for nye

[Kuciwalker]

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.

That's meaningless. Think of your investments as a big black box. You dump money into them. It collects interest. Occasionally, the assets are shuffled around (some are sold/collect dividends/the interest is withdrawn from bank accounts, whatever, and you use that money to buy different assets). Eventually, you withdraw money out of the box and spend it on actual stuff. If you are using a consumption tax/VAT/national sales tax, it gets taxed at this point; if you are a using an earned income tax then it was already taxed (in the same proportion) going in.

Like, imagine that 100 years ago David's great-grandfather earned one million dollars and decided to save all of it, and we had had an earned income tax of 10%. That one million would turn into 900k. Given identical proportions of asset purchases, that set of assets will always be worth only 90% of the value of the same set of assets purchased with a full million dollars. If the 900k were invested in a bank account at 5% interest for 100 years, and then David decided to use the money for either personal consumption or just to reinvest, he will have $118.3 million. But this is exactly 90% of what someone who invested $1 million would have ($131.5 million). And if he reinvests it and his great-grandson withdraws it, it will still be only 90% of what the $1 million investment would have been.

(Math types call this property 'linearity', btw.)

Now, if you're concerned about intergenerational inheritance of wealth, advocate an estate tax, sure. But the CG tax is just distortionary and suck.

[ricketyclik]

You're also giving a benefit to society!

So is someone working for a living.

[ricketyclik]

That's meaningless. Think of your investments as a big black box. You dump money into them. It collects interest. Occasionally, the assets are shuffled around (some are sold/collect dividends/the interest is withdrawn from bank accounts, whatever, and you use that money to buy different assets). Eventually, you withdraw money out of the box and spend it on actual stuff. If you are using a consumption tax/VAT/national sales tax, it gets taxed at this point; if you are a using an earned income tax then it was already taxed (in the same proportion) going in.

Like, imagine that 100 years ago David's great-grandfather earned one million dollars and decided to save all of it, and we had had an earned income tax of 10%. That one million would turn into 900k. Given identical proportions of asset purchases, that set of assets will always be worth only 90% of the value of the same set of assets purchased with a full million dollars. If the 900k were invested in a bank account at 5% interest for 100 years, and then David decided to use the money for either personal consumption or just to reinvest, he will have $118.3 million. But this is exactly 90% of what someone who invested $1 million would have ($131.5 million). And if he reinvests it and his great-grandson withdraws it, it will still be only 90% of what the $1 million investment would have been.

(Math types call this property 'linearity', btw.)

Now, if you're concerned about intergenerational inheritance of wealth, advocate an estate tax, sure. But the CG tax is just distortionary and suck.

This is a good reply, and one that hadn't occurred to me before. I must muse on for a while.

[Kuciwalker]

So is someone working for a living.

And under an earned income tax, people who work for a living are not discriminated against in the form of higher tax rates. But people who decide to save some of their money are, regardless whether they work for a living.

[ricketyclik]

OK, how about where the capital is bought using borrowings? (Which I believe is often the case with high-flyers).

[Dauphin]

Uh, no. Wealth you never spend is just like an option you never exercise - worthless.

What about if you act as a guarantor for someone elses loan. A loan that wouldn't be given without the guarantee, but is never ultimately called upon. There is a tangible benefit created by giving the guarantee and having the "unspent" money.

[Hauldren Collider]

OK, how about where the capital is bought using borrowings? (Which I believe is often the case with high-flyers).

Huh? Borrowing money is how most people get capital to start businesses...or buy houses or cars. Or are you talking about buying stock? I'm confused.

[Dauphin]

I think he is getting at a notion of if you borrow your money in order to consume, then you would not be caught by any income tax, but would be caught by any consumption tax. Although you need to get an income (or have had an income) to pay off your debt, so all you've done is changed the timings of tax payment.

[Kuciwalker]

What about if you act as a guarantor for someone elses loan. A loan that wouldn't be given without the guarantee, but is never ultimately called upon. There is a tangible benefit created by giving the guarantee and having the "unspent" money.

I agree that this is a corner case and I'm not sure how to deal with it, though my instinct is that either 1) there's a way of calculating the value of the guarantee and taxing that (yuck) or 2) the fact that the loaned money will ultimately be hit by a tax (consumption or income) actually captures the benefit.

[N35t0r]

Or, to cover all your bases, you can do like they do over here: TAX THE MOTHER****ING **** OUT OF EVERYTHING!

VAT? Check!
Income Tax? Check!
Earnings Tax? Check!
Tax on every single bank transaction, on both ends? Check!
Import Tax? Check!
Export Tax? Check!

[Dauphin]

I agree that this is a corner case and I'm not sure how to deal with it, though my instinct is that either 1) there's a way of calculating the value of the guarantee and taxing that (yuck) or 2) the fact that the loaned money will ultimately be hit by a tax (consumption or income) actually captures the benefit.

I wasn't looking at this from a tax point. Purely a benefit without spending perspective.

Point 2 is largely irrelevant. Let's say the loan was a bridging loan, purely to facilitate a transaction due to cashflow problem and not to generate income or capital gain.

[Kuciwalker]

OK, how about where the capital is bought using borrowings? (Which I believe is often the case with high-flyers).

As Dauphin said, under a consumption tax any of that capital that is liquidated and spent on goods will be taxed, and under an income tax when you earn the money to pay off the loan that's when you pay the tax.

[ricketyclik]

As Dauphin said, under a consumption tax any of that capital that is liquidated and spent on goods will be taxed, and under an income tax when you earn the money to pay off the loan that's when you pay the tax.

Yes, but what about capital gains tax vs income tax, where consumption tax is absent or minor?

[ricketyclik]

That's meaningless. Think of your investments as a big black box. You dump money into them. It collects interest. Occasionally, the assets are shuffled around (some are sold/collect dividends/the interest is withdrawn from bank accounts, whatever, and you use that money to buy different assets). Eventually, you withdraw money out of the box and spend it on actual stuff. If you are using a consumption tax/VAT/national sales tax, it gets taxed at this point; if you are a using an earned income tax then it was already taxed (in the same proportion) going in.

Like, imagine that 100 years ago David's great-grandfather earned one million dollars and decided to save all of it, and we had had an earned income tax of 10%. That one million would turn into 900k. Given identical proportions of asset purchases, that set of assets will always be worth only 90% of the value of the same set of assets purchased with a full million dollars. If the 900k were invested in a bank account at 5% interest for 100 years, and then David decided to use the money for either personal consumption or just to reinvest, he will have $118.3 million. But this is exactly 90% of what someone who invested $1 million would have ($131.5 million). And if he reinvests it and his great-grandson withdraws it, it will still be only 90% of what the $1 million investment would have been.

(Math types call this property 'linearity', btw.)

Now, if you're concerned about intergenerational inheritance of wealth, advocate an estate tax, sure. But the CG tax is just distortionary and suck.

OK, I think I can see a flaw in this position.

Most taxes are in conflict with linearity, or double-dip. My parents paid tax on their income, and with what remained raised and educated me, among other things. Why therefore should I be subject to income tax? The input capital into me, as a resource, has already been taxed?

Kuciwalker also pointed out that VAT is about taxing the increased value along each step of the chain. If capital gains isn't that, then what is and how is it different?

(Remember, this stems from a sub-discussion concerning capital gains tax vs income tax).

[Kuciwalker]

Yes, but what about capital gains tax vs income tax, where consumption tax is absent or minor?

Er, as I just said, eventually you need income to pay off the loan. At that point the money is taxed.