brothers
pay 40-50% on their salaries), and the 15% rate is raised, it would be
beneficial for the investors to simply take a salary and bonus instead?

~~~
comicjk
At least in the US, the average _actual_ corporate tax rate is much lower than
the statutory (by about half). Corporations get deductions far beyond what
individuals do.

~~~
mseebach
Presumably they get deductions for expenses? Money that's spend can't get paid
out in dividends.

------
MarkMc
In the furore about Mitt Romney paying 15% tax I have not seen one comment
which makes this point in his favour: The tax return does not show all taxes
that a person pays, and so it's an inaccurate way to compare tax rates between
two people.

In particular: corporation taxes (effectively paid by shareholders) and sales
taxes should be added to the mix when talking about tax rates.

~~~
comicjk
To his credit, I suspect he also makes large charitable donations to the
Mormon church which reduce his taxable income.

------
veyron
Another problem with how capital gains are taxed is that the social security
and medicare taxes are not assessed.

------
tomjohnson3
For those who think a flat tax is fair to all, I'm curious if they would still
feel that way after playing this game: www.playspent.org

A progressive tax system seems more fair to me (though not perfect) because
there is some link to discretionary income.

------
Bricejm
The argument that taxes on capital gains is a double tax is crazy. The
original principal isn't taxed, just the gain - no double tax. There's no
reason why capital gains shouldn't have a progressive marginal tax rate like
ordinary income.

~~~
waqf
That's a reasonable point of view, but here are two (different, independent)
possible rebuttals:

1\. You ignored inflation. Your argument gives a justification for taxing the
_real_ gain, but current CGT taxes the _nominal_ gain, which is generally
greater. So the difference between the two is taxed twice.

2\. Let's do some math. For simplicity let's consider a world with no CGT at
all, only income tax.

Say I earn $10k income and pay 40% income tax, leaving me with $6k. Then I
invest it and gain 400% on my investment, so I have $30k.

If I had not been subject to income tax, I would have taken home the entire
$10k I earned; I would have invested it and gained 400%, leaving me with $50k.

But in fact I only have $30k. Since, out of my total (admittedly hypothetical)
tax-free profit of $50k, I have lost $20k owing to the imposition of a 40%
income tax, how can you say my capital gains have not already been taxed?

~~~
pacala
Re 2. You have not lost any money. You gained money proportional to the money
you invested. Your capital gains have not been taxed. What is your point?

~~~
waqf
My point would be that since I already have 40% less money than I would have
had in the absence of taxation, it seems that I have already endured my fair
share of the tax burden. (For simplicity, forget about progressive taxation
and assume that flat taxes are fair. Just compare me with the guy with a $50k
salary who also gets to keep $30k of it.)

As with everything, it comes down to an argument about what's "fair".

------
dmd149
Here is one head tax proposal (where everyone pays the same dollar amount).

<http://www.johntreed.com/headtax.html>

------
ifearthefeds
I think the FairTax is a better proposal, much as I dislike the name.

<http://en.wikipedia.org/wiki/FairTax>

~~~
crymer11
I'm a huge fan of the Fair Tax and am rather surprised at the lack of
discussion about it.

