New proposed tax on income from interest/dividends

[Independent]

In fact, members of an Early Retirement Forum might consider the possibility that an Anti-Laffer Curve exists in very rich countries like the U.S. In other words, workers who are productive enough to generate sufficient wealth to retire early can drop out of the work force sooner the lower the tax rate is. Conversely, the higher the tax rate the longer they have to work before they can retire.

Yep. Since the biggest work/don't work decision is often when to retire, there is a real catch-22 in thinking that we can encourage more work by cutting taxes. I don't know what policy I'd recommend based on that observation, but it seems silly to just ignore it.

 

[ERD50]

But I was delivering economic value that was 3-4 times the median. My employer didn't care why, they paid me based on what I did for them. For this discussion, I think the extra resulted from "winning the birth lottery".

OK. And your employer probably doesn't care much if you deliver 4x the median output due to it coming 'naturally' to you, or through exceptionally hard work. And you can keep asking for raises based on your output, and if your boss is smart (and has the authority), he/she will pay you what you are truly worth to them. Or you can find someone else who values your output.

Are you saying that people who create a certain output and find it easy should be paid less than people with the same output but find it hard? How would one distinguish this in the real world? It seems very subjective and arbitrary, and that situation almost always leads to unfairness.

Conversely, if you had a group of people all working equally 'hard' (however you determine that), and some had 10x the output of others, you would pay them all the same because they all worked hard? If I trained side-by-side with Michael Jordon, and trained just as hard as him, I assure you no one would want to watch me on the court, and I'd get no endorsements. And I think that is exactly how it should be. You gotta perform. What other measurement is there?

The free market system of setting income might seem harsh to some at times, but overall I think it is the only workable system, and the most fair of all in the long run. I just don't 'get' whatever it is you are proposing as an alternate?

-ERD50

 

[youbet]

If you can save $1 million with 5 minutes of attention, then your company should pay you accordingly

Actually, if he can save $1 million with 5 minutes of attention, then his company should pay him just enough to retain him, or, if there are others with similar or better talents who will do the job for a penny less, fire his sorry butt and hire the other person.

Your pay should relate to your job accomplishments only to the extent of what others who can do the job as well are willing to work for. Non-competitive salary determiners (union contracts, legislated salary levels, political clout such as patronage, "old boy networks" and the like) are a huge problem working against efficiency in our economy today. Another is taxes meant to be facilitators of "social engineering."

 

[Independent]

Independent, lots of topics there - let me respond to a bite-size chunk or two. I'll try to answer another chunk later, but first...

Allow this sports agnostic person to make an Olympics analogy - Does the winner in a race work 20x harder than the 4th place person? Probably not, but the winner gets the gold and the 4th place gets zero.

If two companies are competing to get a new product out into the market place, one company may be marginally more efficient or effective, or work marginally harder, but being first to market can easily make a 20:1 difference in reward. But it wasn't a 20:1 difference in 'effort'.

As beowulf mentioned, it's tough to say what 20:1 "effort" is when it comes to these things. But yes, I can visualize it this way: It is unlikely that a group of twenty workers at the $30,000 level could co-ordinate a business plan that brings a new product to the market that creates new jobs. But some people earning $600,000 do exactly that. Yes, they rely on some of those $30,000 wage earners to get the job done, but those $30,000 people didn't create the product or the jobs. They just don't have the skill sets or experience or motivation, even if they put in the same 'effort'. Maybe substitute 'capability' for 'effort'? I think I could say that many entrepreneurs have 20x the 'capability' of many $30,000 'wage slaves'.

"Capability" may be a good word. The key is to recognize that some people can create more economic output with a given commitment of time/energy than others. In some cases, the extra capability comes from prior work (an MD worked hard to fill that brain with knowlege), sometimes it comes from luck. See may response to Beowulf. The market should reward people based on their economic output.

But how should we tax? And, should we tax capital income, or just labor income? For the highest income families, almost all their income comes from capital - and it's not the kind that individual wage earners can accumulate by LBYM.

I actually have no opinion on this - since our tax code is so convoluted, we really don't know what anyone pays in taxes based on their 'income' (we can't even agree on what 'income' is), so I can't say. I do have a problem with the numbers that say ~ 50% pay no Fed Income tax at all. But I don't know what to make of *that* number either, since some of those are getting credits, and it only accounts for people who actually filed taxes.

I'll add some numbers to demonstrate that a NST with pre-bate *is* a progressive tax. For demonstration, let's say the NST was 30% and the pre-bate offset the first $30,000 in spending. Then we have:

$30,000 spent = 0% effective tax rate.
$50,0000 spent = .3(50K-30K) = $6K tax = 12% eff tax rate.
$100,000 spent = .3(100K-30K) = $21K tax = 21% eff tax rate.

Going from $50K to $100K results in a 3.5x tax payment, on 2X the spend. Maybe you think it should be steeper, but I like the fact that I know it would actually be collected (and collected from people who pay zero income tax now from illegal/unreported activities).

And yes, I think a measure of what one spends would be a far simpler and far more accurate (on average) measure of their ability to pay taxes than some complex convoluted measure of their 'income'. And if some wealthy person wants to save/invest it instead of spend it, fine - I thought we wanted to encourage savings and investing, and make money available for credit for others?

-ERD50

I'll agree that it's impossible to get a perfect difinition of "income". It's also impossible to get a perfect definition of "consumption" (does that include tuition? health care? government services?). I'll agree that an NST could be progressive at the low end, but at the top end where people don't spend money (or can arrange to spend outside the US) I think it becomes regressive.

The market provides incentives for people to work and for people to save/invest. Any taxes on either will reduce those incentives at least a little (and a tax on consumption is a tax on work for 95% of Americans). I'm at a loss as to why we should be so afraid to tax investing but so quick to tax work. I don't see elasticities that would justify that.

 

[Independent]

OK. And your employer probably doesn't care much if you deliver 4x the median output due to it coming 'naturally' to you, or through exceptionally hard work. And you can keep asking for raises based on your output, and if your boss is smart (and has the authority), he/she will pay you what you are truly worth to them. Or you can find someone else who values your output.

Are you saying that people who create a certain output and find it easy should be paid less than people with the same output but find it hard? How would one distinguish this in the real world? It seems very subjective and arbitrary, and that situation almost always leads to unfairness.

Conversely, if you had a group of people all working equally 'hard' (however you determine that), and some had 10x the output of others, you would pay them all the same because they all worked hard? If I trained side-by-side with Michael Jordon, and trained just as hard as him, I assure you no one would want to watch me on the court, and I'd get no endorsements. And I think that is exactly how it should be. You gotta perform. What other measurement is there?

The free market system of setting income might seem harsh to some at times, but overall I think it is the only workable system, and the most fair of all in the long run. I just don't 'get' whatever it is you are proposing as an alternate?

-ERD50

I think we cross-posting here, but I'll respond even though I'm probably repeating another post.

Wages should be determined by competitive markets. But taxes are set by law. It's impossible for the gov't to know exactly how much of which wage came from luck and how much from hard work. That would be a waste of effort.

However, we can say as a general rule that the further you are above the median, the more likely it is that you benefit from an unusual level of good luck. Given my definitions of "work/luck", it's obvious that someone at $200k isn't working 5x as hard as the median worker. He may be producing 5x as much, but that extra production comes from a "capability" that is likely to have a large luck component. If you get up to $10 million per year, the necessary luck component is even greater.

It would be ridiculous for MJ to say that the only reason he outperforms you is that he "works" harder. He may have a good work ethic, but so do some ball players who never made the pros. Much of his output is a gift.

 

[beowulf]

If you're opposed to the "from each according to his ability" part of that quote, how do you think we should pay taxes? I said that in an ideal world I'd be okay with everyone paying the same dollar amount, is that your preference for the world that we live in?

The $1M in five minutes was an extreme example. But it's indicative of what "thinking," rather than manual labor can achieve. Sure, there is a "birth lottery" - intelligence, family, country, etc., are all part of that. And yes, it's luck, but so what? Until we become like the genetically engineered folks in "Gattica," it will alwyas be that way.

I've already said how I think we should pay taxes. I don't advocate the same dollar amount for everyone at all - just the same percentage with lots of room at the bottom before the taxes start for low income workers. A progressive system is fine, but as more and more people become exempt from any taxation, the burden falls on a smaller and smaller group. Our current system is clearly not working well. I've seen recent proposals by our legislators to tax fringe benefits - as you said - the devil is in the details.

The real problem, as YTG says, is that we have to figure out what to cut spending on, as I have absolute confidence that our legislators will spend every penny available and then some (a lot some).

 

[Independent]

Actually, if he can save $1 million with 5 minutes of attention, then his company should pay him just enough to retain him, or, if there are others with similar or better talents who will do the job for a penny less, fire his sorry butt and hire the other person.

Your pay should relate to your job accomplishments only to the extent of what others who can do the job as well are willing to work for.

I agree. That's why I put this in the next sentence: "(assuming there are very few people who can do what you do)." The intent was to indicate I was assuming a "typical" situation where the market rate for someone who can save $1 million in 5 minutes is probably pretty high.

Non-competitive salary determiners (union contracts, legislated salary levels, political clout such as patronage, "old boy networks" and the like) are a huge problem working against efficiency in our economy today. Another is taxes meant to be facilitators of "social engineering."

I agree that all of these can get in the way. With only 8% of private workers in unions, I don't see union contracts as a "huge" problem for our economy. Political rent-seeking is certainly a problem, but I see it going to capital (stockholders), and very high income individuals, more often than typical workers. And, if the "old boy network" is CEOs and boards, or gov't/private revolving door, I'll agree.

In most of these posts we're assuming that people actually provide value in exchange for their income, you're pointing out that it isn't always that clean - I agree.

 

[youbet]

I agree that all of these can get in the way.

Good, cuz dats da fact......

In most of these posts we're assuming that people actually provide value in exchange for their income, you're pointing out that it isn't always that clean - I agree.

No need to paraphrase me. I said what I wanted to say in my post and it stands as said.

 

[clifp]

I've already said how I think we should pay taxes. I don't advocate the same dollar amount for everyone at all - just the same percentage with lots of room at the bottom before the taxes start for low income workers. A progressive system is fine, but as more and more people become exempt from any taxation, the burden falls on a smaller and smaller group. Our current system is clearly not working well. I've seen recent proposals by our legislators to tax fringe benefits - as you said - the devil is in the details.

.

There aren't many people in this country who don't pay any federal taxes. There is a large number who don't Federal income taxes, but they for the most part pay Social Security, and Medicare which are quite large. Since I've been retired I think there has only been a couple of years where my income tax , would have exceeded the amount I would have owed for FICA and Medicare if my passive income had been treated as wages.

So when people complain about "1/2 the country doesn't pay taxes", there are conveniently forgetting about folks like me and the other early retirees on the board who are benefiting from COLA increases of social security,and the increased coverage of medicare without paying into the system.

 

[ERD50]

Wages should be determined by competitive markets.

...

It's impossible for the gov't to know exactly how much of which wage came from luck and how much from hard work. That would be a waste of effort.

...

However, we can say as a general rule that the further you are above the median, the more likely it is that you benefit from an unusual level of good luck.


It would be ridiculous for MJ to say that the only reason he outperforms you is that he "works" harder. He may have a good work ethic, but so do some ball players who never made the pros. Much of his output is a gift.

Well, I am just really not following where you are trying to go with this.

As I said, if I work as hard as MJ, he will still outperform me (an understatement!). He gets paid for performance, whether it comes easy for him or hard for him. And you said that yourself, that the govt cannot distinguish.

I think what I'm objecting where you go with your idea that as income increases, the more it can be attributed to 'luck'. Probably so (not sure I'd agree with 'most'), but I just don't like the idea of lumping those that worked hard and earned it with those that fell into it. I don't want to limit the hard workers, because of some lucky ones. So I don't think that should be the basis to justify higher taxes on the 'rich'. I'm in favor of progressive taxes, but for a different reason. As was pointed out, the marginal dollars for a wealthy person are not as painful to give up as they are for a lower income person.

So I guess you are saying high income is alright, if they 'earned' it in a free market, but you want to tax them to effectively lower their income, because you don't think the 'really earned' it, they were mostly lucky? Well, we can agree to disagree then. But I'll add one more thing:

w/o a straightforward tax code, many of the wealthy find ways around the big taxes taxes (ergo the 'Alternative Minimum Tax' - think there aren't loopholes in that?). So it's a big game. Like the discussions that the Estate Tax is supposed to keep silver spoon kids from inheriting billions, but they just find ways around it. Like make your kids the head of your Charitable Foundations? Why couldn't they land that gig on their own?

Another thing that really warps the discussion is that those tax % are based on AGI - so what is that anyhow? It's already distorted the number.

Sorry, one more rambling thought - so Lottery tickets should be taxed at 99% then? It was *all* luck? Think that would do anything to lottery ticket sales? Be careful with your answer

-ERD50

 

[haha]

There seem to be a lot of closet Marxists around. They probably don't realize it, but the labor theory of economic value is completely rejected by economists today.

As a prescription for stagnation and economic decline, there is none better. But this old man will be moving on if these discredited ideas catch on.

Living on a dead or dying carcass is not pleasant for most organisms.

Ha

 

[Bikerdude]

There seem to be a lot of closet Marxists around. They probably don't realize it, but the labor theory of economic value is completely rejected by economists today.

As a prescription for stagnation and economic decline, there is none better. But this old man will be moving on if these discredited ideas catch on.

Living on a dead or dying carcass is not pleasant for most organisms.

Ha

What he said!

 

[Independent]

Well, I am just really not following where you are trying to go with this.

As I said, if I work as hard as MJ, he will still outperform me (an understatement!). He gets paid for performance, whether it comes easy for him or hard for him. And you said that yourself, that the govt cannot distinguish.

I think what I'm objecting where you go with your idea that as income increases, the more it can be attributed to 'luck'. Probably so (not sure I'd agree with 'most'), but I just don't like the idea of lumping those that worked hard and earned it with those that fell into it. I don't want to limit the hard workers, because of some lucky ones. So I don't think that should be the basis to justify higher taxes on the 'rich'. I'm in favor of progressive taxes, but for a different reason. As was pointed out, the marginal dollars for a wealthy person are not as painful to give up as they are for a lower income person.

The "most" depends on the income. Someone who earns 2x the median may work twice as hard, or be twice as lucky, or any combination of the two. I don't know.
However, someone who earns 10x the median isn't working 10x as hard. I'm guessing that at most humans can work twice as hard, so maybe the income comes from twice the effort and 5x the luck. Multilplying 2 times 5 gives the ratio of 10. So I say that "most" of the extra income comes from luck.

I'd agree that "marginal utility is a decreasing function" is my the first reason for supporting progressive tax rates.

So I guess you are saying high income is alright, if they 'earned' it in a free market, but you want to tax them to effectively lower their income, because you don't think the 'really earned' it, they were mostly lucky? Well, we can agree to disagree then.

I don't want to tax people to lower their incomes. I want to tax people to pay for government services. I can imagine a utopia where we would live with no government and collect no taxes, that would definitely be better. Government and taxes are unfortunate necessities in the real world. I'm looking for the least destructive way to collect the taxes. As it happens in our world, that means lots of our total tax dollars will come from a small percent of the population. That wouldn't happen in a perfect world, but it seems unavoidable in ours.

I threw out this "luck vs. work" thing because I thought you were going in the "high tax rates create an unreasonable disincentive for hard work" direction. I wanted to point out that very high income people get there with high hourly incomes, not by working impossible hours. So a high tax rate still leaves them with plenty of after tax income and therefore plenty of incentive to work.

(I do believe that extreme differences in income and wealth are unhealthy for a nation, but I don't see many ways for gov't to prevent them. Mostly the obvious like providing decent educational opportunities for everybody, or preventing insider trading.)

Note, again, that the OP is about taxes on capital income, not labor income. So, IMO, all this discussion of taxes on wages misses much of the story.

But I'll add one more thing:

w/o a straightforward tax code, many of the wealthy find ways around the big taxes taxes (ergo the 'Alternative Minimum Tax' - think there aren't loopholes in that?). So it's a big game. Like the discussions that the Estate Tax is supposed to keep silver spoon kids from inheriting billions, but they just find ways around it. Like make your kids the head of your Charitable Foundations? Why couldn't they land that gig on their own?

Another thing that really warps the discussion is that those tax % are based on AGI - so what is that anyhow? It's already distorted the number.

Sorry, one more rambling thought - so Lottery tickets should be taxed at 99% then? It was *all* luck? Think that would do anything to lottery ticket sales? Be careful with your answer

-ERD50

All true. No tax system is leakproof. And, the more dollars we try to collect the greater the incentive to avoid it. But that's true about any law. I'd be willing to compare an NST and an income tax in another thread.

Finally, I'm not in favor of taxing "luck" at 100%, if that's what you were thinking.

 

[ERD50]

...

I threw out this "luck vs. work" thing ...

Well, I think you should "throw it out" (and I am saying that in a friendly way, in case that doesn't come across with a 'smiley')

I seriously don't see what it adds to the discussion. Not only do I think you can't even come close to attribute X% to luck at $Y income, I think it is unfair to paint a group with a broad brush.

As a counterpoint (which I really don't care to make, as I think it is pointless), I could easily say that many lower and middle income employees are the 'lucky ones'. Some of them (I want to avoid the broad brush) come in, don't do much more than warm a stool for 8 hours, and leave work with zero responsibilities in their off-time. Yet, they might be making 1/2 or 1/3 the income of some hard-working, aggressive, ladder-climbing middle manager who takes work home, gets calls at night, weekends, vacations, etc. I think that middle manager is easily working 2-3x 'harder', and probably had to put in a lot more hard work to get there (education, time, experience, etc).

Sorry, it just seems pointless to me to try to make any determination of how hard someone works or how lucky they were (lucky to be born to wealthy parents, lucky to have the body of a pro-athlete or super-model, lots of kinds of luck), let alone assign that to a group. I think it is a slap in the face to those who worked their way up (and I'll admit to having a good share of some things we could call 'luck', but it would mean nothing w/o some effort put in along the way).

To get back to the point of the OP (I had to look!), the tax code is so complex and convoluted, that I don't think one can say much at all about what one added form of taxation will or won't do. If the goal is to increase taxes on those over $200,000/$250,000, then eliminate some current deduction/credit, or just raise the marginal rate at that bracket. I don't think we need any more pages added to the tax code, and I'm stickin' to it!

-ERD50

 

[clifp]

To get back to the point of the OP (I had to look!), the tax code is so complex and convoluted, that I don't think one can say much at all about what one added form of taxation will or won't do. If the goal is to increase taxes on those over $200,000/$250,000, then eliminate some current deduction/credit, or just raise the marginal rate at that bracket. I don't think we need any more pages added to the tax code, and I'm stickin' to it!

-ERD50

We already have two brackets for capital gains 10% and 15%, and I am not sure that making a 3rd bracket for those over 250K adds even a two pages to the zillion pages we already have. Yet it adds billions to the revenue side.

 

[Texas Proud]

Independent...


From reading your posts.... it appears that everybody is 'lucky' in one way or another.... so anybody that earns over the minimum wage is 'lucky' that they have the smarts or the athletic ability or whatever to make more money... even the guy who works twice as hard to make twice as much is 'lucky' to have the strength or whatever it is he has to do 2X work...

And then the guy who IS making minimum wage is 'lucky' also... as he would not be making that amount of money unless the government said that is the least amount you can pay someone... so he is lucky we have a gvmt...

So let's take out something that everyone has.... 'luck' and see what we still have left... well, from what you would say... nothing... because if someone is smarter, he is luckier... if someone is more driven because of whatever, he is luckier in a different way...

Now do you see why I don't think what you say makes sense... because it does not have anything in there for hard work and determination... because that is luck also... luck that someone taught you them...

 

[haha]

We already have two brackets for capital gains 10% and 15%, and I am not sure that making a 3rd bracket for those over 250K adds even a two pages to the zillion pages we already have. Yet it adds billions to the revenue side.

Capital gains taxes raise the cost of capital to industry. Capital gains taxes are unfair as they mainly tax illusionary gains from inflation.

Why are so many well off people on this board eager to throw away the thing that got us here? All the lower middle class people in the world pushing paper around won't do as much for the world as a small group of intelligent capitalists trying to get rich.

This board has really changed. A few years ago the dominant thought here was that over time, people make their own luck or lack thereof. And calling intelligence luck is ridiculous.

Even Jesus told us not to get too incensed by the persistance of povery in the world. Ricardo figured out that many things such as public health measures or better harvests just increase povery, as it is the habit of all animals to breed themselves up against bare survival.

Intelligently employed capital is is the only thing that creates wealth. Get busy worrying about "distribution of income" and you are trying to kill the golden goose. And as the USSR, Maoist China, and many other places have demonstrated, the goose can be killed.

Ha

 

[Gone4Good]

There seem to be a lot of closet Marxists around. . . .


Living on a dead or dying carcass is not pleasant for most organisms.

Ha

My wife starts in January her Medicare premium is 110.5 due to the increase this year for new medicare people, others who have been in medicare pay the old rate of 96.5.

That's about a 15% increase, if my math is working today. Seems like a hefty increase over what I am being charged.

And a super discount to what a healthy 39 year old can obtain in the private market . . . wow! No wonder the plan is going broke.

You forget- Medicare recipients have been paying into the system their entire working lives.

 

[plex]

I think this forum is more of a happy medium between those who would advocate for progressive taxes, and those who would not, which is why this thread is so long.

As for me, I am not sure where I stand on the progressive debate. What I do know is, the majority of Americans really hate really visible tax increases, so while increasing taxes on capital gains would provide a massive increase in tax revenues, it would be an extremely hard sell, not to mention all the abuse in the form of loopholes that would inevitably be produced, there would certainly be exemptions all over the place. I won't even get into the other reasons people would object to this type of tax, progressive or not.

One more likely possibility, at least for a large increase in taxes, is a type of consumption tax that exists in most other developed nations and is a gigantic source of income for them, a supply chain tax, in which the product produced at each level of a supply chain is taxed. This would have some potential decrease in productivity problems, and would make products more expensive, but the government would likely receive a fairly large increase in revenue, as some things simply must be produced closer to home.

As for how to define luck, I agree with the majority, and say that, besides the luck of who your parents are, luck makes very little difference between large groups of people. People are a sum of their own efforts. While I agree a person cannot work 2-4x harder and longer in a single day, wealth/income is not based on how hard you work in a single day, anything that involves a single day of work, which had nothing to do with past work building up to it, I would consider luck, and the only situation I can think of where this happens, is winning the lottery (which as people know, is actually a curse for most winners, the bankruptcy numbers are horrifying). In rare cases, the luck of birth is so unfavorable (significant/sever health issue), or so favorable that very little effort is required on their part. Nearly all those with high income and wealth that I have met or read about, did it by slowly building up their skills, or by slowly building a business. This invariably required working hard for many years, and just like with dollars in investments, hard work compounds. If someone doesn't work hard early on, it can be either hard, or impossible, to change the course a person sets themselves on, there just isn't enough time to compound the hard work, or they end up making so many mistakes (which also compound), that they are in the equivalent of debt hell and can never get out.

The effort analogy aside, there are other non-luck reasons some people have higher incomes. One of them is supply and demand. Putting the effort analogy aside, where some jobs require much more compounded effort to reach, there are many types of jobs in which there are simply less people who are willing to do them. These jobs pay a premium as a result. This occurs so often that I doubt there is a person (at least in this country), who has not faced this trade-off. If there is no premium for going into something like poop plunging (plumber), then no one would do it, or some sort of mental poop plunging (too many examples to even list).

 

[Gone4Good]

Capital gains taxes are unfair as they mainly tax illusionary gains from inflation.

Perhaps, but all taxes are based on nominal income. The worker who gets a 3% raise in an era of 3% inflation sees that increased income taxed even though his real income didn't increase. Similarly bond investors get taxed on both the real and inflation portion of their coupon. Taxing nominal gains is no different. Treating all income the same is the very definition of "fair". What is patently "unfair", and leads to inevitable gamesmanship, is when we start treating income from different sources differently . . . as in one tax for capital and a different, higher tax for labor.

The right answer is to tax all income at the same exact rate, regardless of source. Eliminate the corporate tax altogether to get rid of double taxation issues (the owners of the corporation will get taxed either on their wages, or their dividends or on the gains they get from retained earnings accumulation at their individual tax rate). This would treat all business owners the same regardless of whether they are sole proprietors or mere share owners. It has the ancillary benefit of abolishing the current tax advantage debt capital has for corporations.

This is another area where rote political thinking leads you astray. "Conservatives" are right to want to eliminate the corporate tax. "Liberals" are right to want to equalize the tax rates between capital and labor. But each side refuses to acknowledge the merits of the other side's positions.

 

[ERD50]

Originally Posted by haha
Capital gains taxes are unfair as they mainly tax illusionary gains from inflation.

Perhaps, but all taxes are based on nominal income. The worker who gets a 3% raise in an era of 3% inflation sees that increased income taxed even though his real income didn't increase. .... Treating all income the same is the very definition of "fair".

But when I run some example numbers, Capital Gains and Earned Income seem very different.

Say a worker earns $30,000 one year, inflation is 3% in each of the next ten years, and he gets 3% raises each year. His buying power has remained the same. So he has earned $300,000 in buying power over ten years. He can buy 'stuff' with that income each year.

An investor puts $300,000 (that was taxed as income as he earned it) in equities that increase 3% each year. After ten years, he sells it for $403,175 and has a Cap Gain of $103,175. Yet, he has earned absolutely no buying power with that money. He can't buy anything more than he could ten years ago, so why should he pay taxes on the 'gain'? It has zero value to him. In fact, he could have *lost* buying power, and still owed taxes on it. The worker got to buy stuff.

Add in the wrinkle that tax brackets and standard deductions and exemptions are sometimes adjusted for inflation along the way, and that moves the point in favor of eliminating Cap Gains taxes above the inflation rate. Add in another wrinkle that a $30,000 earner won't pay much income tax anyhow, but a Cap Gain can raise your AGI to the point of limiting deductions, credits, etc.

And 'thanks' - I've heard this comment made before, but never fully understood it until I ran the numbers myself.


-ERD50

 

[Independent]

Well, I think you should "throw it out" (and I am saying that in a friendly way, in case that doesn't come across with a 'smiley')

I seriously don't see what it adds to the discussion. Not only do I think you can't even come close to attribute X% to luck at $Y income, I think it is unfair to paint a group with a broad brush.

As a counterpoint (which I really don't care to make, as I think it is pointless), I could easily say that many lower and middle income employees are the 'lucky ones'. Some of them (I want to avoid the broad brush) come in, don't do much more than warm a stool for 8 hours, and leave work with zero responsibilities in their off-time. Yet, they might be making 1/2 or 1/3 the income of some hard-working, aggressive, ladder-climbing middle manager who takes work home, gets calls at night, weekends, vacations, etc. I think that middle manager is easily working 2-3x 'harder', and probably had to put in a lot more hard work to get there (education, time, experience, etc).

Sorry, it just seems pointless to me to try to make any determination of how hard someone works or how lucky they were (lucky to be born to wealthy parents, lucky to have the body of a pro-athlete or super-model, lots of kinds of luck), let alone assign that to a group. I think it is a slap in the face to those who worked their way up (and I'll admit to having a good share of some things we could call 'luck', but it would mean nothing w/o some effort put in along the way).

To get back to the point of the OP (I had to look!), the tax code is so complex and convoluted, that I don't think one can say much at all about what one added form of taxation will or won't do. If the goal is to increase taxes on those over $200,000/$250,000, then eliminate some current deduction/credit, or just raise the marginal rate at that bracket. I don't think we need any more pages added to the tax code, and I'm stickin' to it!

-ERD50

Maybe our experiences are different. At my company, middle income people ($40k per year) don't "warm a stool" for 8 hours. They're working, sometimes at frustrating jobs where they have to make somebody else's bad decisions work. (In fact, people who were below the median were working, too. I don't remember any stool-warmers in my department.)

At higher levels, you'll find people who work more overtime and took work home, but have more control. I believe our CEO had a base salary of $2.8 million. He enjoyed his job (he had enough from prior employment to FIRE). I didn't see any hint of him working 70x as hard as the median. Maybe you see something else where you work.

I'll agree that adding this tax makes things more complex. We'd generate more revenue by simply applying the same rates to capital income that we apply to labor income. That would also simplify the code.

 

[Gone4Good]

But when I run some example numbers, Capital Gains and Earned Income seem very different.

Yes, this is true.

But I think only because we're mixing up before and after tax amounts in our assumptions. With the investment you implicitly assume before tax growth of 3% and with wages you implicitly assume after tax growth of 3%. So yes, under those assumptions you end up with different results.

 

[Independent]

Independent...


From reading your posts.... it appears that everybody is 'lucky' in one way or another.... so anybody that earns over the minimum wage is 'lucky' that they have the smarts or the athletic ability or whatever to make more money... even the guy who works twice as hard to make twice as much is 'lucky' to have the strength or whatever it is he has to do 2X work...

And then the guy who IS making minimum wage is 'lucky' also... as he would not be making that amount of money unless the government said that is the least amount you can pay someone... so he is lucky we have a gvmt...

So let's take out something that everyone has.... 'luck' and see what we still have left... well, from what you would say... nothing... because if someone is smarter, he is luckier... if someone is more driven because of whatever, he is luckier in a different way...

Now do you see why I don't think what you say makes sense... because it does not have anything in there for hard work and determination... because that is luck also... luck that someone taught you them...

Sure, everybody has luck. Sometimes it more or less weights out to "average" over a lifetime. Sometimes it's much worse than average, sometimes it's much better than average. I suppose I should have been saying that very high incomes are usually associated with "much better than average" good luck.

You can get all tied up over whether "work ethic" is a choice or simply a result of your genes/childhood. That's the same question of whether there is any such thing as free will. I vote for the existence of free will, the older we get, the more we can choose.

The point of even discussing this in the context of taxes is a couple arguments that oppose progressive taxes. One says it's "immoral" to have higher tax rates on higher income people because the only reason they have the higher income is that they work harder. The second says it's "impractical" to have higher tax rates because those rates generate such large disincentives to work.

I think that both of those arguments ignore the fact that there are wide differences in economic rewards per hour of work (or "unit of effort" if you prefer that). If you don't like the word "luck", use some other word, but I think it's obvious that some people get more leverage from a given effort than others.

If you're fine with progressive taxes for other reasons (such as marginal utility), this "luck" discussion may be irrelevant. But, regardless of how we get there, if we have progressive taxes and a wide disparity in incomes we're going to get lots of tax from a thin slice at the top.

(Note that I think "income" includes both income from labor and income from capital. The OP was about capital income, much of this discussion is about labor income. The CBO link I posted says that the top 1% of families by income also own 58% of the income producing capital, that impacts the numbers a bunch.)

 

[Independent]

Capital gains taxes raise the cost of capital to industry. Capital gains taxes are unfair as they mainly tax illusionary gains from inflation.

Why are so many well off people on this board eager to throw away the thing that got us here? All the lower middle class people in the world pushing paper around won't do as much for the world as a small group of intelligent capitalists trying to get rich.

This board has really changed. A few years ago the dominant thought here was that over time, people make their own luck or lack thereof. And calling intelligence luck is ridiculous.

Even Jesus told us not to get too incensed by the persistance of povery in the world. Ricardo figured out that many things such as public health measures or better harvests just increase povery, as it is the habit of all animals to breed themselves up against bare survival.

Intelligently employed capital is is the only thing that creates wealth. Get busy worrying about "distribution of income" and you are trying to kill the golden goose. And as the USSR, Maoist China, and many other places have demonstrated, the goose can be killed.

Ha

Wow. You implied earlier that Marx went off the deep end by claiming that the only thing that mattered was labor, capitalists are just "parasites". If that's what he said, then he was wrong.

IMO, you've made the same error at the other end of the spectrum. It seems that you think the only thing that matters is capital, labor is worthless.

I think you're both wrong. All economic goods are the result of labor, but labor productivity is determined by the proper application of capital. We absolutely must have the first, but I want to live in a world that also has the second. Fortunately, we've already got enough capital to generate something like $70k of GDP per worker. I'm not sure that additional capital accumulation is really our biggest economic issue.

Most people will go to work even if we tax their wages. People with a reason to save/invest will do so even if we tax their returns. Nobody is suggesting a 100% tax on either labor or capital income.

But I'm saying that we should tax capital income. Sure, capital investments are "good", but so is hard work. I can't see taxing one and not the other.

I understand the concerns about inflation, but I disagree that real returns are zero. The best way to deal with inflation is to have so little that it hardly matters. Since that seems very hard to do, we could index gains. But the right tax rate isn't zero. (Maybe the right answer is an income tax on labor but an asset tax on capital. There's no economic law that says income is always the best tax base.)