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Taxation of Carried Interest (avc.com)
157 points by tzhenghao 6 months ago | hide | past | web | favorite | 298 comments



The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate.

Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral tax model. Moreover, it's a socially dangerous one - the idea that there is one set of rules for the rich and another for everyone else is already stressing our nation. Stop actually proving the point, lest you want a revolution to deal with it when society lacks the nerve.

Corporate income tax is no big loss. For one thing, it's an increasingly shrinking part of our tax base. For another, it's riddled with loopholes and borderline graft, much more so than individual taxes. This kind of stuff is biased against entrepreneurship, in favor of cozy relationships with politicians. Being connected is more important than being hardworking or imaginative.

Tax capital gains as ordinary income. It's simple and fair.


Abolishing corporation tax has always seemed to me like something that makes sense only in a quite naive view of the world.

The idea is always just to tax methods of getting income out of a corporation instead, (income, dividends) but there's a problem with this idea.

There are infinite ways to get your money out of a corporation.

If you start off with: power is power all forms of power can be transferred into money somehow

Then you realize that allowing someone to put their income into a company and only pay tax on DIRECTLY taking it out, there's hundreds of ways to get around that.

My company employs your son, then you give me a kickback in whatever form My company buys from your company, you give me a kickback somehow My company invests in something related to another investment that I hold and pushes the value of it up. My company employs me on minimum wage for 80 years instead of employing me on a high wage for 40 years, halving the tax that I pay through income My company employs my own son, girlfriend, relative

If I have access to and control over an entity that can swing a million pounds around you can guarantee I can find an indirect way to get paid from that which you can't prevent/tax/foresee. The only reasonable way to mitigate that is to slap some level of tax on me putting money into my proxy.


Not to mention, it assumes a priori that double taxation is bad.

Double taxation has consequences, which may be bad or good in different situations, but isn’t itself bad or good. Hell, I’m now getting double taxed, through the adjustment to the SALT deductions.


Most importantly. If you only tax money coming out of the company to individuals, any savings within the company can be invested tax-free.


Corporate taxes suck because they are a bad method of levying taxes, and also because its hard to know who is actually paying them. The taxes can fall on investores, on the workers or consumers, and that changes based on the market the company operates in.

I dont think I understood your proposed schemes: all those individuals you mention pay income taxes. Income taxes always have the shortcomings you mention, particularly because there are different rates to different types of income. If you made income tax a flat rate it would be infinitely smaller.


I don't think there is anything wrong with someone hiring people as a favor or someone selecting a specific vendor as a favor. As long as the company's owner knows what's going on and is ok with it. And as far as kickbacks go or repaying those favors, if it's money, that's taxable. If it's more favors, well that's merely bartering.

When it comes to stock manipulation, I think that's a crime. But if not, I can't see it being profitable. It would most likely result in a net loss unless there was some inside information being shared.


Mitt Romney had such a low income tax because the majority of his earnings was through municipal bonds. (which are not taxed)

I rolled my eyes when the media said he was 'taking advantage of a loophole' and some people floated removing that 'loophole'. That would have been a blunder of blunders.


so the the question becomes 'why municiple bonds are not taxed?'


Because if they were taxed, municipalities would see their interest rates skyrocket. Having municipal bonds be free of taxation benefits the investor (they don't pay income tax), the municipality (more people will be interested in the bonds, hence lower interest rates), and the citizens of the municipality (their tax rates won't go up as quickly).


Seems like a wealth transfer from municipalities that don't borrow heavily to those that do.


That's true, but you seem to imply that this is a bad thing. It's not. A municipality that does not borrow must either tax its current citizens to raise the money to pay for capital expenditures, or stop investing in infrastructure. Neither option produces vibrant economies, particularly in a country where people are relatively free to move.


Or rely on transfers from the federal government.. As most already do..

Munis are a timebomb, imho.


The entire economy of the world is a time bomb since it is predicated on exponential growth continuing indefinitely into the future. That cannot happen, so sooner or later we need to radically shift gears or we're in for a world of hurt. It's a question of when, not if. But since the current regime has been working for several millennia now, it is hard to make the case that The End is Near. It may or may not be.


>The entire economy of the world is a time bomb since it is predicated on exponential growth continuing indefinitely into the future.

Adding zeros is not that hard. Munis have actual tax bases and actual obligations and those seem out of step in some situations. That muni debt will be mispriced because of tax incentives seems obvious.

Municipalities are in the same spot that Greece or Italy is in. They have debt in a currency they do not issue. They cannot devalue or inflate that debt away. Therefore they have to manage their debt as a corporation or state would, but they are much smaller and less flexible. Bad buy.


It's not like munis are a gift; they are repaid through taxes on the citizens of the city/county/state. TANSTAAFL.


Right, but those citizens are paying less than they otherwise would if the lenders were taxes on the proceeds. That discount could be considered a "gift" from the federal government to both local governments and lenders, whose taxes are lower than they would be if muni income were taxed.


Yes, and that 'gift' comes in the form of higher nominal taxes for everyone else.


I agree. However, I can't see the situation changing anytime soon.


It is the simplest and only way to make them competitive for an investor. Anyone can buy them (that can invest in the U.S. anyways). If you tax them, nobody would buy them (risk versus earnings). To become a competitive and practical choice, and since it is an option for this investment, they make them tax free. Otherwise they would have to increase the interest to an unrealistic amount; at that point there would be no lending option practically. (Yes, investors only buy municipal bonds for the tax free trait to be honest. Not a loophole, just giving your money earlier to the government if you think about it from an opportunity cost perspective.)

Think of it as a way to take money from state and federal taxes and to move them to municipalities etc. It's either that or the government above would have to pick up the slack.


If you abolish corporate taxation, (rich) people will just use them to avoid taxes. Won't have to pay any tax on investment growth if you wrap all your investments in a corporation. Hiring me? No you're hiring my corporation, which pays me a meager salary. Company car? Check. Company apartment? Check.

There is another consideration, you want to motivate people with lots of money to invest it somewhere. Money sitting on a bank ledger can't do nearly as much as money in a venture capital fund. You have to be careful with taxes to make sure you don't disincentivize investment too much.

I think the goal should be _more_ people earning capital gains, and perhaps a more progressive tax rate on them independent of other income including a generous 0% bracket at the bottom. (i.e. regardless if you make $20,000 or $1,000,000 in wages, the first $10,000 in capital gains is tax free.)


> If you abolish corporate taxation, (rich) people will just use them to avoid taxes.

That's already a loophole, or it would be, except the tax code has already closed it. You're about 40 years too late.

> Company car? Check.

Already taxed, heavily. The whole "just hide your income in a company" gambit doesn't work. Corporations are already taxed much lower than the top marginal rate of income, so people already want to do this.

> Money sitting on a bank ledger can't do nearly as much as money in a venture capital fund.

The whole point of a "bank" as a concept is that they solve this issue through maturity transformation. Your money doesn't just sit on a bank ledger; it gets lent out to do things such as, yes, invest in venture capital funds.


it now have to be overseas company in Panama... because the upper middle class was getting in on the corporate tax thing so they had to raise the bar just a little to keep the status quo.


Just augmenting other replies a tiny bit: > Money sitting on a bank ledger can't do nearly as much as money in a venture capital fund. You have to be careful with taxes to make sure you don't dis-incentivize investment too much.

Money never sits around, especially in banks. (And when "it does" it's because they are playing games with the government.) For every dollar in your account, you can bet they are lending "3 dollars", (see https://en.wikipedia.org/wiki/Fractional-reserve_banking).

It is important to realize that a bank's liabilities are your deposits. You deposit $2000, they write down liabilities $2000. Their assets are their loans, credit card revenue, derivatives owned etc. That's why you are owed an interest. Their job is to use your money to make money. Insurance companies (health, car, ...) and retirement funds work the same. Their advantage over you is that they manage a big sum of money, which gives them access to better-term investing deals, full-time (and knowledgeable supposedly...) personnel for investing etc.

Thus, despite what any of the above institutions, might want you to think, they really want your money; the problem is you don't see any part of the capital gains produced practically.

"The only way that money sits, is if it is under your bed or you burned it."


Company car? Check. Company apartment? Check.

All that can be taxed as well.


Which of course will be ripe with caveats and loopholes for accountants to take advantage of.

Combined with the fact that they won't be taxed when they earn wealth but only when they use it, a significant advantage allowing one to let wealth compound tax free until the last second when it is used and taxed.

When you come up with these things it's not a simple equation, it's a game of chess or an evolutionary arms race. This doesn't obviously cause that. You're playing on people's motivations and loopholes which can be found and exploited. Just like a computer program doesn't always (never) does exactly what the programmer intended on the first version. There are always bugs and exploits and weird behavior nobody thought of.


All that can be taxed as well.

At the risk of increased compliance cost?


Just count every benefit one can feasibly calculate a dollar amount for the company provides the employee to the income for purposes of calculating income tax due. In German law there is a phrase for that, geldwerter Vorteil, formally Sachbezug. The wording is: > EStG §8 Abs. 2 Einnahmen, die nicht in Geld bestehen (Wohnung, Kost, Waren, Dienstleistungen und sonstige Sachbezüge), sind mit den um übliche Preisnachlässe geminderten üblichen Endpreisen am Abgabeort anzusetzen. This translates to: > Income, which does not consist of money (housing, food, goods, service and other employee benefits), are to be taken at the, reduced by usual price discounts, usual end prices at the place of fulfillment. There were minor re-orderings, due to the German language having somewhat different rules regarding word ordering, and some words not mapping 1:1 to their English counterpart. As you can see by the strange sentence structure in the translation, I skipped any such cosmetic changes, only using the bare minimum to try to keep the semantic of the predominant parsing the same as in the original.


> Income, which does not

I believe you actually need to remove the comma there, so it becomes

> Income which does not

English and German have different rules for commas surrounding relative clauses. In English, including the comma changes the meaning of the sentence, and I'm pretty sure the meaning implied by the version of the sentence without this comma is the correct one (equivalent to the intended meaning in German). You'd also need to remove the comma at the end of the clause (before "are").

In any case: what you're describing seems to be analogous to what the US already does with regards to tax treatment of benefits.


It's easy to fudge and difficult to investigate whether employee use of company assets/funds is actually compensation or actually for business purposes.

I'm a software engineer. My company assigns me a Macbook Pro and iPhone with data plan to do my work, use 2-factor auth, and answer PagerDuty. It doesn't make any effort to stop me from using these devices as my personal daily drivers. Anecdotally, my coworkers do. If you're the kind of person to buy a new Mac and iPhone every 2 years, having the company do it for you saves $1500+/yr. Is that compensation? Maybe it depends on how the devices are used. Well, now you've got the tax authorities poring over MDM logs trying to tell how many minutes of screen-on time were business vs. personal. Yikes.

I've been a field technician. We had a pool of company cars at the office for visiting client sites. For some jobs, it did not make geographical sense to drive my personal car to the office and switch, so a company car became my daily commuter for a while. Was this compensation? If the company car was ever the most readily accessible in the driveway, I may even have used it for a purely personal errand in the evening. Would it have been compensation then? Maybe it depends on what proportion of use this accounted for. Now you've got the tax authorities poring over GPS logs trying to determine which POIs I drove to and from were work-related, and we're arguing about whether it was my house or the office that needed toilet paper when I made a particular CVS run. Assuming there even are GPS logs.

I've been asked to take meetings and work with adjacent teams at our satellite offices. I obviously take advantage of my time in a new city to see the sights. For what proportion of the trip do I need to be in the office for it to count as work vs. work underhandedly paying for a personal vacation, and how are you going to check? Entry leaves a paper trail, exit doesn't. What if I just badge into our satellite office each day for the free coffee and then go about my vacation? Often the whitelisted hotels in our travel booking system are nicer and more expensive than anything I'd book personally. They're in keeping with the general high quality of our offices and equipment, but nicer than they need to be to fulfill the business purposes of the trip. Is this a form of compensation? Directors and above get to fly first class. Cattle class gets your ass to the meeting just the same. Is that a form of compensation? Now you're in the business of benchmarking what is a reasonable price to for travel/lodging in a given city at a given time under specific parameters (advance notice, number of travelers, etc). And what if your manager says he authorized first class so that your productivity wouldn't take as much of a hit? Does Gogo even keep good enough logs to tell whether I was really using the company VPN during the flight?

This is not to say you should throw up your hands. The IRS certainly doesn't. It gets into the weeds on all of this, at least as to whether the business can deduct the expense (not so much whether to count extra income for the employee). But this stuff is incredibly nuanced and complex, and there's more than enough room in that complexity to hide a scenario where the employer pays much of the employee's living expenses tax-free in lieu of salary.


You certainly have a good point. There is quite some room, sure, but not enough for full-scale blatant abuse.

Now, to the classification of your travel to the satellite office. Here in Germany your employer has to keep records of sufficient detail to show the iirc. customs office (as they are assigned to keep an eye on this, as far as I remember), that you did not work more than 10 hours on any single day, and not more than 8 hours per workday on average over usually 3 months. So the time after those 8/10 hours are not work, and the tax office doesn't care much about where you spend your time off after work. Sure, it's a nice job (if you don't have a family), if you fly business class around to all the little satellite offices for just 8 hours or work, possibly even staying the weekend (as it is cheaper to stay than to fly you back home, which should be the point where it counts as compensation for taxes, e.g., the additional cost of the hotel, compared to flying you back and forth, would be counted as compensation).

The champagne you drink on the flight, at least as far as it costs more than water, should/would count as compensation. The nicer seat shouldn't, because the increased comfort isn't really a material benefit. If they pay you a nicer seat than they can explain with less of a productivity hit, they might themselves need to argue differently for why they paid for it, when they themselves get an audit. And while I don't know the IRS, I assume they compare the compensation listed by the employer with that listed by the employee. So this would be noticed, and the IRS might well claim tax fraud. Sure, not everyone cares, but this should give them enough to go after blatant abusers.


Capital gains is not necessarily an immoral tax, but it's not obvious that the people who make this argument would enjoy the alternative.

In Norway, capital gains and corporate income tax are set such that they are (practically) identical to the income tax when they are both applied. So gains from owning shares in a company will not give you a tax advantage over receiving wages from said company.

Then again, this is exactly the argument you're making - ensure that corporate + capital gains taxation is identical to the income tax.

The difference that we still have a corporate income tax. I would think it's necessary to keep this, or else capital owners would just avoid realizing profits at all, while waiting for the political climate to favor reducing the capital gains tax again. With an annual tax on corporate profits, you ensure that capital owners are forced to contribute to a degree no matter what. But consumption is still taxed.


The correct solution is to eliminate income-based taxes altogether, be they corporate, individual, derived from regular wages or derived from capital gains, etc ... and stick to a flat consumption based tax. But we're so deep down the rabbit-hole of our current system, we can't even imagine doing that.

Without going to that level of simplicity, it's worth noting that some countries have done away with capital gains altogether and are doing perfectly well socially. That would be a perfect first step.


If we're doing radical changes to the tax structure, land-value taxes have far better side-effects than consumption taxes.


If we are going to massively simplify taxes, then it needs to be done on the richest rather than the poor like a consumption tax does. By rich, I don't necessarily mean rich individuals. The richest entities in society are businesses and they benefit the most when you or I have money in our pockets.

If you think about it, the most common federal tax on individuals or families, income wage taxes, is in fact a revenue tax on businesses just like the payroll tax. A business has to pay an employee more to cover that employee's income and payroll taxes.

If we are going to replace all taxes with one tax, I would like to see a simple, flat business revenue tax. This has a few benefits. First, businesses already pay revenue taxes and individuals don't have to worry about taxes. Companies like Amazon cannot behave like a non-profit to avoid taxes. Individuals will have more money in their pockets to spend which helps business make more money. We could probably excempt small businesses and/or startups and still generate enough tax revenue. A revenue tax would also double as a consumption tax except it is only the richest that have to pay it.


"If we are going to massively simplify taxes, then it needs to be done on the richest"

Why? This is a built-in assumption most people seem to be operating with and I've never understood the rationale that the rich should pay more.

Does a rich person wear roads out more than a poor one? And if they do, wouldn't it be better if they paid for how much they wear the road down? As in: a percentages of miles driven on it? As in: a consumption-based tax?

Anyhow, even if you decide to work with that flawed premise, to me, if we're going to tax revenue, then "fair" translate to a very simple mathematical concept: fixed-rate.

Everyone pays 10% tax on their income. This way, the "rich" pay more, and the "poor" pay less. Because 10% of 1M is 100k and 10% of 100k is 10k.

Fairness handled.


If you pay 10% on $100,000 a year, you have 90,000 left over. Plenty of money to live comfortably and have your needs met.

If you pay 10% on $20,000, you have $18,000. It was already hard to live on 20k, living on 18k and having your needs met is even harder.

Your examples reveal your bias. Most people don't make $100,000. And it's the "most people" that you would impact hardest with the flat tax scheme.


If you looked at the Ted Cruz tax plan from the 2016 campaign, he advocated for a 10% tax on individuals with a high standard dedication and a 16% tax on business income. Taxpayers making under $50k would have paid zero under his plan.

It is possible to do a flat tax while protecting the poor.

But, as Milton Friedman said, the tax code is complex for a reason — it gives politicians a means to exert power and reward or punish. With a simple tax code, the incentive to donate to campaigns would be reduced. The Democrat and Republican establishment both oppose simplifying the tax code because they would be killing the golden geese that keep getting them re-elected. It’s no accident that the tax code changes literally every year. Politicians are busy rewarding or punishing constituencies.


$50k -> $45k is still a much bigger impact than $1M to $900k.


It's fundamentally because:

a) most people are along for the ride that it's a moral imperative to keep all of the population happy b) the more money you have, the easier it is to make money. If you don't even that out at all you end up in a feudal society where some dude owns all the land, air, water and you're effectively his slave. Which is broadly the direction America has been going to for the last (30?) years

Fairness is very motivating for people but I don't think it's how you should base your society, I don't really think there's such a thing as fairness as a useful concept.

The real fix is a wealth tax but that is hated by both the old and the rich (look at how mansion tax policy was received in the UK). It's also kind of harder to measure than income.


If we are talking about fairness, what I described is more fair. 10% of income for a poor person can mean the difference between buying prescription drugs or going without as one example. However a rich person is going to have enough money to buy prescription drugs whether they pay 10% or not. In other words, the poor person is already at a significant financial disadvantage. So not asking them to pay taxes helps level the playing field some.


> The richest entities in society are businesses

I can never get this narrative. A business is an organization of people, of investors workers and consumers. You cant offload taxes to an abstract business, you are putting it on one of the groups of people above.


Yes except that the vast majority of the population are part of the businesses in some manner so if you tax all businesses then you are taxing the whole population (or vast majority). And as I said, personal income taxes on wages are actually a business tax. The requirement to provide workers comp, healthcare is a business tax. Businesses are taxed all the time.

And those groups of people are financially more powerful collectively than individuals which means those groups of people have a responsibility to help pay for society which they benefit directly from such as roads, power cables, etc.

If only one or a very small group "abstract business" was required to pay all the taxes for the entire society, then I would agree with you. However no one is arguing that.


> Yes except that the vast majority of the population are part of the businesses in some manner so if you tax all businesses then you are taxing the whole population (or vast majority). And as I said, personal income taxes on wages are actually a business tax. The requirement to provide workers comp, healthcare is a business tax. Businesses are taxed all the time.

There is little merit in name of a tax that it gets to "the majority of people". It can fail equitability super hard because of who pays the economic burden of the tax.

> And those groups of people are financially more powerful collectively than individuals which means those groups of people have a responsibility to help pay for society which they benefit directly from such as roads, power cables, etc.

Sorry, but this is just not economic thinking, not even of the wrong kind. If the burden of a tax is on consumers, your assertion falls hard. If it falls on workers, then you are punishing labor. If it falls on investors you are punishing investment. "Being powerful parts of society" is not an argument for taxation.


I think you and I fundamentally disagree on what a tax is. You seem to view it as punishment or a burden. I view it as the method for paying for things that help the collective good. Not a punishment but rather a duty for those with the means. If we aren't using taxes to collectively protect society (e.g. military, police, courts), help the less fortunate, etc then why collect them at all? The richer the entity (individual or business), the more means they have and the more they actually benefit from those taxes even if they have to pay them.

EDIT

Just to add, if you agree we need taxation to have functioning society, why wouldn't we get the money from the richest? Why wouldn't we put the burden on the richest? In terms of people inside rich organizations, it is only the already rich, owners and investors, which would feel the burden. Supply and demand will continue to give consumers high quality and low prices. Employees will still get their market-rate wages or minimum wage for low-skill jobs.


You're responding to a technocratic argument about how to allocate taxes equitably with a moralistic argument that taxes are good. From a meta-debate perspective this is both infuriating and tragically common. Details matter. Incentives matter. "Taxes are actually good" isn't a reason to stop caring about which taxation schemes produce the best outcomes or are more fair.

"Punishment" carries some unnecessary connotation. How about "disincentive." People respond to incentives; good policy exploits this by taxing the things society wants less of. Failing that, it levies taxes that don't depend much on behavior, to avoid undesired distortions.

The argument is not that corporations have some kind of right to their income that's being unfairly abridged. It's that taxing corporations is sloppy: the true cost of the tax falls on consumers, workers, and owners in not-very-deliberate proportions. If you want to put the burden on "the richest," great, so do I. But let's tax those actual people.


Okay but why is it sloppy? Saying the true cost is on consumers, etc is a start but it is not a full argument. How do you know where the true cost lies? And like the other commenter, you seem to think a tax is a cost/disincentive which it is but there is a positive side too. Morality or not there is a benefit to taxes which many purely economic arguments on HN ignore.

In other words, the true cost may be on individual people. But so is the true benefit. So would taxing solely corporations have more cost or benefit for those people? Both for the people in the corporations and those without? I have yet to see a coherent, let alone persuasive, argument against the idea.


> Okay but why is it sloppy? Saying the true cost is on consumers, etc is a start but it is not a full argument. How do you know where the true cost lies?

These are the questions the field of economics studies. Thats what they say.

> Morality or not there is a benefit to taxes which many purely economic arguments on HN ignore.

Saying that there is a benefit of taxes is an economic argument. Thats why it gets responded with economic arguments. If you imply the act of paying taxes is moral, I would compare it to the donation to church, where self-sacrifice is a virtue of its own. Much like the donation to church, it should be for those that want it. After all, its not self-sacrifice if its not voluntary!

> In other words, the true cost may be on individual people. But so is the true benefit

The ones that pay are not the ones that receive the benefit. Under this Doctrine you could always see a robber stealing a wallet and conclude that society is not a dime poorer. After all, one side gained what the other side has lost. What a defense the criminal has! That he has not made society poorer!

> So would taxing solely corporations have more cost or benefit for those people? Both for the people in the corporations and those without? I have yet to see a coherent, let alone persuasive, argument against the idea.

Its very hard to tell , precisely because corporate taxes hit different people in different ways in a chaotic way. It is much easier to make a conclusion with different taxation methods, but corporate taxes are very obscure and distortive.


> The ones that pay are not the ones that receive the benefit.

Again, that is factually and objectively incorrect. I even gave you a personal example where I pay and I benefit. You are entitled to your own opinions but not your own facts.


Thats you, does every single payer receive the benefit? And does the benefit outstrip the cost?

If the latter is true, there is no need for a tax: the government can sell it optionally and every single payer would subscribe to it. The tax is only necessary to collect the money from people that would not pay for it.


Great way to say it.


> think you and I fundamentally disagree on what a tax is. You seem to view it as punishment or a burden. I view it as the method for paying for things that help the collective good. Not a punishment but rather a duty for those with the means. If we aren't using taxes to collectively protect society (e.g. military, police, courts), help the less fortunate, etc then why collect them at all? The richer the entity (individual or business), the more means they have and the more they actually benefit from those taxes even if they have to pay them.

A tax IS a punishment. It is a charge not reciprocated by a service to the person that pays for it. Collective goods dont require individualized sacrifices, just individual collaborations. But okay, we can divert ideologically on that point, but nevertheless any effect of taxation is a cost on the person paying for it, and will have the same effects to him as if the person lost the taxed money into the abyss.

> Just to add, if you agree we need taxation to have functioning society, why wouldn't we get the money from the richest? Why wouldn't we put the burden on the richest? In terms of people inside rich organizations, it is only the already rich, owners and investors, which would feel the burden. Supply and demand will continue to give consumers high quality and low prices. Employees will still get their market-rate wages or minimum wage for low-skill jobs.

I think I've always had a curious thought about the idea of not discriminating minorities, except for the rich, you better discriminate those! If we can agree at least that taxation is the cost of government, why should the cost of government only come from a section of society? A society that achieves to make a part of it responsible for its whole will not thrive in collaboration and cohesiveness. A society where some expect to make a living at the others expense is not a free one.

In economic terms, there are multiple criteria on measuring how good a tax is. There is of course how the burden affects the person itself, but also how efficient it is to levy it, how convenient it is to pay or how predictable it is. Satisfying multiple criteria will not give you much room to tax "the rich".

There are normative arguments as well: just placing a tax on the rich doesnt mean you'll be able to raise that money, as the rich have the highest recourse to escape. Human beings are very hard to corner!


> A tax IS a punishment

A tax is a legitimate cost of a functioning economy as much as an electricity bill or a truckload of cement. That tax pays for the infrastructure which makes that same transaction possible in the first place.

Ideally the cost of participation in the economy should scale linearly with how much excess benefit you derive. Total benefit minus the cost of being a functioning human in the society. This requires the insight that a person who has $1,000 of discretionary money every week has a lot more than ten times the excess benefit as someone who has just $100 discretionary every week.

Put another way, from the perspective of a rich person, it's in my interest to have everyone else in society well fed, free of disease, mentally healthy and able to work productively. The best way for rich people to ensure that is to require them all to pay a much larger proportion of taxes.


These are 3 very different arguments. I will answer each:

> A tax is a legitimate cost of a functioning economy as much as an electricity bill or a truckload of cement. That tax pays for the infrastructure which makes that same transaction possible in the first place.

A tax can be used to pay for the infrastructure, and also pay many other things that are terrible and inefficient and immoral. Government spends a very small fraction of its budget on infrastructure, what about the rest? If only a fraction of the spending justifies the whole, then as long as you use some part for good you are entitled to rob the whole.

Moreover, as time progresses, we find more and more ways to pay for infrastructure without taxes. Why is the infrastructure of the US is crumbling, and tax pressure is equal or higher? Its just not real that taxes are necessary for infrastructure, and that taxes are spent on infrastructure.

> Ideally the cost of participation in the economy should scale linearly with how much excess benefit you derive. Total benefit minus the cost of being a functioning human in the society. This requires the insight that a person who has $1,000 of discretionary money every week has a lot more than ten times the excess benefit as someone who has just $100 discretionary every week.

I dont see well the justification for 'excess benefit'. What is excess benefit and who decides? For me, goverment employee salaries are excess benefit, because many of them do actual damange and collect a paycheck. Can we tax those 100%? The second part talks about the ability to pay: if someone has higher ability to pay a tax they should pay a higher tax. I dont think this is in everyones best interest either. If someone is earning a lot more because he produces more value, the tax will punish the productive fields, and prize the least productive fields. This means more people will work on the least productive, and less people on the most productive. The end result is worse wealth for the entire society.

> Put another way, from the perspective of a rich person, it's in my interest to have everyone else in society well fed, free of disease, mentally healthy and able to work productively. The best way for rich people to ensure that is to require them all to pay a much larger proportion of taxes.

It is not true that taxes are the way to help people advance. The greatest advances of human kind in quality of life and wealth happened in time of low government tax and intervention. Equating taxes to benefit is a grave mistake, one that reality has once and again shown extreme dangers. The society with the ultimate taxation, Socialist-communist, has shown greatest decline and misery of its people.


> taxation is a cost on the person paying for it, and will have the same effects to him as if the person lost the taxed money into the abyss.

In my town, in addition to the normal local taxes, there is a special greenery fee/tax that all residents must pay. It is only $25/year. The purpose is to pay the upkeep of all the green spaces which there are many. I happily pay this because I like to walk through these green spaces. Individually there is no way that $25/year would pay for that, but collectively the town can afford to and it improves living here for all the residents.

There are of course many examples where tax money is not used wisely, but there are also many examples where it is. We should get better at spending it wisely which is of course easier said than done. But to say that taxes are like throwing money into the abyss just doesn't stack up to the data.


And while we all would prefer greater efficiency in government, an inefficient government is still universally preferable to an absent or non-functioning government.

Also, if that inefficiency is in the form of salaries or domestic spending, it's only partly wasted as it adds to movement of money in the economy.


God no. The broken window fallacy comes back from 1830, before Bastiat.

If you pay someone to do nothing you waste both the money you used that could have gone to something useful and the time of the person that would have done something else, hopefully productive, instead.


That assumes that a maximally efficient economy is also the maximally desirable. I strongly disagree. (Though if a generous UBI was already in place, I could change my mind...)


No, it just debunks that the idea of burning peoples time is a benefit for society.


If you are happy to pay for it, why do you need it to be a tax? You can pay your government directly.

Unless you want other people to pay for it, of course.


That is what a tax is and how it is levied. The people in the town agreed via voting to levy the tax so that we could all collectively benefit. I am sure some people disagreed but that is democracy.


Do people that vote against it not get to pay for it?

Democracy is not a justification for payment. 51% can vote to rob the other 49%.


Democracy is a justification actually. That is the point of the system. If you want a different one, good luck but so far no one has been able to beat democracy. Personally sometimes I get what I want and sometimes I don't. Democracy is a compromise.


You are conflating the validity of a political process with the validity of an economic process. Saying that 51% can rob 49% and that is fine both in justice or economic terms means that you have no capacity to argue against anything but the number of votes. IT truly destroys your position to say that the only right thing is the result of a poll.

But lets say I go down this path with you, one that is not only not how democracies work, but a reprehensible if it were. Lets put it up to a poll then. Lets vote for all these issues and see what happens. The results might surprise you. I have seldom if ever seen a vote for a tax increase to pass popular support.


Tax consumption, land, pollution and using natural resources. Allow people to get some amount of consumption tax back every month to make the system progressive. Get rid of all income taxes. Make sure there is inflantion as a form of tax on stashed cash as well.

Consumption tax is much harder to gain than income taxes. Corporations pay in the country they sell to so that closed all tax heaven loopholes instantly. Making the system progressive is easy as well, just allow every citizen to bring receipts up to X$ per month to the taxman and get the money back. If you really want you can tax luxury items at higher rate as well.


Simply taxing gains as ordinary income is often unfair because it taxes stuff going up in nominal terms without actually being worth more in real terms. You can get around this by indexing for inflation, which gets complicated, or taxing it at a lower rate. Carried interest isn't really capital gains - it's income and should be taxed as that.

The deeper problem is if there is some way to reform the political system to be less easily bought.


Isn't that how income tax works too? Why should cap gains be different?


Say you buy a house for $1m. You then want to move to an identical house in another location and houses now cost $2m. By moving, on a basic capital gains tax calculation you have a profit of $500k and a tax bill of say $200k. But you don't have $200k and can't move. This not a good situation hence various fixes. That particular problem does not come up with income although there are other problems there.

Tax is messy. I'm reminded of the quote from the 1600s "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing." The above problem causes hissing.


So provide an exemption for primary residences. There is a similar concern with stock sales causing tax payment, but in that case it's an incentive for longer term investment. You goose quote is really awesome.

On a related note, I think we need to stop providing incentives for housing prices to go up. Municipalities could put caps on the percentage of value they'll enforce a lean on. This would reduce housing costs to the benefit of people at the bottom.


This is a problem for all assets, not just primary residences.

> I think we need to stop providing incentives for housing prices to go up.

While true, the main such incentive historically is inflation: housing prices have been growing at about the rate of inflation in the long run, averaged over the US.


Ideally, capital gains tax should be charged on gains above the rate of inflation.


So that still assumes that saving is risk-free (maybe) and the discount rate people apply to consumption is 0, right? The latter just doesn't match reality.

But it would definitely be a step up from where we are now, in theory. In practice, measuring inflation is an interesting exercise; there are multiple measures that differ quite a bit once your timescale is "decades" as it can easily be for savings and housing. And yrs, I know I said "the rate of inflation" -- I forget which measure those studies used. For housing specifically, one could use whichever inflation measure best matched housing prices in the past, I guess...


> But you don't have $200k and can't move. This not a good situation hence various fixes.

So dont move or move when you can afford to pay the tax.

Why did the value of the neighbourhood increase, its because society aka the police keeping the area safe, the people who maintain all the infrastructure/roads etc, who is going to pay for all that?


"Don't move" is terrible public policy. For one thing, people change jobs. Two families that end up living and working on opposite sides of town should be able to swap houses to keep the commutes sane. When they can't, congestion gets worse, and energy and infrastructure demands grow. Or worse, people stay in suboptimal jobs due to the difficulty of moving, suppressing productivity. Empty nesters hoard the family-sized houses, making things impossible for young couples. Etc, etc.

>move when you can afford to pay the tax

Why could they afford to pay the tax? Their income hasn't changed.

>Why did the value of the neighbourhood increase

Usually this kind of meteoric rise in property value happens due to changes in demand, i.e. your city suddenly becomes a tech employment center, or the fashion suddenly shifts from suburban to urban.

>its because society aka the police keeping the area safe, the people who maintain all the infrastructure/roads etc,

Nope. Typically all those things were there when you bought in, so would not explain the delta between your previous and current home value. And if the quality of your local institutions got 2x better during your stay, it's likely you had a hand in building them.

>who is going to pay for all that?

Excuse me, what? No place in America has capital gains tax on primary residences; do you imagine that we don't have police or roads? We'll pay for it like we've always paid for it: a combination of property taxes, user fees, and state income taxes remitted to the municipalities.


Do you have any data which gives the number of people who swap houses to keep the commutes sane?

Long commutes can be reduced if you have a good public transport which again depends on tax.

> Usually this kind of meteoric rise in property value happens due to changes in demand,

which brings us back to the same points which I raised, its because of the society the demand rises, demand is not going to increase in high crime, poor infrastructure area.

> Excuse me, what?

What part did you not understand?


How is the $500k profit calculated?


Inflation. Inflation is one of the two reasons capital gains should be different. You can make a large profit in nominal terms while making a real loss if inflation is high enough. This is not a risk with non-capital gains income.

The real reason capital gains taxes are a bad idea is that they discourage investment and we want more of that because it’s how we increase our productive capacity and get more of what we really want, consumption.

We should abolish income and capital gains taxes altogether and tax consumption. Encouraging investment by ceasing to tax it will lead to higher production and consumption in the long run.


Income tax is based on income earned, capital gains is based on a sale of a asset. There is definitely a difference.


> Income tax is based on income earned, capital gains is based on a sale of a asset.

but couldn't you claim that income is sale of personal time (an infinitely valuable, and non-renewable asset)?


If your personal time is infinitely valuable to yourself, why do you sell for way below that?


Yes, but that doesn't mean they should be taxed differently. You need more justification.


Problem is that capital gains aren’t all gains, they include inflation. I’m all for a transition to ordinary income if you index the basis of investments to the inflation rate.


Or we could simply allow shareholders to pressure companies into giving dividends, as was the original intent for the value of a share. The bizarre focus on capital gains at the expense of dividends was created by the tax code. Switching it back would eliminate the perverse incentive for corporations to merge and acquire for no other reason than to avoid disbursing capital as dividends.


A hundred times this. If your plan is make money by selling at a higher price, you're playing the greater-fool game. If you make your return via dividends, it is a direct reflection of the value of the company.


but how does that system allow for a company that re-invest all profits into growing, if doing so is a tax disadvantage?

selling at a higher price is how investors "get out" of the game, but allow other investors to "take over the reigns", all without the company having had to pay out dividends at inopportune times.


>> selling at a higher price is how investors "get out" of the game, but allow other investors to "take over the reigns", all without the company having had to pay out dividends at inopportune times.

No. Selling is how investors get out. No need for a higher price because they presumably got a return via dividends. If there's no increase in stock price, there will be no capital gains on the sale price either.

Reinvesting all the profits into growing is a phenomenon that became popular due to tax law. A dividend paying company can still make the choice to reinvest profits rather than pay them out. That will just mean a lower dividend than if they paid out all the profit to shareholders.


> If there's no increase in stock price

Then the value of the company (and the expected dividend stream) presumably fell, in real terms, because inflation is typically nonnegative.


There's also depreciation. Most assets tend to decline in real value while simultaneously inflating. Companies may have a period over which the value appreciates, but the evidence points to eventual obsolescence. They'll probably liquidate their assets and give one final dividend at that time.


Long term investors might buy shares if they expect high dividends in the future. Eventual profit, not immediate profit.

It's not a tax disadvantage if the expectation is that the bulk of the income eventually comes from dividends, even if that time is 10 years down the road.


> but how does that system allow for a company that re-invest all profits into growing, if doing so is a tax disadvantage?

Use your own money to gamble. Once you accept shareholder's money, you play by their rules.

If you are not paying dividends, register as non-profit.


Imagine how much more heated debates about the accuracy of the government CPI calculation would be if the number formed the basis of a bunch of people's tax bills. Oh man oh man!


I think Americans have this today via Social Security!


True, and that definitely causes plenty of rumbles.

Just thinking it would get 10x worse if it also formed the basis of cap gains taxes.


Isn't this accounted for with the standard deduction and marginal tax brackets?


Not at all. Neither of these account for how long you've held something, which is what implicates inflation.

For example, Person A buys stock in Company A and holds it for just over 1 year. Person A's gain on this stock is $1,000.

Person B has held stock in Company B for the last 50 years. He sells at exactly the same time as Person A and has the same $1,000 taxable gain.

If we accounted for inflation, Person B would pay much less tax than Person A, because Person B's gain is mostly (if not completely) inflation. Person A's gain, on the other hand, is mostly real gain, not inflation.


No.

The standard deduction essentially establishes a 0% rate on a "minimum $ necessary to live" salary. Marginal tax brackets establish a progressive tax system which is consistent with diminishing marginal utility of money.

The problem that valuearb refers to is completely different. Because of inflation I could buy an asset in 1 year, sell it 5 years later and show a nominal gain (sale price > purchase price) but have actually made any real money. By most standards it would be unfair to tax me on this sale.


I think what we're really upset about when it comes to rich people making a lot of money through investments is not that interest isn't taxed more, but rather that they had such a high (non-investment) income in the first place. In fact, I think there should be zero investment taxes. My reasoning goes like this:

If I would rather have two coconuts seven years from now than one coconut today, and I'm willing to find someone to sign a contract to make that trade with me, why do I deserve to be penalized more than someone who would rather have just one coconut today? This is in effect what capital gains taxes are. Penalizing future consumption in preference to current consumption. But there's no reason we as a society should prefer one over the other.


Your post belies one of the most harmful stereotypes that many rich and right-leaning people hold, that the poor would simply "rather have just one coconut today", and it's due only to their own short-sightedness and lack of impulse control that that they are poor.

For many people, it's not a fucking choice. It's eat your last coconut or starve until your next paycheck.

The recent story on HN about performance on the "marshmallow test" being predicated on being born rich is relevant: https://www.theatlantic.com/family/archive/2018/06/marshmall...

Your point about "penalizing future consumption in preference to current consumption" makes no sense either. Capital gains tax could be 99% and (modulo inflation) you'd still be ahead by investing, so I don't get your point. God forbid someone who earns their income from investing rather than manual labor should have to pay taxes on it.


You wouldn't be ahead because there is risk in investing. The biggest capital gain tax the less sense it makes to invest. That's why the capital gain tax rate is different than income tax. Making capital gain tax progressive is a recipe for not getting any more investment from private citizens.


Who says we need more investment from private citizens? Perhaps we need less.


If you care about people benefiting from economy growth you want them to own part of it. This is accomplished by them investing instead of consuming.

If something really crazy like progressive capital gain tax is introduced then a lot of people will rather consume instead of taking bets with a lot of risk attached to it and very little upside. This goes for every high tax: if the upside becomes not very tempting you may just as well settle on what you have and stop trying to improve your situation/produce more as huge part of that surplus will be taken away from you anyway.


Since when do you pay taxes on capital losses?


You don’t. But you lose the money. Risking $10 to make $10 is much different that risking $10 to make $0.10.

You are more willing to invest at 1:1 odds than you are 100:1. Especially since the odds actually don’t reflect the actual risk of the investment itself. 100:1 on a sure thing is better than 1:1 on something that is very high risk. However, no investment is a sure thing. There is a non-zero level of risk in any investment, so if the payoff doesn’t match the risk, you simply will put the money under your mattress.


Yes, there are people at the extreme ends whose spending vs. saving behavior can't be influenced (much) by the relative favorability of investing. But there are also lots of people who will respond to this incentive, and we should be concerned about what effects that might have.

Your post belies an assumption that the new tax revenue would actually be spent on the people for whom "it's not a fucking choice." But that's orthogonal. Congress is perfectly happy to spend new tax revenue on tax cuts for the very rich, on the military-industrial complex, on seniors of all income brackets, on predominately upper-middle-class students, etc. "What are the right ways to raise revenue" is a different question from "what are the right things to spend it on," and having a compelling reason to spend has no bearing on the virtue of any particular method of raising the funds.


Your claim that capital gains taxes could be 99% and you’d still be better off by investing makes no sense. Because why would you risk $1,000,000 — money that you could completely lose, for the chance to earn $10,000 after taxes? That would be an insane thing to do. You would be better off simply burying the money in the backyard.


I read the tone of your post as angry disagreement, you seem to be agreeing with me? My point was

>I think what we're really upset about when it comes to rich people making a lot of money through investments is not that interest isn't taxed more, but rather that they had such a high (non-investment) income in the first place.

And people having different levels of income is definitely at the heart of your objection. Rich people tend to have more flexibility with regard to their ability to choose future consumption over current. The problem we have with that is that they're rich enough to do that, not that they are making that tradeoff. The tradeoff is inherently benign and should not be discouraged through taxation.


The problem comes when you are contributing labor to the underlying asset. In this case you can forgo wages in lieu of capital and that labor should be taxed the same as anyone else's.


Alternatively, investments should have much higher tax rates. If someone invested money then they clearly did not need it, thus they need returns even less.

Really, you can try to justify any tax policy by reframing the question, but the root argument breaks down to having other people pay more so I pay less which is never really justified.


> Really, you can try to justify any tax policy by reframing the question, but the root argument breaks down to having other people pay more so I pay less which is never really justified.

Indeed, the "root argument" in favor of taxation is fundamentally all about "having other people pay more so that I pay less". That being the case, why did you start out by saying that "investments should have much higher tax rates", only to contradict yourself later?


Because I was simply coming up with a counter argument not advocating for a position.

I could support the fist line by saying investments are taxed at below average rates including loans (bonds) which are not double taxed. And a flat tax without any form of tax breaks is the only fair solution.

But, again not trying to support a position just disappointed with the way taxes are discussed. Arguably all people deserve a tax break, but the only way to do that is reduce spending.


This is an incredibly anti-savings policy, given that we have central banks ensuring positive inflation (except in Japan) and capital gains are calculated in nominal, not real terms.

In other words, if you just hold some money for a few years and it doesn't lose value (interest rate equals inflation), you _already_ owe tax on it. That's just broken.

If we did capital gains in inflation-adjusted dollars, the situation would be somewhat different.


The world is flush capital which is driving down returns. We don't need to try and increase it as people with a surplus are always going to invest it.


I agree there's a problem there: we seem to have more capital than we need, yet we also have less savings (in the sense of people deferring consumption) than individuals need to have a comfortable retirement, for example.

I have yet to see good solutions for this problem.


So a teacher’s 401k is money they don’t really need? Because that’s an investment too you know.


Just a note with this post's structure:

I'm surprised in this day and age of dealing with complex global economic systems that we'd upvote any post that starts with an absolute view "The correct solution..."


Maybe it is the correct solution?


I think this conveniently ignores the risk factor your risk of not getting payed your wage is a tiny fraction of the risk of someone loosing the invested money. You want to participate on the win side of that risk without sharing the losses.


You raise a good point about risk profiles. Let's consider other asymmetric risks?

An employee is hired at will and largely vulnerable to employment risk. The employee has no legal claim to income earned by an employer beyond general compensation provided in the duration of employment. On the other hand, an investor, without major financial restructuring, can through equity or debt secure a claim with various degrees of seniority.

So, to counter your claim, an employee is exposed to downside through these terms.


> An employee is hired at will and largely vulnerable to employment risk.

The employee is almost always paid for work they have already done, except in extreme circumstances. There are substantial legal protections in place to assure this. There are entire divisions of Federal and State governments in place to ensure that employees get their wages for work they have already done.

The risk you're talking about is that they may not continue getting paid the future. They haven't done that work yet, that work may not even exist and need to be done yet, so of course there's no guarantee that they'll get paid for it.

In order to make it analogous to the risk an investor takes, the employee's deal would have to be something like "come in and work for 40 hours a week, if it turns out your work created a profit, you'll get a cut of that profit in a few months or years"


> governments in place to ensure employees get their wages for work they have already done.

does payment to employees override payment to creditors/investors when a company goes belly up? I get the feeling that employees are secondary compared to the primary creditors.


the coupon on bonds is not capital gains so as far as this discussion goes taxes and wages are first. Also generally you have the whole investment at risk vs a few weeks of wages.


To be more precise, you are proposing eliminating the long term capital gains deduction. Short term capital gains are already taxed as regular income.

In other words, you propose eliminating the tax advantage of being a long term investor. Active traders will be unaffected.


I mostly agree, but not quite.

> abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate.

I would rather see a low but nonzero corporate tax rate with very strong enforcement. Otherwise it would be too easy to create a corporation to defer taxes indefinitely.


I would agree, if they taxed "real gains" not inflation.


I'd rather go in the opposite direction. Tax all ordinary income as corporations get taxed. Corporation only pay taxes on their profits, not on the expenses necessary to keep them alive, so why not give the same deal for people?

Yes, it would make people's taxes more complicated, but also much lower. Software like Mint and Personal Capital already make it easy to track expenses. Although they might not be accessible to everyone, such as people who are unbanked, but in that case they're probably not making enough to be taxed in the first place.


Two problems, first the tax system needs to raise a certain amount, just to cover government expenses. So putting forward a proposal of lowering taxes should always be accompanied by a proposal of how to cover the shortfall.

Second, I would actually argue that everybody being unhappy with the tax system is an expression of the too complicated tax system. The problem is, that everybody has the feeling that their neighbor is paying less than their fair share, because the neighbor has found the one weird trick to avoid taxes. So I would actually argue that the opposite is the way forward, radically simplify the tax system, say you get some tax free minimal income and everything above is taxed with 50%. Then people would at least have the assurance that they understand how taxation works, and I would assume are quite a bit happier paying taxes. (Well, nobody likes to pay taxes, but at least compared to now.)


Usually you want to use income taxes to discourage particularly high wages, if you take away expenses then this effect becomes less strong, which could lead to more inequality.

Taxing money at the point where it leaves the 'corporate' sphere and enters the 'private' sphere is also a fairly simple way of ensuring there are no loopholes. This is also why tax on capital gains is necessary.


Progressive tax schemes more or less do this.

Deductions take them in the other direction, giving people with higher bracket income a larger benefit than people in lower tax brackets. Of course they are still paying more tax, but deducting $30,000 of mortgage interest from the 39.6% bracket is quite a bigger tax benefit than deducting $5,000 of mortgage interest from the 20% bracket.


Isn't this what we already do? For individuals, our income is more or less profits, which is what we're taxed on. You can claim deductions against your income for the expenses your occurred while getting that income.


But for a company, they can claim taxes on expenses such as rent, but for an individual, they couldn't.


Well rent isn't an expense directly occurred while earning income. It isn't a cost of doing business.


It's hard to do any business when you're homeless. Likewise you can't do any business while you're starving.

A company's rent for their office space is considered a business expense. That's what I'm proposing for individuals. Each person is an individual "business" selling their services on the open market. Every expense that is necessary for them to be able to do that should be deductible.


Corporate taxes include foreign companies which would otherwise extract money tax free from the US economy. Removing them is a terrible idea that increases the net US tax burden.

Further, the tax rate is less important than the fact capital can appreciate for 40 years without paying any taxes what so ever. Remember the robber barons accumulated vast wealth just fine in a time with extremely high personal income taxes. Those appreciated assets then pass on without ever being taxed at death.


What are the unintended consequences of that? If a capital gain gets taxed at 35%, it follows that you will have less incentive to seek capital gains in higher risk investments. Look at the paucity of VC and angel investing in France for example — extremely high capital gains taxes result in much more conservative investing and thus a relative lack of funding for startups. Much startup investment is from quasi-government programs that require Byzantine and Kafka-esque processes that favor “safer” businesses that fit in with central planned priorities rather than businesses that might become truly disruptive.

It’s simplistic to suggest making tax rates the same. Capital gains are what drive investment. Increase the tax on investment and naturally, you will get less investment. Capital gains are a reward for risking capital. You lower the reward, you will create a reduction in investment — which has a much more deleterious economic effect than the marginal gain achieved from raising the tax.


>corporate income tax that justifies the "double taxation" argument

Why should any credence be given at all to "the double taxation argument"? Everybody gets taxed more than once.

If you're going to make a taxation argument based on fairness it would make more sense to consider whether the wealth flowing to you was earned by you (income, capital gains/dividends in a company you built) or whether it is an entitlement (e.g. rental, dividend & capital gains income fro the stock market that would accrue just as easily if you were in a coma for a decade).


Corporate income tax is just an indirect tax on the populace.

regardless, just flat tax all income equally and refund everyone a set amount that can be adjusted as needed. In other words, use the old flat tax that some have pushed to get your tax equality and basic income in one step. (no cap on income or tax from it)

in this day and age the computational power and such is such that we can easily do it all.

the reason it won't? because a flat tax/etc takes power away from politicians who use the tax code to punish and reward, it never has been fair


>Tax capital gains as ordinary income. It's simple and fair.

It might seem like money is money: if you have $20,000 more than a year ago, due to making capital gains on something you've just sold, you're $20,000 richer (less taxes) than if you hadn't invested. If you make an extra $20,000 in income through a salary raise (you get a raise to $80,000 from $60,000) you are also $20,000 richer (less taxes) than if you hadn't worked for, argued for, and gotten the promotion or change of jobs. And if as a side gig you sell $20,000 of software as a service as a 1-person engineer with a web app, you're also $20,000 richer (less taxes) than if you hadn't been on that market and promoted it in the right way.

And yet these three are totally different sources of wealth in every respect, and taxing them equivalently would have a totally different effect on people's behavior, as well as produce wildly different amounts of tax revenue. They are also subject to different ideas of "fairness".

The main difference is risk structure.

There's a counterparty to most salary income which guarantees it in a way.

By contrast, capital investments can go up and down, so if you want people to make capital investments it makes sense to have a lower tax rate to incentivize it.

There's a risk when you make income, but it is basically limited to the chance that your employer will go bankrupt and not pay for one month of that income. (Or similar risks if you charge someone yourself.) These risks are absolutely minimal and a whole different kind than the idea that capital investment will not appreciate (or even go to 0!)

You can feel this difference yourself quite easily: if you had $1.25M in cash how much of it would you make as a capital investment, and into what kinds of investments (how risky) if capital gains were charged at 90%? (You could keep only 10% of the gains.) I think most people would make only exceedingly unrisky investments, basically keeping it as cash. Investment would be heavily disincentivized.

On the other hand would you stay at home or work for a $1.25M/year salary if it were taxed at 90%?

Most people would still work! And there are historical examples of this (where the marginal tax rate at the highest end was 90% or more.)

So saying capital gains = income is very dangerous from the point of view of incentivizing investment (fundamental to capitalism) and also ignores the risk structure.

The only time it seems similar is in a "bubble mentality". In other words, if you think that all capital investments always appreciate. For example if you thought this way: of course it's not risky; of course it will go up; of course I would put my $1.25M net worth into bitcoin, after it goes to $20M then even if I had to let go of 90% of my gains it still makes a lot more sense than keeping it as cash. The fact is it's no different than $18.75M of income from any other source.

I hope I don't have to tell you how irrational and bubble-like this thinking would be.

I believe that in sane capital markets, capital gains and earnings from other sources are entirely different kinds of things. Investment behavior responds extremely different to these things.


I would argue that income tax is immoral - the more you care and provide for the society - the more you are punished for it. Only fair tax I can think of is a poll tax, where everyone pays the same amount regardless of their income. With this model you could think of giving 100% discount to those who can't afford it.


> the more you care and provide for the society - the more you are punished for it.

Could you expand on your argument? It appears that you are arguing that income directly correlates with social benefit, which I would argue is at the very least not obvious. What is the precise benefit of say a Ferrari dealer compared to a typically lower income trade like a teacher?


> What is the precise benefit of say a Ferrari dealer compared to a typically lower income trade like a teacher?

The Ferrari dealer's value to society lies in connecting prospective producers and consumers of Ferraris. It is popular to undervalue middlemen, but without the dealers producers' skills would be underutilized while buyers' wants would go unfulfilled. Presumably the job itself is not something just anyone could do, either, or everyone would be dealing Ferraris (and the pay would be much lower); one needs a relatively rare combination of personality, skills, and connections to succeed.

The marginal benefit to society of yet another new teacher, on the other hand, is not very high. Education is not something society particularly values; primary school these days is basically a glorified day-care. Nonetheless, the role of teacher still carries a certain glamour which ensures a steady supply of idealistic applicants, despite the low wages. Whatever issues the educational system may have, throwing more warm bodies at the problem is not likely to prove any more effective than the past and ongoing attempts to resolve the issues with piles of money.

If you're approaching this from the position that a teacher "objectively" provides more benefit to society than a Ferrari dealer, despite the fact that the dealer's services are clearly valued more highly, then I'm afraid I can't help you. The marginal value, and consequently "social benefit", associated with performing a task is subjective, not objective. The closest you will ever get to an objective measure of value is the price the good or service has historically commanded in a free market, and even then all you really know that that at the point the trade took place the buyer valued the good more highly than the payment, while the reverse was true for the seller. If the seller makes a profit it means that they took materials valued at one price and turned them into something valued more highly by the buyer. In the absence of external costs, what benefits the buyer also benefits society as a whole, if only in the aggregate.


People at the top are usually getting more benefits from society, so they should pay more. Jeff Bezos's riches from Amazon couldn't exist without a vast highway network, regulated airspace, stable government, etc. A person digging ditches or picking strawberries in the central valley can do that without many of the previous benefits.


You are going to the extremes - most wealthy people don't pay taxes or pay what they think is right. Who is getting shafted is the middle class that pays for everyone and is bleeding money, because the poor enjoy number of benefits and exemptions and the rich can afford loopholes.


But all the workers at amazon pay income tax that go into that infrastructure.


> the more you care and provide for the society - the more you are punished for it

If marginal tax rates exceeded 100% you might have a point. Not to mention the implicit bizarre self-righteous assertion that income correlates directly with "caring for society". Tell that to fire fighters, EMTs, teachers, and disaster aid workers.

But I guess "marginally, the more you convince others to part from their money, the less you directly benefit from it" doesn't quite get the objectivists as agitated.


In the free society those people would have been paid as much as society thinks they deserve. In socialist society specialists must be paid much more than they deserve to offset progressive taxation and that is at the cost for less skilled workers. This increases inequality as people are not capable of getting wealthy.


Capital gains are only taxed for American investors. Foreign investors get away scott free. Their proceeds are highly unpredictable and even more cyclical compared to corporate income tax. There are too many ways to defer or never pay them. It's more reliable as a tax base to take a little of profits every year than take a bunch all at one uncertain time in the future.


I don't have problem with rich people making more money.

After all capital should go to people who can best use it.

Did you also create as much as value as Mitt Romney? As many jobs created?

If not then i think he deserves more money, so that he can continue doing that.

If James and Bob both make $100 but James invested that money into company (which used his capital to create more jobs) while Bob simply hold onto that money, I don't see anything wrong in James ending up with unfairly large returns (along with low taxes) since that's what's best for the economy.

Bob might be working somewhere, buying stuff for his family, indirectly creating jobs but if James money creates more jobs and value, he will likely a better bet.


We are (literally or figuratively) in Silicon Valley, disrupting everything.

Why is anybody suggesting that innovating in the form of investment into companies, is creating jobs? Value, yes, by definition since it produces enormous wealth done properly. Why would anybody think this behavior creates jobs when ideally it tends to eliminate ALL jobs and charge eagerly into that Star Trek future?

'capital investment creates jobs' is a completely outdated concept that will never, ever return to validity.


'capital investment creates jobs' is a completely outdated concept that will never, ever return to validity.

Why look at it in isolation?

Here we comparing taking a job and collecting a paycheck vs investing capital.

Investing capital is more likely to create or eliminate jobs which makes economy efficient than taking a simple job.


By all means he deserves more money, no problem. But why with a lower tax rate?


By all means he deserves more money, no problem. But why with a lower tax rate?

Labor produces guaranteed income atleast in the west.

But investing capital doesn't.

How else do you incentivize risk taking?


By all means he deserves more money, no problem. But why with a lower tax rate?

Low tax rate can be seen as a discount from society.

So, how else do we incentivize him if not by lower tax rate?

And if we don't, he will just take a lazy job and continue earning his paycheck.


Incentivize him to make money for himself? I'd like a discount from society for doing that myself. How much does Romney actually contribute to society as a whole by making so much money for himself? Why does he deserve a discount?


Incentivize him to make money for himself?

You are talking as if capital gains don't increase efficiency the company, help produce more goods and services for the people or create/eliminate useless jobs via automation. He only gets to keep money for the value he creates for the society. Society gets to keep the value.

Now he might be corrupt or using loopholes, but that's smth we need to fix.


> abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate.

That's not the double taxation argument. After abolishing the corporate income tax, you still have to pay the personal income tax.

The double taxation argument is that money now is better than the same amount of money later ( https://en.wikipedia.org/wiki/Time_value_of_money ). But the concept of the capital gains tax is that someone who defers spending their money must pay an additional tax despite not receiving additional value. Their larger amount of later money is the same money-value at a higher tax rate.

> the idea that there is one set of rules for the rich and another for everyone else is already stressing our nation.

Question: are you aware of any nation at any point in history which was large enough to have "the rich", but which did not apply different rules to the rich in the sense you're talking about?

This may not be a major source of societal stress.


You are incorrect about what is often referred to as a "double taxation argument."

https://www.investopedia.com/terms/d/double_taxation.asp

Double taxation often occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals. When corporations pay out dividends to shareholders, those dividend payments incur income-tax liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level.


That is a double taxation argument against the corporate income tax.

I described the double taxation argument against the capital gains tax.

Unsurprisingly, different taxes are relevant. But I feel safe in saying that "the double taxation argument that justifies the capital gains rate [being different from the labor income rate]" is the double taxation argument against taxing capital gains, not the double taxation argument against taxing corporate income.

From your link:

> Double taxation is a taxation principle referring to income taxes paid twice on the same source of earned income.

The model I described matches this definition perfectly. Where do you think I was incorrect?


I'm not disagreeing with any of your ideas. I'm just saying that it is very very common for people to say, for example, "capital gains taxes should be less than wage taxes because of double taxation: the income is already taxed at the corporate level and then it gets taxed again at the individual level."

It is very uncommon for people to say that double taxation has occurred when a nominal (but not real) gain due to inflation is taxed.

I'm not saying any of the concepts you have described are in any way wrong. I'm just saying that the way you use the phrase "double taxation" is unusual and is extremely unlikely to be the same as other people you might talk to.


> It is very uncommon for people to say that double taxation has occurred when a nominal (but not real) gain due to inflation is taxed.

Note that this was not any part of the model I described; assuming inflation of 0%, capital gains taxes are still double taxation because the value of $100,000 (real, inflation-adjusted, or your favorite equivalent term) today is greater than the value of $100,000 inflation-adjusted dollars 20 years from now.

Believing that "the double taxation argument that justifies the capital gains rate" has to do with the corporate income tax is a significant mistake that will cause you disappointment should you manage to eliminate the corporate income tax -- the arguments for a lower capital gains rate will not go away, because eliminating the corporate income tax will not address them.

Here's a professional economist making the same point in far-off 2017: ( http://econlog.econlib.org/archives/2017/07/do_you_really_w.... )

> I always find that some people are confused by the claim that investment income should not be included with wage income. I like to explain this with a thought experiment of two equally well off twin brothers. Assume that both earn identical lifetime wage incomes, and neither inherits money from their parents. Then both are equally well off. If one chose to buy two Hondas and the other chooses to but one BMW, you would not say the guy with two cars is better off. If one chooses to buy a BMW at age 25 and the other saves and buys two BMWs at age 55, you would not say the more patient brother is better off. (Unless you were the US government). Future goods have less value than present goods.


What is the modern argument for preferential tax treatment of capital gains?

Arguments against it seem compelling to me:

1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American.

2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of resources.

3. Many states including California tax capital gains at the same rate as ordinary income; CA is not exactly suffering from lack of investment income.

4. Optics are terrible: I and many other ordinary Americans pay a higher average tax rate than the very wealthy, including ex-presidential candidate Mitt Romney and in all likelihood President Trump.


https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is a good place to start. Right up top is a nice summary:

"Starting from the conceptualization of capital income as future consumption, the taxation of capital income corresponds to a differentiated consumption tax on present and future consumption. Consequently, a capital income tax results in the distortion of individuals' saving and consumption behavior as individuals substitute the more heavily taxed future consumption with current consumption."

Here is a simplified explanation of the above:

http://www.thebigquestions.com/2010/01/27/a-quick-economics-...


These arguments use a simplified model where capital income occurs as the consequence of investing wage income. They don't address the modern reality that capital income replaces wage income, through accelerated depreciation, inheritance, carried interest, etc.

And yes, of course taxing capital is distorionary; but so is taxing labor, and exponentially so when capital income may be substituted for labor.


You asked a question. I gave you an answer. I agree that it is a complex question with many competing arguments on both sides.


Agreed; not attacking you, I just feel like the pro-differential-taxation arguments are too theoretical and ignore political and economic realities.


My personal view is that the pro-differential-taxation theory mostly argues for zero taxes on cap gains. But you're right that this ignores political and economic realities. In particular, I find the discussion about the difficulty of distinguishing between capital and wage income (the topic of Fred's blog post!) particularly compelling. So a compromise is in order: lower taxes on cap gains but not all the way to zero.

This is, not coincidentally, the status quo in the US and most other western/developed nations.


35% of all financial assets in the US are precisely the consequence of investing wage income: retirement savings.

[0] https://www.ici.org/research/stats/retirement/ret_17_q4


That argument would work in an economic environment with high inflation, high interest rates, low overall rates of investment and a high capital gains tax.

The fact that we are currently operating under an environment with low inflation, low interest rates, too much capital floating around and a low capital gains tax rather suggests that it should actually be raised, and quite a lot at that.

If raising capital gain actually did bring forward consumption then that would actually act as a form of economic stimulus (on top of filling up depleted state/city coffers), none of which would be unwelcome. Unless you're extremely wealthy.


1. The higher the capital gains tax rate, the less money will be invested.

2. Higher rates make for less efficient economics, because people will hold on to poorly performing investments longer.

3. A big chunk of capital gains are actually inflation.


Every point you make applies equally well to labor:

1. The higher the labor tax rate, the fewer people will work.

2. Higher labor tax rate makes for less efficient economics because workers will prefer lower-paying (less stressful) jobs.

3. Wage tax brackets are not indexed for inflation.

Given these, why should the tax code prefer capital ownership to labor?


1. only if they have alternatives to work.

2. are you sure about that? Lower paying jobs tend to be more stressful.

3. they are last time I looked, though those things change over time


This sounds like the gross argument that it's more efficient to tax labor because they have no recourse. The rich can move, hire lawyers, etc. to avoid taxes, so more it's efficient to focus on the hapless poor!

The rebuttal is to simplify the tax code as to eliminate loopholes, such as preferential income taxation.

You're right and I was mistaken that tax brackets are indexed for inflation. I'd support indexing capital gains if it eliminated their preferential taxation.


>1. The higher the labor tax rate, the fewer people will work.

This is what you said and is basically untrue. It is not a gross argument, we are talking about how taxation motivates people. The fact that wage income is taxed does not seem like it would make people work less.

This may be different if we ever start a significant movement towards a post-scarcity economy where automation makes necessities so inexpensive that people with even a small amount of capital do not need to work. Then you might have to do strange things to incentivize people to do the few jobs that need humans.


1. The higher the labor tax rate, the fewer people will work

If higher tax rate pays for better infra and healthcare, more people are likely to work.

2. Higher labor tax rate makes for less efficient economics because workers will prefer lower-paying (less stressful) jobs.

Isn't labor tax progressive, so bottom earners do not pay a high rate. Higher paying job might have more stress but it's offset with more disposable income and there is strong incentive to invest this disposable income into lowly taxed capital gains setup in the absence of which either people will hoard this money (where it sits doing nothing or hold onto worse performing assets) or spend it ( increasing inflation (which isn't good for economy)

3. Wage tax brackets are not indexed for inflation.

Yes, for higher wage earners there is strong incentive to purchase stocks/real estate to enjoy lowly taxed capital gains.


The only point that seems unfair is point 3, which can be mollified by adjusting for inflation.

If we reduce points 1 and 2 to their logical conclusion, capital gains should not be taxed at all. This is idiotic. Due to the structural advantages individuals with money have investing, you'd basically be creating a system where people with money would capture almost all of the wealth.

The end goal shouldn't be the most efficient economy possible, it should be the highest standard of living for the individuals in your country. To that end, a certain amount of taxation is necessary.


> If we reduce points 1 and 2 to their logical conclusion, capital gains should not be taxed at all. This is idiotic.

FWIW a great many people believe that capital gains should not be taxed at all. And while there are certainly fine arguments against that point of view, I don't think it's fair to say that "it's idiotic" when their p.o.v. is based on solid economic theory.


I'm familiar with the theory, but I think economic theories that only looks to maximize economic productivity while ignoring philosophical or ethical concerns are idiotic.

If you don't take into account what is being produced and why, you are left with a line of tautological reasoning that more productivity is good because more productivity is good.

The reason this is idiotic because there are a lot of ways to maximize productivity where the vast majority of people do not benefit. Not only that, but there is absolutely no reason that maximizing the productiveness of an economy results in maximum utility (in the philosophical sense).

Even if you could demonstrate that economic productivity was positively correlated with (philosophical) utility, you'd have absolutely no guarantee that utility would be distributed equitably. You could literally have 1 super happy person with everyone else on the planet enslaved in perpetual (productive) agony.

That's even before you get into the fact that maximizing production now probably ends up creating a hellscape of a planet tomorrow.

Of course you could argue that you can account for all of this using negative externalities. In that case you might as well tax capital gains to account for the negative externalities. I suppose you could tax something else, like lifetime earnings, but the point is I feel comfortable making the claim that not taxing capital gains is idiotic.


Economic theories do take into account what is produced and why. No one thinks that we should devote 90% of our economy to paperclip production even if that meant we would be producing more total stuff than otherwise. When people talk about economic efficiency they actually are talking about utility.

Economic theory can also address questions of equality. There are efficient ways to redistribute income and there are less efficient ways.

Economic theory can also address environmental questions. There are efficient ways to address resource usage and there are less efficient ways.

Philosophical and ethical concerns are indeed outside the realm of economics. That part is true (which is why I said "there are certainly fine arguments against that point of view"). But much of your rebuttal understates the range of topics than can be reasonably addressed by economics.


My topic statement was thus:

> Economic theories that only looks to maximize economic productivity while ignoring philosophical or ethical concerns are idiotic.

I did not claim that economic theories cannot address philosophical or ethical concerns, I claimed that economic theories which do not take these in to account are idiotic.

I am not an economist, but I took quite a few economics classes in college. I am confident that I know enough to say that eliminating the capital gains tax is not a policy that would be pursued by someone looking to address concerns of regarding equality or the environment.

The economic theory that supports the elimination of capital gains tax is one that focuses on maximizing productiveness above all else. It's the type of policy you come up with if you got your hands on a macro 101 textbook and you forgot other people exist.


> I am confident that I know enough to say that eliminating the capital gains tax is not a policy that would be pursued by someone looking to address concerns of regarding equality or the environment.

Your confidence is misplaced. On equality one might convincingly argue that by lowering cap gains rate we could increase the overall growth rate of the economy. By doing so we could increase other taxes on the rich without leaving them in a worse state than they would have been in the lower growth economy. We can then use this additional tax revenue to fund social services or otherwise redistribute income to reduce inequality.

On environmentalism, one might argue that we should cut cap gains taxes and, in order to make up the lost revenue, institute a carbon tax or other tax on environmentally damaging activities. This could have a profound positive impact on our environmental footprint.

Now, I'm not necessarily saying these are good ideas. But they are also not, prima facie, idiotic (to use your word). They are complex questions uncertain impacts. Reasonable people can disagree.

Your assertion about "macro 101 textbook and you forgot other people exist" is also quite strange when you consider the fact that I'm not talking about college freshman's stoner thoughts on optimal taxation of capital. I'm referring to the ideas of professional PhD economists who are well respected in their fields.


In context, I believe that OP was arguing for eliminating capital gains from our current system, not totally rewriting the way our taxes work such that capital gains was eliminated but we recovered those taxes in another manner.

My argument accounts for this:

> Of course you could argue that you can account for all of this using negative externalities. In that case you might as well tax capital gains to account for the negative externalities. I suppose you could tax something else, like lifetime earnings, but the point is I feel comfortable making the claim that not taxing capital gains is idiotic.

I mean, ideally we would have a system where negative externalities were taxed appropriately, however that is a monumentally complicated task, and I somewhat doubt it could be done efficiently. This is especially true when you start dealing with externalities that arise from situations like "the reason why eliminating capital gains tax is productive is because people will continue to reinvest their money because it's the most productive use for their money," where reinvest effectively means you end up buying more and more of the economy.

What regulations do you enact to prevent this from devolving into feudalism? How do you ensure that system you have put in place isn't destroyed by regulatory capture? What if having a ton of money is a negative externality in and of itself, even though it means you contribute more efficiently to the economy?

I know that capital gains tax is inefficient, but it's an easy tax to levy, it's hard to evade, and politicians can understand it.

Removing capital gains tax and accounting for the externalities is not idiotic. However, removing capital gains tax in our current system would almost definitely be an idiotic move.


Capital gains taxes resulting in less efficient resource allocation does not imply that it is instead allocated in an ethical way, nor distributed more equitably, or any of the other notions mentioned.

Having a more efficient economy means there's a surplus that enables resources to be expended on environmental and social concerns. Hungry people don't care about those things. There's a reason poor countries tend to be the worst polluted.

Lastly, efficiency isn't about maximizing production. It's about maximizing productivity, i.e. production/cost.


I never said that less efficient resource allocation would result in more utility. That's a straw man. My claim is the argument that more efficient resource allocation would result in greater utility is almost certainly false in a hypothetical situation where capital gains tax is eliminated.

What evidence have we ever seen that allowing wealthy individuals to make more money results in increased utility? There is literally no reason to believe that any of the marginal increase in resources would be expended on environmental and social concerns.

The only reason you could justify eliminating capital gains is if you literally believe all government is evil.


> What evidence have we ever seen that allowing wealthy individuals to make more money results in increased utility?

SpaceX is a modern example.

Historically, people of great wealth have been able to invest in great projects. Scientists historically have been wealthy people. The guy who won WW2 was a wealthy man who invested his fortune into developing radar. Many historians believe that radar shortened the war considerably and saved an awful lot of lives. Wealthy people donate a ton of money to universities to fund research. (UW has a Gates building and an Allen building.)

> on environmental and social concerns

The Gates Foundation, for a modern example. For a historical one, see the Carnegie libraries.


I can't think of worse examples of industries supposed to benefit from reducing funds available for government investment to ensure more funds are available for private investment than space and defence, which have depended almost entirely on government investment.

Similarly, charitable donations are generally tax deductible so again, if anything, capital gains taxes serve to encourage people to allocate more of their returns to it.


SpaceX shows that people with great wealth can embark on successful space programs.

> charitable donations are generally tax deductible

I find it ironic the complaint that wealthy don't use their money to help social causes and yet complain that such help is tax deductible.


SpaceX took enormous amounts of funding from the government, which also happens to be its only customer for most of its services. Virtually all the technological advances which made it feasible for Elon Musk to found a rocket company were based on enormously expensive state funded programmes which private companies would neither have had the fundraising ability nor the realistic expectation of returns to embark upon.

Arguing that the space industry would be better off with less government funding and more private wealth is akin to arguing the earth is flat.

And I'm not "complaining" that private charitable donations are tax deductible, I'm observing that because they are tax deductible they're not particularly likely to be reduced by the existence of taxes.


SpaceX has saved the government boatloads of money by breaking the monopoly ULA had on government launches. It's one of the wiser investments the government has made recently as not only has it saved the government money but made a US company dominant in the commercial market to the point the market is expanding because costs are so low.


SpaceX could not have been started by your or I, because we are not mega wealthy. It never would have happened without the ability for Musk to accumulate great wealth.

If you want only government funded research, take a look at the old USSR. They produced a few notable advances, but nothing like the quantity produced in the US.


"Rich people fund research universities after getting rich" seems like a far less efficient way to fund research universities than not letting them get so rich in the first place.

I'd prefer the direct route of funding them from the public coffers than waiting on the largess of rich people to fund them decades after their fortunes have been made.


Wealthy people have often funded very valuable research that the government had no interest in:

1. rockets

2. radar

3. jet engines

Government research is directed by politics, which usually means safe, non-controversial topics, and money directed at politically connected scientists. There's nothing "efficient" about that.


Privately funded research is directed by one person's politics, which is far, far less good than the politics of a democratic state.

Or maybe you trust rich folx to call the shots? I don't. The world's moved on from monarchy.


1. The higher the capital gains tax rate, the less money will be invested.

Wouldn't that also be true if they don't have alternatives to invest? What are those alternatives?

2. Higher rates make for less efficient economics, because people will hold on to poorly performing investments longer.

Why does it matter to the government/citizens if some investments are held onto for too long? What hit would the gov take?

3. A big chunk of capital gains are actually inflation.

So?


It used to be that we had shortage of capital for large projects. So capital accumulation was incentivized over consumption. This is probably no longer true with some companies sitting on hundreds of billions of dollars, but the system persists.


American dream is actually using capital to make others work. That is the way to scale. Not necessarily hard, but smart work.


Taxation of carried interest as capital gains makes absolutely no sense - I can't think of a better example really to illustrate "one set of rules for the rich and another for everyone else.'


Carried interest is effectively the General Partners share of the dividend. Dividends are taxed at a lower rate than ordinary income, so this is as well. This is true whether you’re poor and own one share of a dividend paying stock, or you’re Ray Dalio.

Here a pretty good breakdown of how it works and why it makes sense [0].

To be clear, I’m not saying you have to like it, but the rich have been getting richer since the beginning of time. I don’t expect that will ever change. It’s as true with humans as with animals like lions (albeit the measures are different, as lions have no care about dollars).

[0] https://www.cnbc.com/2014/03/04/cnbc-explains-carried-intere...


Yes, but as the parent article states, and even what is pointed out in your own link, while dividends are taxed at a lower rate, the manager is paid the lower rate on capital that is not his to begin with. That's the part that makes no sense to me. It is quite simply an incentive payment for his labor: it's income that investors pay him for his expertise, and as such should be taxed at income rates.


You & I start a company. I provide $100,000 in seed money but little actual work/time. You provide no seed money but a lot of work & time. We agree to split ownership of the company 50/50.

5 years go by.

We sell the company for $1,000,000. You get $500,000, I get $500,000.

Should I get to pay a lower tax rate than you?


FWIW, the common rebuttal scenario goes like this:

You and I earn $200k in wages, and each pay $100k in taxes. You spend your remaining $100k on a boat. I invest my $100k, and 5 years later it's worth $200k. Suppose that $100k gain is taxed like ordinary income at 50%. After taxes I have $150k, which I also spend on a boat.

Without taxes, you would have had $200k to consume in year 0, but you actually got $100k; your effective tax rate is 50%. Without taxes, I would have had $400k to consume in year 5, but I actually got $150k; my effective tax rate is 62.5%.

Who should pay the higher tax rate? The person who consumes their wage income immediately, or the one who defers consumption? For them to be equal, the capital gains tax rate has to be 0%.


My comment was providing a defense of preferential tax treatment for carried interest.

You provided an argument for a 0% tax rate on capital gains.

I'm not sure how your comment is a rebuttal to mine? Perhaps you responded to the wrong comment by accident?


Your example seems to have nothing to do with carried interest. There's a single investor; no investment manager. The question around carried interest is whether certain types of income earned by investment managers should be classified as labor or capital income, whereas you have one person with labor income and one person with capital income, and are asking who should be taxed more heavily.


In my comment "I" am the investor and "you" are the investment manager.

I'm sorry if that was unclear.


No, you have risked nothing but your time. Since you have no investment at risk you should not get preferential tax treatment meant to encourage you to do so.


(I think you might have inverted the "I" and "you" in my scenario making your comment a bit confusing. But I think I understand the point you were intending to make.)

Why is the risking of money deserving of special tax treatment but not the risking of time?


I personally don't think it is but that is the logic used to justify the capital gains tax.


No. You shouldn't. The person doing the actual work should be paying it as tax on labor, and the person who put up the funds should be paying it as capital gains. And obviously, capital gains should be taxed at a rate greater than labor.


That is a fine point of view, but perhaps outside the scope of the topic under discussion.


The parent poster is saying that carried interest should be capital gains taxable to avoid having it in the higher bracket, as it would be if it were taxed as wages. Thus, the idea that it is wages but that should be cheaper than capital gains answers the issue.


Uh, what?

You want to make it more expensive to increase productivity? (Because that’s what capital does - it gets invested to increase profits).

The logical path you’re going down would replace road builders with people with spoons to move dirt around and file down rocks with spoons to put them in the ground to walk on.

Seriously, if you consider the logical conclusion of your argument, we end up in madness.


That's nonsense. The gains of investing in a work crew still make money for capital. They still get their income. The increase in productivity is its own reward - the road gets built faster or with less labor, you're able to out-bid your competition. It makes more sense to extract money from the people who contributed money than from people who contributed labor.


Nonsense?

#1 You’ve just discouraged capital investment.

#2 you’ve just agreed with my initial statement that there is a reason carried interest is taxed the way it is. If you tax capital more than labor, then by definition, carried interest is fine, because the people who pay it ARE THE PEOPLE DOING THE LABOR!!

Seriously, I realize that this is an emotional topic for many people, but you have to think through the second order effects. The first effect is pretty simple, but in this case the second order impacts have all sorts of ramifications.

I’m fine with people having their opinion and feeling that something is right or wrong - that’s healthy. What’s not healthy is having an opinion that is either self-contradicting, or made out of frustration.

Think through the scond order effects. Harry’s gave a great exam-let that showed just one simple version. There are tons more.


Carried interest is a misapplication of the idea of labor. Of course it's fine that they're taxed less than people who put up only money - but I disagree with the entire idea of capital taxation being less.

Capital investment is discouraged, but it's not as if it's going to stop due to this discouragement. What are people going to do with their money, NOT invest it? Found their own companies instead? Acquire capital assets and lease them? It's not as if you can work _instead_ of capital gains, cap gains income is passive.

Capital gains taxes in the US have been higher in the past, and at several points, were higher than wage taxes are now. Things worked out fine.


Cap gains are absolutely NOT passive.

I build a company. Work my fingers to the bone for years, and take a significantly reduced salary compared to my market value. Later I sell it for a billion dollars.

That is taxed as long term capital gains. Are you saying that’s passive? Sure, you buying a few shares of Ford is passive, but tons of capital gains like in my example are not.

Also, you comment “that came out fine” is rather flippant. When you dominate the world after a world war, pretty much everything is going to go your way, whether you tax income at insane rates or make black people drink from separate fountains. Both occurred in the same time period. If you use you’re argument that “things worked out fine”, why not also keep that around? I think the reason is we’ve managed to see that correlation doesn’t drive our decisions there. And they shouldn’t in taxation either.


Then let hedge fund managers organize their funds as equity purchases from their investors. To use your analogy, if managers were deserving of 20% of the profits, then structure it as investors own 80% and managers own 20%.

Of course, that would make many hedge funds a lot less attractive for many investors. Hedge fund managers want to have their cake and eat it too.


That is (more or less) what hedge fund managers do.


I know they are organized as partnerships, but the managers don't really have any equity rights to the committed capital, only the profits. But I guess that's really no different than an investor with preference rights in a startup.

In any case, thanks very much for your explanations, really helped me think about the issue in a different way.


Happy to help out!

In any case, as I stated elsewhere(1), I'm actually not sure what I believe on this topic. I can really see it both ways.

1. https://news.ycombinator.com/item?id=17276214


This analogy doesn't work; carried interest isn't granted because of any sort of ownership stake.


That is not correct. Hedge funds and VC funds are generally organized as partnerships. The General Partners (GPs) are just as much owners as the Limited Partners (LPs).


I think harryh ‘s comment states everything I could but much more succinctly, so I’ll just second his statement.


:)


If the point of lower capital gains tax rate is to incentivize risking capital then the carried interest loophole makes no sense because the noney manager isn't risking his capital. His "share of the dividend" is just another fee that should be taxed as any other income.


If you want to discuss “fair”, I’d tend to agree with you. But taxing them while not screwing out all the other business structures that look just like this (see harryh’s example above) is damn near impossible. Which is why the exemption is in there. Figure that out and it might change. Until then, you risk screwing up all sorts of businesses that are not financial let alone hedge funds.


> the rich have been getting richer since the beginning of time

That's not true and we must be careful not to accept an aristocracy (or oligarchy) as inevitable. That the wealthy will inevitably hold and consolidate power is counter to the history of democracy, a specific rejection of aristocracy, and a system which has worked the other way in country after country to great success economically and politically - great news and great hope for humanity in these times. The foundation of the U.S. is that all are created equal, and after that it's a land of opportunity where merit wins out, not inherited wealth and corruption.

If by that you mean that rich have been getting richer relative to others, that's certainly not true. In the U.S. it's been true since the 1980s, but it fluctuates and in most other advanced economies the proportional difference (the disparity) is much less.

If you mean that there is not downward social mobility for the rich, that's also not true. I don't have the numbers, but I've read about research that overall social mobility (up and down) is significantly less than it was before Reagan. There's also the old American family story: Rags to rags in 3 generations. More concretely, the U.S. used to have higher taxes on the high income, and more importantly, a (much higher?) estate tax: Inherited wealth is not merit, but effective aristocracy. That said, I don't know the inter-generational overall trends of wealthy families.

(Or maybe the parent means something else.)

EDIT: Some clarification + the last sentence


I’ll pick out one point that you seem to miss - when the US taxed the heck out of people with high incomes, you still had people like Howard Hughes, Warren Buffet, and John Paul Getty becoming even richer than they were before.

So yes, the rich get richer, and high taxes do not stop that (but present the illusion that it stops ).

I’ll gladly admit I’m wrong if you can disprove my three simple examples. Last I hexked, they were R I C H.


You do realize that you can still have some very rich people and still have a more equitable distribution of wealth than we have today, right?


I never made that argument. Reread my comment.


I don't think three examples are representative of the wealthy overall. I didn't say 'no rich get richer'; beyond a doubt, some do - and that's fine and fully compatible with meritocracy. The question is, what is the overall trend? Is there social mobility, opportunity and meritocracy, or aristocratic power and inheritence?


Ok. Interesting point you have. But let’s dive into something that shows how statstics can get really skewed:

Take money 100 years ago. The richest guy on the planet (ignoring royalty, as those figures aren’t reliable) was John D Rockefeller. He was worth a ton of money, possibly even a billion dollars. Today’s richest man in Jeff Bezos, worth about 100 times that (depending on the stock price, somewhere roughly between 100-125 billion).

So today, people say that the wealth gap is growing. Indeed, the rich are richer.

However, at his peak, Rockefeller was worth about 1.5% of GDP ( a truly crazy sum of money that equates to roughly $350 billion today).

So if we look at inflation-adjusted money, the rich are poorer than they were 100 years ago - indeed, Rockefeller was about 3 times richer than Bezos.

So depending on the metric, the rich are getting richer, and wealth disparities are growing. But when you normalize for inflation one other factors, the disparity is not growing.

Also, if you take the poorest person at the world with zero dollars, and the richest person in the world with one more dollar, than the wealth disparity is growing, and headlines shout out crazy stuff that sets everyone’s emotions.

But zero will always be the lower bound, and the number at the top will always grow (assuming inflation).

So is disparity growing or now? Well, I think the best way to answer that is ask this question: “would you rather be you today, or Rockefeller 100 years ago?”

I’d rather be me. Between the internet, healthcare, cars, planes, etc, I’m way richer than Rockefeller, because despite all that money, he couldn’t begin to buy those things. So society has gotten much richer, and the disparity between me and Bezos is smaller than between me and Rockefeller. Also, I don’t have to really be worried about dying from the flu. Rockefeller did - even a simple infection could kill him, but unlikely to kill you or me.


Economists aren't stupid, and they've thought of these things like zero lower bound. This is a well-studied issue. When people say the concentration of wealth is increasing, they aren't saying it's increasing relative to Rockefeller's time (how far back should we go? 1492? The start of the neolithic?), but it's increasing now, such as over the last few decades.


I get your point, but have a couple issues. First, there are plenty of stupid economists. Just like there are plenty of stupid people in finance or politics, or many other things.

But I’m not going to debate that particular thing, and I’m fine if we disagree. *

That being said, the timespan question is very valid, but pinnning down the cause is really hard.

If you read the research, the highest correlation is with globalization, not taxes. Let’s pretend you fully buy into that statement. If so, would you argue against globalization? And I mean that as a serious question. This is a really hard problem, and the answers are more like foggy hints than anything else. But if we’re really honest with ourselves, and the answer was yes, what should we do about it? Taxation is hard because it immediately districts the natural market and causes many second order effects. Pulling those apart to understand the root cause is really hard and few people can do it at all, let alone well.

*My main issue is that economists tend to have a poor understand of statistics and cause and effect relative to what they need to really do their job. If you listen to Ed Yardeni, he basically throws out all macro-economics as being a sad state of affairs given how bad their models are compared to the reality they’re supposed to predict. Still worse, novel prize winners continue to spout their theories after they have been proven empirically wrong. Hence my general issue with the field. Some are clearly smart, but enough aren’t that gives me great pause.


The idea of democracy as a “rejection of aristocracy” has been well discredited for centuries now.

The topic of discussion here is not “social” but economic mobility. Let’s not mix them up so carelessly. Economic mobility is a measure of ability, or potential, not concrete events. To discuss “downward” economic mobility is to imagine wealth being forced upon these folk.


> one set of rules for the rich and another for everyone else

The rich (LPs) aren't the ones getting carry, it's the GPs who get carry.


Many hedge fund managers are plenty rich, oftentimes orders of magnitude more than some of their clients.


Yeah and there is that one chef at Google who made $45M. But the average wealth manager has less money than the average founder, and the average founder is broke as shit.


There are people much more broke than the average founder but they don't get wealth manager's or founder's standard of life.


I guess the HN "Georgist land tax as a solution to all taxation problems" meme has died off.


FWIW, here is the simple counter argument:

Alice & Bob form a partnership to invest some money. Between the two of them they invest $100. After 5 years they sell their investment for $200. As far as the government is concerned, that's a long term gain of $100 and should be taxed as such. How Alice & Bob decide to split the gains is between them and not a tax question.

I don't necessarily buy this argument, but it's a valid way to look at things.


Sure, but this is equally true for any form of labor. So you are really arguing for equal rates for everyone.

The interesting point is why do hedge fund manager labor income get taxed at a different rate then all other labor which you have not addressed.


> I don't necessarily buy this argument

Why should risking time and risking money get taxed at different rates? I guess I don't understand the argument for why LPs should pay less taxes than GPs. Especially since entrepreneurs get to pay longterm capital gains on their stock, and the risk profile of being a founder is basically identical to the risk profile of being a GP.


Yes, your first sentence is an especially pithy way to boil down what I wrote.

When I said that "I don't necessarily buy this argument", I didn't mean that I necessarily disagreed with it either. TBH, I remain uncertain.

It's interesting that you compare founders/GPs/LPs without bringing up employees. They also risk their time and, in a majority of cases, will not receive preferential tax treatment.


Employees invest their time for immediate pay off (they get paid twice a month, monthly or something like that typically) So in essence, this is short-term capital gain which is taxed at the same level as regular income.


I'm sorry, I was unclear.

When speaking about employees, I was talking about startup employees who take a significant % of their compensation as risky stock options. My point was about this portion of their compensation.


Aren't employees get a same long-term capital taxation treatment on profits from their shares for their risk of taking part of the company in exchange for their time?


It depends. But, in general, no.

Startup employees generally get equity in the form of stock options. In order for employees to get preferential tax treatment on these options they have to exercise these options at the time they are granted (which can require a large outlay of cash) and then hold them for at least one year.

Due to the cost and risk of this exercise, most employees do not do this. Instead they wait to see if the company becomes more valuable (and liquid) and only exercise the options if so. At that point any realized gains are taxed as ordinary wage income.

There are a great many resources online on this topic if you are interested in more details.


sounds like a pretty bad deal... I am glad I never accepted stock options in lieu of compensation.

EDIT: after reading more about it, it actually makes sense. What really employee is getting is an "option" similar to one can buy for publicly traded companies. And whatever option price is already reflected in employees tax situation - it is an actual expense which lowers tax base by the cost of this option.

Now - the cost of that option (i.e. different between full salary and limited salary when getting options) is something that can be very incorrectly priced (which I assume is the case in the majority of startups)

So it is not tax code discriminating against these employees. It is actually employers taking advantage of these clueless employees.


From a strictly "expected value" calculation you are probably right that in many cases startups are getting a pretty good deal when they get employees to trade salary for stock options. It's hard to say if this qualifies as "taking advantage of these clueless employees" though.

Certainly it is in some cases, but in others the employees could have a high enough risk tolerance that it is a good deal for them.

In addition employees also often make career decisions on factors that are not purely financial. This is also a perfectly reasonable thing for people to do.


From what I read typical stock option results in about 50k per year extra if company succeed. Chances of hitting that are really really small. So risk/reward doesn't seems to be right.

As for non-financial reasons - this is 100% valid point. But then why we are talking about non-fair taxation? Stocks come into picture only when employee exercise (at a nominal price on the moment employee was hired) The same would apply if you use regular options for the publicly traded company on RobingHood for example.


Why should risking time and risking money get taxed at different rates?

GP gets 2% in management fees. That's a guaranteed return for his time.

Then 20% of the profits.


> GP gets 2% in management fees.

Only at the most senior level. Most GPs only get carry, and then maybe 40 - 60k a year of salary if they get any salary at all.

And for the ones that do get management fees, they pay normal taxes on that.


(Disclosure: I'm a VC in California, which is one of the states proposing this tax.)

For what it's worth, the tax rates being proposed on carried interest in these states are very high. E.g. California is proposing 17% while Maryland is proposing 19%. The result is that these carry taxes combined with a capital gains tax can be significantly higher than regular income taxes. I think imposing taxes of this size at the state level is foolish because I suspect many VCs would move to other states and commute. I already know LA VCs who fly to SF for 1-2 days every week, and the flight from Nevada or Portland would be approximately the same. Plus housing is much, much cheaper in those areas. It would be even easier to do this in Maryland, since Washington DC is so close.


Sounds like win-win. CA gets the parasites to move, then gets to declare that the policy works because CA companies still get investment, then the policy gets applied nationally. What's not to like?

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