Greg Krehbiel
A zero capital gains tax?
by Greg Krehbiel on 1 February 2012
HT Hispanic Pundit.
See The Optimal Capital Gains Tax Rate is Below Ten Percent
Obviously raising revenue isn’t our only goal in setting tax rates. If it were, we’d be taxing a lot more people.
But when we’re talking about the top 1%, is the goal (1) to get more money in the government coffers, (2) to keep them from becoming super-rich, (3) to satisfy our envy, (4) to be “fair,” or … what, exactly?
2012-02-01 » Greg Krehbiel
1 February 2012 @ 9:17 pm
If taxing capital gains at over 10% discourages investment, how come taxing my earned income at 30% doesn’t keep me from going to work?
A lot of “capital gains” is actually disguised salary. Most of it can be sheltered from taxation regardless of the nominal tax rate with a very few perfectly legal tricks.
1 February 2012 @ 10:25 pm
I don’t know, but maybe real numbers from reality might give an answer.
2 February 2012 @ 1:42 am
What kind of model did he come up with? Was it linear or non-linear? What about his choice of variables? Which ones were continuous variables, which were categorical variables, which were predictor variables, and which were dependent variables? Do you think his variable selection for his model was too wide or too narrow? I’m asking because you seem to agree with the guy and most know a lot about it.
2 February 2012 @ 8:34 am
SM, the point is to contrast a glib comment to an actual study of real numbers in the real world.
If you think there are problems with the study, point them out.
2 February 2012 @ 11:25 am
My comment wasn’t glib.
Look, if I have a bunch of cash, I would worry that the cash will decrease in value because of inflation. One way to protect against that is to invest the money in some asset and receive a dividend that offsets any losses due to inflation. If the asset increases in value, so much the better.
When I sell the asset, assuming I have made a profit, I have to pay tax on my profit. If I made $100,000 and have to pay $30,000 in tax, I still have more money when I’m done than when I started. The tax is only paid on the gain.
Even if I can’t sell the asset at a profit, I should have made money from dividends in the period of time during which I held the asset.
The point is, nobody refrains from working because they have to pay payroll taxes. They are still better off than they were before they got paid. So it just doesn’t make sense that people will refrain from profitable investments just because they will pay taxes on them.
2 February 2012 @ 1:27 pm
I think the analogy is poor for this reason.
I have to work to support myself and my family. If the tax rate was 50%, I would still have to work.
If I have money to invest, I can invest it here, there, or wherever. I have choices, and I’m going to choose the place where I maximize my return.
3 February 2012 @ 12:46 am
JohnK,
This post and this post goes a long way in answering your question.
3 February 2012 @ 9:23 am
“If I have money to invest, I can invest it here, there, or wherever. I have choices, and I’m going to choose the place where I maximize my return.”
And if the tax policies are counter-productive enough, it will be under my mattress.
Even Warren Buffett could cash out, put it all under his mattress, and spend it down. It *should* last the rest of his natural life, even counting the fact that most of his wealth is paper and will substantially decrease if cashed out.
So yeah, you can not invest, but you can’t not work for wages.
3 February 2012 @ 10:02 am
HP,
Apparently, if the numbers don’t work out (15 percent), you can amortize the tax rate over 10 years and voila you have 40 percent. How convenient.
4 February 2012 @ 8:43 am
HP,
All the first article says is that if someone didn’t pay taxes on any income at all, he would have more to invest.
Duh!
Pentamom and Greg,
Anyone just stuffing money in a mattress (except under deflationary conditions possible with the gold standard, I guess) is an idiot. Even getting a below-inflation rate of return and paying taxes on that return, you are better off than just letting the cash depreciate in value.
And who says it’s not possible to just plain quit working? In my worst moments, I have thought about getting a tent and sleeping bag and walking off into the woods myself.
But what we’re really talking about is marginal behavior, in the sense “Bill is already making X dollars, will he be motivated to make X + N dollars?” If he pays taxes on the additional income, he still has more after working than if he hadn’t. So if Trip has X gazillion dollars in investment income, will he stuff it all in a mattress if he has to pay, say a 40% tax rate on additional investment income?
This whole discussion reminds me of people who try to find ways to increase their deductions so they can pay less in taxes, but forget that those deductions are losing money in the first place. People who should have known better were deliberately spending money on deductible interest to save on taxes, but winding up with less on the bottom line.
4 February 2012 @ 10:10 am
“And who says it’s not possible to just plain quit working? In my worst moments, I have thought about getting a tent and sleeping bag and walking off into the woods myself.”
Because the assumption is of rational self-interest. Of course my “under the mattress” was a reductio ad absurdem. But the point remains — rational self-interest could induce someone to invest in less economically productive instruments if the tax rate is too high. Rational self-interest would not induce anyone to quit his job and have no income. If you have no income, you starve, unless you try to go live in the woods, in which case you get arrested for trespassing and poaching.
4 February 2012 @ 1:20 pm
“assuming I have made a profit”
This is the biggest question affecting whether people will invest with capital gains in mind. Tax rates are just one variable in the equation.
But certainly there are people who lose money on their capital investments. Their money has fueled the economy – at their own personal expense. They are the ultimate economic philanthropists, if you will. So the next time you talk to someone who had to sell their upside down house at a loss, you can comfort them that this is all a part of stimulating the economy… (wry humor not intended for actual implementation, for the record.)
As my dad used to say ” “all other things being equal’ is automatically a lie” – or rather, impossible.
But if I remember the capital losses rules, you are limited to writing off such losses to a short window of time. I don’t remember the specifics. It would be an important thing to be clear on to understand the big picture.