for nye

[Berzerker]

I still have no idea what you're referring to. In all likelihood, you misunderstood my objection to what you were saying. All I remember is that you displayed a complete lack of understanding of the fundamental concepts underpinning cosmology, and thus could not have a meaningful discussion on it.

And again, I have no idea what your question above is asking.

You said the theory of relativity precluded a prior universe incompletely collapsing in on itself before the big bang (expansion) of this universe. If you didn't mean this (or I got it wrong, I didn't ) thats fine, I'd like to know one way or the other.

[ricketyclik]

Because the "value add" from your capital gains have already been taxed, because the amount you can invest was limited by your post-tax income. In the case of a 20% earned income tax, your capital gains are 80% of what they would have been without the tax.

But so are the added values in a VAT - my original point - so why is capital gains different?

[ricketyclik]

Are you retarded?

Yes I am Please don't ask me again, as it's upsetting to be reminded.

The capital pays the tax when it is redeemed for consumption.

I began the conversation by excluding consumption tax, and specifically comparing capital gains tax with other income tax.

Current capital gains tax laws

I was talking about capital gains taxes in general, not US capital gains taxes specifically.

... cause capital to pay tax:

a) when it is accumulated

and

b) when it earns returns (realized)

(outside of capital accumulated under programs like IRAs/401Ks/RRSPs etc)

Production used to finance deferred consumption is therefore taxed at much higher rates than production used to finance immediate consumption (which is taxed only upon accumulation).

This is the relevant margin. Unless taxpayers at a given income are heterogenous enough that savers display far less sensitivity to tax rates than spenders do, this is an idiotic means to collect taxes.

It sounds like the US capital gains tax regime is a bit different to Australia's. Our capital gains are taxed only when they are realised - when the capital is sold. They are then taxed at 50% of the rate of income tax, assuming the same total earnings over a financial year.

They used to be taxed at the same rate as income. The 50% discount has been blamed - at least in part - for a market distortion in that more investment is directed toward speculative real estate than would otherwise be the case (because the income derived is taxed at half the rate) causing more investment than is desirable to be tied up in a relatively unproductive sector.

[ricketyclik]

... if you're so primitive as to believe in fairness...

The views expressed are those of the individual and of their employer.

[Jon Miller]

So? I don't believe I've ever cast the capital gains tax as unfair - my only claim is that the tax is distortionary (in the sense that it taxes deferred consumption at a higher rate than immediate consumption). A tax that is distortionary is less efficient than a nondistortionary tax that raises an equal amount of revenue, in the sense that it depresses economic activity more (what's known as deadweight loss). Moreover, the CG tax is in fact strongly distortionary against savings, which has all kinds of other negative effects besides a higher deadweight loss.

Where do we see this distortion in real life economics?

The decrease in savings rate is due to a drop in real income and an increase in consumer culture. The increase in consumer culture is due to marketing/etc not due to taxes.

I think that the gains to be gotten from Investment are great enough that the current tax is below threshold and has little real effect (so causes no real distortion).

Also, I am not at all sure that the savings rate is calculated right. Really, money spent towards owning your own home should count as savings (investment) and is the most common form of savings for households with income below 100k. I have noticed that all my friends who got real jobs and are making decent amount of money now own property. They chose to do this instead of of buying stocks/etc (in some case selling stocks/etc) because they thought it was a better investment.

Wealth has been going up, pretty uniformly. I think you are trying to fix an imaginary problem.

JM

[Kuciwalker]

They are being taxed at the same rate. The difference is treating capital gains as income. I have pointed out some reasons why this might be a good idea. You disagree.

No, you are at this point either lying or willfully deceiving yourself.

nye, we define the taxation rate as (one minus) the proportion of money you have to how much money you would have had but for taxes. This is the overall, effective taxation rate, i.e. as distinct from the marginal tax rate. I have shown that Bob ends up with a smaller proportion of his pre-tax money than Alice under an income + capital gains tax. That means he is being taxed at a higher rate by definition.

Note that the definition nowhere states whether capital gains is to be treated as income. Nowhere does my argument state "I'm not counting capital gains as income".

[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.

nye, which of the following facts do you disagree with:

1) pre-tax, Alice would have had $1000
2) after we apply an income and capital gains tax, Alice would have had $800
3) 100 - $800/$1000 = 20
4) pre-tax, Bob would have had $1025
5) after we apply an income and capital gains tax, Bob is left with $816
6) 100 - $816/$1025 = 20.4
7) 20 < 20.4

[Kuciwalker]

By the way, nye, say we did move to a consumption tax/VAT/national sales tax, so that you pay 20% of all money you spend to the government. If Charlie is living off a trust fund that pays him $100k a year (which he spends), so he pays $20k a year in taxes, would you say that his capital gains aren't being taxed?

[Flubber]

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?

Import duties-- I know on Canada US travel, if you exceed the specified dollar value, they charge you the GST. Jewelry etc would be easy to conceal though

Also cars can be very tricky. I know some Canadian provinces will charge the equivalent of their provincial VAT as a fee/tax when licencing a car purchased out of province

[Dauphin]

DP

[Dauphin]

Paying tax once, today, does not pay for services and benefits received for the rest of your life.

Which is ironic, the services and benefits received over the last 10 years has created a deficit that requires you to pay taxes for the rest of your life. (maybe not you as a Canadian, but certainly your American and British cousins).


But to comment further on your point. Future taxes are often spent long before they get collected thanks to the issue of gilts, treasury notes etc that are effectively secured against future tax revenues.

[Dauphin]

Oh, you're talking about a case where you invest purely on the margin? My understanding is that* that's generally illegal, and some amount of collateral is required. In which case you still get the linearity - the amount you can invest on margin is linear in money which is linear in income which is linear in the tax rate.

*i.e. I could be completely wrong and wouldn't be surprised

Hmm. Check this.

You buy an asset for $100k. Borrow $100k secured against the asset (i.e there is no previous earnt income which has been taxed). Asset increases in value to $110k. You sell and make a profit of $10k. You repay your loan plus interest $105k.

Net position - you have $110k sale proceeds - $105k loan repayment = $5k to spend.

Scenario 1 (Income tax ONLY): The $5k is not taxed
Scenario 2 (Consumption tax ONLY) : The $5k is taxed.

You can say that 100% loan is not realistic, but you can amend to say you buy $200k of asset, and borrow $100k, and then treat the investment as two investments - the first an investment with borrowed money, the second with loaned money.

If you introduce CGT as an income tax, it resolves the problem, but creates another, when you consider someone investing earnt income.

[Dauphin]

I considered the notion that the interest income is taxed, but the interest rate is arbitrary, so a tax on $5k of interest is purely coincidental, and not fundamental.

I'm also considering from an individual perspective of tax, and their tax planning.

[Al B. Sure!]

Kuci:

I think nye's issue is that Bob, by saving, still has more money than Alice even if Bob has a higher effective tax rate. So the tax doesn't discourage saving because Bob is 'not hard done by'; he still has more money than Alice.

[Al B. Sure!]

I have a scenario. Same as kuci's with Bob and Alice but slightly different...

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 invest that money in a security. Alice chooses to spend all $1000 right now, and Bob chooses to spend $500 now and invest $500 in a security. Now, unbeknownst to him, his investment is a dud and drops 50% in value and he sells it at a loss. So poor Bob, in a non-taxed environment, has only $750 to spend (500+(500*.50)).

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 invest $400. Now, Bob is unlucky and he sells the security at a loss. The security cost him $400 and he sold for $200 (the same 50% loss in value) for a loss of $200. In total he gets to send $400 + $200 = 600. But, fortunately, his capital losses reduce his income tax liability...

Now, the government demands 20% of all income. Before, when Bob earned $1000, he was taxed at this 20% rate for $200, leaving him with $800 to do as he pleased with. He has a $200 tax liability.

When it comes for tax time, however, his income for the year was only $800 once he deducted capital losses ($1000-$200 in capital losses). $800 at 20% tax rate leads to a tax liability of $160 (alternatively, $200 in losses*20% to get his overpayment). He overpaid $40 in taxes and will get that back. So now, he has $640 to spend.

Now what is his effective tax rate? 100*($750-$640)/$750= 14.67%, which is lower than 20% - Bob is paying a smaller proportion of his income than Alice, he's benefiting from taking a risk and investing rather than spending all his money at once.

Now before you cry foul and say, well wait, he lost $250 in the non-taxed environment and only $200 in the taxed because he had $100 less to invest. That brings us to 100*($800-$640)/$800= 20%. This reflects directly the $160 in actual taxes paid only.

Now, under tax regime B, Bob gets to spend $400 now. He gets to invest $400 and loses $200 but he can not deduct capital losses. In total he gets to spend $400 + $200 = $600. 100*($750 - $600)/$750 = an effective tax rate of exactly 20%. Or, alternatively, to reflect actual taxes paid only, 100*($800-$600)/$800= an effective rate of 25%. Under tax regime B, Bob IS penalized for investing his money rather than spending it all at once.


The same that giveth can taketh away it seems. Take it from someone who lost $9K speculating on Citigroup and AIG options in the winter of 2008/2009, being able to deduct capital losses is peachy keen by me.

This other side of the coin, this benefit of the capital gains tax law with regards to losses, should be considered when tallying the effective tax rate with regards to capital gains. Now, of course, it is limited by $3000/tax year so there's that. I'm sure you could come up with a nifty little equation where you could put in different probabilities of different gains/losses, constrained on the downside by the $3000 cap on capital losses, and the resulting effective tax rates under conditions of uncertainty.