for nye

[Kuciwalker]

Perhaps for us slower readers you could lay out the groundwork, like what personal tax rate, capital gains rate, corporate rate, VAT or other 'equivanlent' consumption tax?

OK, I'm going to demo two hypothetical people (Alice and Bob) under two hypothetical tax regimes, A and B.

Tax regime A is a flat 20% income tax - including interest and capital gains as income. Tax regime B is a flat 20% earned income tax, i.e. it excludes interest and capital gains.

Alice and Bob each earn $1000 at the end of 2010. They can spend some portion of the money now on stuff they want now, or they can save the money in a bank account at 5% interest and spend that money at the end of 2011. Alice chooses to spend all $1000 right now, and Bob chooses to spend $500 now and save $500 for the end of the year (which lets him spend $525 then, for a total of $1025).

Under tax regime A, Alice only actually gets to spend $800 now, so she has an effective tax rate of 20%. Under tax regime B, she still only gets to spend $800 now, so she still has an effective tax rate of 20%.

Under tax regime A, Bob gets to spend $400 now. He gets to save $400, which collects $20 of interest, which itself is taxed at 20% to become $16 of interest. In total he gets to send $400 + $400 + $16 = $816. 100*($1025 - $816)/$1025 = an effective tax rate of 20.39%, which is higher than 20% - Bob is paying a higher proportion of his income than Alice, he's being penalized for saving for later rather than spending all his money at once.

Under tax regime B, Bob gets to spend $400 now. He gets to save $400, which collects $20 of interest, which is untaxed. In total he gets to spend $400 + $400 + $20 = $820. 100*($1025 - $820)/$1025 = an effective tax rate of exactly 20%. Under tax regime B, Bob is not penalized for saving his money for later rather than spending it all at once.

Obviously in this particular example with these specific numbers, the difference looks small, "oh it's only a .39% difference". But this result generalizes - a capital gains tax will always penalize people who save, and with realistic incomes, tax rates, and timescales there is a significant distortion.

[Kuciwalker]

Note that tax regime B could easily be changed to a 25% national sales tax and be mathematically identical. Alice would get to spend $1000, which would buy him $800 of goods on which he would pay $200 in sales tax. Bob would spend $500 now for $400 of goods on which he would $100 in tax, and $525 later on $420 of good on which he would pay $105 in tax.

[notyoueither]

I think your proposed 20% consumption tax (if a VAT) would be in excess of double that in some (or many) other jurisdictions.

You would really benefit by doing some basic research before you post. This is wrong, of course, but I'll leave it up to you to find the evidence. You could use the practice.

I really should have looked at that first.

Still, it is 5% in Canada and we welcome most any youngish gringo who can plunk 100K into some form of equity in the country.

Australia is 10%, but I do not know if they are as welcoming of the affluent.

We both need people.

[Drake Tungsten]

No one's going to move to Canada for tax purposes. That's just crazy talk.

[notyoueither]

Perhaps for us slower readers you could lay out the groundwork, like what personal tax rate, capital gains rate, corporate rate, VAT or other 'equivanlent' consumption tax?

OK, I'm going to demo two hypothetical people (Alice and Bob) under two hypothetical tax regimes, A and B.

Tax regime A is a flat 20% income tax - including interest and capital gains as income. Tax regime B is a flat 20% earned income tax, i.e. it excludes interest and capital gains.

Alice and Bob each earn $1000 at the end of 2010. They can spend some portion of the money now on stuff they want now, or they can save the money in a bank account at 5% interest and spend that money at the end of 2011. Alice chooses to spend all $1000 right now, and Bob chooses to spend $500 now and save $500 for the end of the year (which lets him spend $525 then, for a total of $1025).

Under tax regime A, Alice only actually gets to spend $800 now, so she has an effective tax rate of 20%. Under tax regime B, she still only gets to spend $800 now, so she still has an effective tax rate of 20%.

Under tax regime A, Bob gets to spend $400 now. He gets to save $400, which collects $20 of interest, which itself is taxed at 20% to become $16 of interest. In total he gets to send $400 + $400 + $16 = $816. 100*($1025 - $816)/$1025 = an effective tax rate of 20.39%, which is higher than 20% - Bob is paying a higher proportion of his income than Alice, he's being penalized for saving for later rather than spending all his money at once.

Under tax regime B, Bob gets to spend $400 now. He gets to save $400, which collects $20 of interest, which is untaxed. In total he gets to spend $400 + $400 + $20 = $820. 100*($1025 - $820)/$1025 = an effective tax rate of exactly 20%. Under tax regime B, Bob is not penalized for saving his money for later rather than spending it all at once.

Obviously in this particular example with these specific numbers, the difference looks small, "oh it's only a .39% difference". But this result generalizes - a capital gains tax will always penalize people who save, and with realistic incomes, tax rates, and timescales there is a significant distortion.

In this thread and in earlier discussions I took KH to be arguing for 0 income tax (and I could assume 0 capital gains).

Simple elimination of capital gains is not what I've thought he's been on about. I am not sure that works or is justified, but it is much less arguable than eliminating income taxes.

Stick the cash in your matress and you will not face taxes for saving. Stick it in a bank and you are receiving a benefit from society and maybe you should put something back to help pay for it.

[notyoueither]

No one's going to move to Canada for tax purposes. That's just crazy talk.

Slap a 20% federal VAT on things and find out how crazy it is. Besides, they could also go to Oz, or Japan, the Bahamas, Costa Rica, South Korea... I am sure there are other options.

[notyoueither]

Especially when they could remain residents of the US and simply spend a lot of time (and money) in Canada.

Income taxes in the States and play taxes in Canada.

Win-win.

KH may be on to something.

[Dinner]

The capital gains taxes in the US are also far more draconian than in Canada, BTW...

Theoretically though there are lots of ways around the law, tax credits, and exceptions which a savvy investor can use to minimize or avoid much of it. I'd agree with tax simplification but I do like progressive taxation even if it means I get hit with them while some tea bagger who *****es about it doesn't. That said the US tax code is ungodly complex and needs to be simplified and, yes, we should probably drop all capital gains taxes but only after we've reformed our corrupt political system which lets moneyed interests buy and sell politicians at whim.

Until then increased 401k limits or even a forced 3% automatic savings rate (tax free, of course) can result in a much higher savings rate without major changes to the tax code. Chile & Singapore both have forced savings systems (the government removes the money before the worker even sees it, like a tax, but it goes into a private account the worker controls but must invest along sound guidelines) which work very well. I'd let workers take part of the money out of their forced savings account to buy a house or start a business but most of it simply would have to be long term savings for retirement.

[Drake Tungsten]

Especially when they could remain residents of the US and simply spend a lot of time (and money) in Canada.

No one's going to spend a lot of time in Canada for tax purposes, either. I don't think you understand just how unappealing your country really is...

[notyoueither]

Trolling, trolling, trolling, Rawhide!

[Dinner]

I could easily see people making major purchases in countries which don't have consumption taxes even if they work in countries which don't have income taxes but had high consumption taxes. That's only human nature. Why pay 20% tax on a new car or a wedding ring or furniture or what not when you can drive across the border and purchase the same goods for 20% less?

[Drake Tungsten]

Trolling, trolling, trolling, Rawhide!

I'm the ideal person to comment on this issue.

[notyoueither]

In your feverish dreams.

[ricketyclik]

No. Tax was already paid on the money they're spending. (Alternately, under a consumption tax they will pay tax on the money as soon as they spend it.) The only thing a capital gains tax does is create a distortion in favor of spending money as soon as you get it, rather than saving it and spending later.

What if the capital was bought using income derived from capital gains? I'm not talking Mum and Dad here, I'm talking ultra wealthy, top end of town types.

[Kuciwalker]

In this thread and in earlier discussions I took KH to be arguing for 0 income tax (and I could assume 0 capital gains).

Simple elimination of capital gains is not what I've thought he's been on about. I am not sure that works or is justified, but it is much less arguable than eliminating income taxes.

As I demonstrated, they are exactly the same.

Partial list of things that are the same:

Earned income tax.
Earned income minus savings [i.e. consumption] tax.
VAT.
National sales tax.

Stick the cash in your matress and you will not face taxes for saving. Stick it in a bank and you are receiving a benefit from society and maybe you should put something back to help pay for it.

You're also giving a benefit to society! Or, more properly, you are giving a benefit to your bank, and your bank is giving you a benefit back. None of which you addresses the point, that for some reason our tax code actually has Alice paying a lower rate. Why would we want to favor Alice? Do we really prefer her behavior to Bob's? At the very least, shouldn't we avoid penalizing people for picking one of the two options?

Morever, if we add in Charlie, who just stuck his money under his mattress, we see that a CG tax also doesn't penalize him, as you said. Is that actually the result you want? You would prefer Bob save his money in his mattress to saving it in his bank? What if everyone did that?