for nye

[Jon Miller]

By increasing the propensity to consume rather than invest.

I don't think it plays a large role. The rate of return on investments is high enough that anyone who makes decisions based upon economics invests.

Those who don't invest aren't making the decision based on economics, rather they are making the decision based on culture/marketing.

If you look at capital gains taxes, investment, and investment return you won't see that investment is constrained by low capital gains taxes.

For example, in the US during the last 50 years, the highest savings rates were also at the times when the capital gains tax was the highest. It isn't a significant effect in the situations which the US has been in.

JM
(I already mentioned that I have a problem with how the savings rate is calculated.)

[Kuciwalker]

I don't think it plays a large role. The rate of return on investments is high enough that anyone who makes decisions based upon economics invests.

You realize that people can also choose how much to invest, right?

[Dauphin]

As long as you needed collateral in proportion to the loan then to total amount of money you have has been decreased linearly by the tax.

I know that (and you also said it already). I was this time getting at the point whereby you have no collateral. Back in the crazy days, unsecured loans and 105% mortgages (often given solely on the assumption asset values would increase) were all the rage.

[Kuciwalker]

... but in your example there was collateral. And as I said, my understanding is that pure margin investing is generally illegal. So what's the point?

[Jon Miller]

You realize that people can also choose how much to invest, right?

And everyone I know invests as much money as they feel they can. This includes those who don't invest at all.

My indian friends feel that they can eat rice and not have a car/etc. They invest quite a bit. Myself, who felt that I should live a 'normal' life and go out to eat/etc haven't invested at all (so far).

Note that this is with a liberal, and I think more correct, definition of investment (a house is an investment).

Investing is, and has (excluding a couple of bad years/etc) always been, the best way to make an income. This was true when capital gains taxes were <20% and when they were over 30%.

The reason that people don't invest is because they 'need' something. Most people invest all the money that they don't think they 'need' to spend. And this has always been true.

When investment rates go up or down, it is because changes in what people think they 'need', not that the return isn't high enough on the money that they didn't 'need'.

It probably would cause changes at very high rates (70%), but I don't think evidence validates yours and KH's position that capital gains taxes provide a significant distortion in choice of whether to invest or not.

You guys are concerned about 3rd order effects.

JM

[Jon Miller]

Note I don't know any very rich people. Maybe they consider that they don't 'need' a personal pizza place and that they don't 'need' to have more money yet still somehow make the decision economically.

But somehow I doubt it. We have Buffet living in a decent house driving a decent car. And we have rappers with private taco bells/etc.

JM

[Al B. Sure!]

Only if you are just as likely to be losing money on your investments as gaining. Do you really want to penalize saving by intelligent investors but reward it by really dumb ones?

Umm... What are you not understanding? Under conditions of uncertainty (WHICH ARE ALL INVESTMENTS WHICH CAN POSSIBLY CAUSE CAPITAL GAINS!)! It's not about dumb investors. It's about the fact that...

Here let me make it real simple even a CS grad can understand:

You stated the tax disadvantages of a capital gains tax on positive capital gains (ie- higher effective tax rate than if the capital gains were un-taxed). That is completely true. What I am pointing out is that there are tax ADVANTAGES of a capital gains tax on negative capital gains ie- losses (ie- lower effective tax rate than if the capital gains were un-taxed).

Now, what that means is that on any particular investment (well EVERY investment that allows for the possibility of capital gains [capital gains tax does not equal tax on interest or dividends), the outcome is uncertain. It's not about smart or dumb investors. The only difference between a smart and a dumb investor is a smart investor does more research and minimizes his risk exposure but that doesn't mean he operates under any more certainty on the success of any particular security than the dumb investor (learn some basic portfolio theory).

So the point is, the advantages and disadvantages nullify each other under conditions of uncertainty (which all investments that allow for capital gains are under). There is a cap on this though at $3000 loss per tax year. So the tax advantages of losses beyond that do not nullify the tax disadvantages of corresponding percentage gains.

The net result is the capital gains tax increases one's effective tax rate under conditions of uncertainty but only in conditions when the gains or losses exceed the loss value that would result in a $3000 loss (ie- for $10K income, $8K invested due to 20% tax rate, 38% loss or gain is this point; The capital gains tax has no effect on tax rate between a loss of 38% and a gain of 38%).

No, the effective tax rate by definition is the proportion of money you no longer have compared to the no-tax scenario.

Read a book. Really, you are not knowledgeable enough to speak on any of this stuff.

http://www.investorwords.com/1668/effective_tax_rate.html

"Actual income tax paid divided by net taxable income before taxes, expressed as a percentage."

http://www.ncnblog.com/2007/11/16/a-bit-about-taxes-understanding-effective-tax-rates-for-2007-planning-for-2008/

there's a little about calculating ETR for IRS purposes.

By definition my ass... Where did you pull that from? Are you just making things up now?

Your definition makes meaningful comparison between tax schemes impossible.

Um... no, it still works. ETR as properly defined is still valid but because I admit having less money to invest kind of saved someone from losing money, I included both calculations in my analysis of the two schemes. Either way, the point remains that when one losses money, he's better off having a capital gains tax than none.

And to re-iterate once again, this means that the advantages/disadvantages under losses/gains nullify each other up until a $3000 cap because investments are made under conditions of uncertainty.

(and technically, because that $3000 cap is only for a specific tax year and can be carried over into other years (ie- $10K in losses can be carried 3000 in years 1, 2, and 3, and $1000 in year 4)... well, it's a bit more complicated but you can progressively increase the possible gains/losses on an asset beyond let's say 38% in my previous scenario, constrained only by the Present Value of the future tax rebates).

[Al B. Sure!]

I'm posting a new topic, Kuci. We can move this there. If that's okay, Jon? (how's it going by the way, Jon?)

[Dauphin]

... but in your example there was collateral. And as I said, my understanding is that pure margin investing is generally illegal. So what's the point?

The whole debate is a "what's the point issue" (it's not reality that you have only one type of tax etc). So the exceptions to the academic arguments are far more interesting.

[KrazyHorse]

I don't think it plays a large role. The rate of return on investments is high enough that anyone who makes decisions based upon economics invests.

It seems like step one of any argument that a given tax is a good idea is to assert, without evidence, that the relevant factor is inelastic.

Those who don't invest aren't making the decision based on economics, rather they are making the decision based on culture/marketing.

Do you mind phrasing this is some sort of coherent manner?

If you look at capital gains taxes, investment, and investment return you won't see that investment is constrained by low capital gains taxes.

Really?

For example, in the US during the last 50 years, the highest savings rates were also at the times when the capital gains tax was the highest. It isn't a significant effect in the situations which the US has been in.

Jon, do you realize how ridiculous an analysis of this kind is? Over the last 60 years in the US there's been a secular decline in capital gains taxes as well as a secular decline in savings. Cross-country trends show the latter without necessarily showing the former. This demonstrates that there is some sort of third factor driving the secular trend downward in savings. It does not demonstrate **** about policy impacts. Secondly, capital gains taxes are paid WHEN GAINS ARE REALIZED. This means that investment responds to LONG-TERM EXPECTATIONS of the tax rate, not to the current rate.

Lastly, ANY capital gains tax distortion is unnecessary. If I earn the same as somebody else through my entire life, and that other person chooses to spend their income instead of saving some of it, then how the **** does it increase equality to tax me more than this other person? The current tax-and-benefit system does precisely that. I get to consume less of the NPV of my earnings over my lifetime because I chose to defer my consumption until later in life.

Capital gains taxes are a TERRIBLE choice for a redistributive tax.

[KrazyHorse]

I know that (and you also said it already). I was this time getting at the point whereby you have no collateral. Back in the crazy days, unsecured loans and 105% mortgages (often given solely on the assumption asset values would increase) were all the rage.

Stop arguing with Kuci about this. His point is tangential. The real point is that SOMEBODY pays the taxes, and as everybody who knows anything knows, it doesn't matter which side of a transaction you collect the tax on.

[KrazyHorse]

And everyone I know invests as much money as they feel they can. This includes those who don't invest at all.

My indian friends feel that they can eat rice and not have a car/etc. They invest quite a bit. Myself, who felt that I should live a 'normal' life and go out to eat/etc haven't invested at all (so far).

Go play with the children if you're going to make childish arguments.

It probably would cause changes at very high rates (70%), but I don't think evidence validates yours and KH's position that capital gains taxes provide a significant distortion in choice of whether to invest or not.

Way to pull numbers out of your ass, Jon.

You guys are concerned about 3rd order effects.

JM

The government changing the rate of return from 6% to 3.5% (for interest income, once you include state+local taxes) is a 3rd order effect? Are you out of your mind?

[Kuciwalker]

The whole debate is a "what's the point issue" (it's not reality that you have only one type of tax etc). So the exceptions to the academic arguments are far more interesting.

... but are there significant real-world exceptions to that rule? If there aren't, you might as well be asking how this tax deals with people who are legally permitted to print their own money.

[Al B. Sure!]

Kuci, just want to make sure you noticed the new thread for our discussion.

[Kuciwalker]

Umm... What are you not understanding? Under conditions of uncertainty (WHICH ARE ALL INVESTMENTS WHICH CAN POSSIBLY CAUSE CAPITAL GAINS!)! It's not about dumb investors. It's about the fact that...

This is untrue. You pay tax on savings account interest even when it is covered by the FDIC which ensures, in practice, that it cannot realize a loss.

Here let me make it real simple even a CS grad can understand:

Let's get another thing out of the way: I'm smarter than you. I understand what I'm talking about better than you, even if you might be more knowledgeable about the topic than I am (though as I note below, you seem pretty confused about that too). I'm better at mathematics than you. I have a better intuitive grasp of quantitative systems than you. And I bet all these are true of the majority of computer science majors at top universities. In addition, I also was an applied math major. And I'm starting work as an actuary in a few weeks.

The upshot? Drop the condescension. It makes you look like an idiot.

You stated the tax disadvantages of a capital gains tax on positive capital gains (ie- higher effective tax rate than if the capital gains were un-taxed). That is completely true. What I am pointing out is that there are tax ADVANTAGES of a capital gains tax on negative capital gains ie- losses (ie- lower effective tax rate than if the capital gains were un-taxed).

This 'advantage' only comes into play when you lose money on your investments, i.e. it only comes into play when people make investments that lose money.

Moreover, Bob could achieve better risk mitigation by simply buying only 80% as much of the asset and putting the other 20% of the money under his mattress (since CG tax is not inflation-adjusted). Therefore earned income + CG tax is still worse for Bob than earned income tax. And since we've already demonstrated that an earned income tax results in the same effective tax rate for Alice and Bob, a fortiori a CG tax taxes Bob at a higher effective rate than Alice and is therefore distortionary.

Now, what that means is that on any particular investment (well EVERY investment that allows for the possibility of capital gains [capital gains tax does not equal tax on interest or dividends)

No, interest and dividends are taxed at the normal earned income tax rate, which for most people making significant investments is higher. How does this possibly help your point?

(Yes I know there are a few specific classes of investment that are exempt, e.g. Roth savings and federal/state/municipal debt. These exceptions illustrate the rule rather than challenge it.)

"Actual income tax paid divided by net taxable income before taxes, expressed as a percentage."

Under this definition Bob pays $209 in tax on $1025 in pre-tax income, which is 20.39% which is exactly the number I calculated before. The only reason you get your number is because you're ignoring money that disappears into the ether rather than actually being collected by the government. When looking at the economic effect of a tax on it obviously doesn't matter whether the tax money actually reaches the government or if it is just set on fire.

Alternative formulation: a consumption tax/national sales tax/VAT reaches the 20.39% number exactly even IF we accept your idiotic scheme. They also clearly have identical economic impacts because they result in identical real allocation of resources (if you need me to, which you might because you appear quantitatively challenged, I can redo the Alice/Bob example with a national sales tax to show that). Therefore for the practical purpose of examining the economic impact of a tax any method that treats an earned income tax differently from a consumption tax/national sales tax/VAT is flawed.