for nye

[Drake Tungsten]

and as everybody who knows anything knows, it doesn't matter which side of a transaction you collect the tax on.

Ohhh, OP-related burn.

[KrazyHorse]

No, interest and dividends

Dividends are exempted for the next little while due to Bush tax cuts.

[Al B. Sure!]

Why are you posting here? I have a new thread for this discussion. "For NYE" is not a good thread title to attract DinoDoc and Roland and the other economic savvy people to clarify our discussion.

Fine. Whatever. Here we go.

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.

But not Capital Gains tax. Capital Gains can only occur from selling an asset at a value higher than what was paid for it. It's not interest income. If you want to talk about the 'fairness' associated with interest income than yeah, you have a point because a tax on interest income does lead to a higher effective TR categorically.

To clarify, I take absolutely no issue with your original scenario. I pointed out an alternative scenario more relevant to Capital Gains tax in which a loss results in a lower ETR which in turn implies under uncertainty... i've said it over and over again. For some reason you are still not understanding.

Let's get another thing out of the way: I'm smarter than you.

For someone with a supposed better grasp of quantitative systems, you can't seem to understand concepts like expected value.

The tax advantages/disadvantages of a CGT associated with losses/gains respectively are nullified (constrained by losses up to the cap on capital losses deducted from earned income) under conditions of uncertainty.

Note in my original equation,
effective tax rate= 100*[(I*PsubscriptN*(1+N))-(((I*(1-T))*(1+(PsubscriptN*N)*(1-T)))]/(I*PsubscriptN*(1+N))

If the probability of a 10% gain for example is greater than the probability of a 10% loss, then yes, it will skew the ETR towards being greater than the NTR. If the probability of a loss is greater, then it would skew the ETR towards being less than the NTR. For simplicity sakes, I'm assuming the possible outcomes are normally distributed; the probability of gains or losses are equal to each other at each value across all values.

So if my investment declines by 10%, I'm better off with the tax (lower ETR).
If my investment appreciates by 10%, I'm worse off with the tax (higher ETR).
But if the two events have equal probability of occurring, then the differences are nullified and ETR=NTR (limited of course by the constraints of the capital loss maximum).

I don't think you're understanding my argument (I also misnamed the other thread just to be more noticeable). We agree in that a Cap Gains tax results in a higher ETR than NTR. My point is it's not as clear cut as you seem to believe. The higher ETR only occurs under conditions of certainty (ie- risk-free assets) and with gains/losses beyond a certain point corresponding to the tax rebate and the PV of future rebates. There is a wide gamut of possible investment outcomes in which ETR

money that disappears into the ether

1) it doesn't disappear into the ether. It is re-distributed by market forces
2) ETR's definition is clear. I don't see what your point is. It literally involves actual money paid to the government ($200 at first, then $160) Let's go back to my original post. I said:

"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."

100*($800-$640)/$800= 20% (see that 800-640? That's the 160 he gave to the gov't)
100*($800-$600)/$800= an effective rate of 25% (see that 800-600? That's the 200 he gave to the gov't but did not receive a rebate on)

I'm following what ETR literally means, not your bizarre definition. Tax paid/Income.

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.

Hence why I made the distinction in the ETR's. Under one, obviously, with less money to invest because he was taxed, his absolute dollar losses were therefore reduced (just as his gains would've been reduced). I just put that there for comparison purposes.

The ETR's I just posted are the relevant ones for tax purposes. His $200 investment loss is not relevant to that unless you want to somehow say the tax resulted in an economic situation that caused the decline in the value of his investment.

The point is what was he taxed? And in that case, he was taxed $160 versus $200. He paid more in taxes without the CG tax.

[KrazyHorse]

You're a ****ing idiot.

"For NYE" is not a good thread title to attract DinoDoc and Roland and the other economic savvy people to clarify our discussion.

Neither DinoDoc (lol) nor Roland (much more serious competition) knows econ as well as I do, sweetheart.

Due to Adam Smith's sad passing and the fact that a couple of the other knowledgable people no longer post actively, I'm what passes as the expert around here right now (this is more an indictment of Poly than something I'm proud of).

[Drake Tungsten]

Due to Adam Smith's sad passing and the fact that a couple of the other knowledgable people no longer post actively, I'm what passes as the expert around here right now (this is more an indictment of Poly than something I'm proud of).

Struth.

[KrazyHorse]

The tax advantages/disadvantages of a CGT associated with losses/gains respectively are nullified (constrained by losses up to the cap on capital losses deducted from earned income) under conditions of uncertainty.

Are you honestly this ****ing stupid?



Expected rate of return (under real-world probabilities) = expected rate of return (riskless) + mkt price of risk * vol

[KrazyHorse]

therefore, with fully-rebated capital losses and with homogenous rates on winners and losers (neither assumption is true, but for demonstrative purposes it's fine), realized capital gains tax = tax on risk-free returns + tax on risk + government taxing smart investment + government subsidizing poor investment

[KrazyHorse]

I never met the man, but randomturn is certainly the only one who would compete with me in any serious finance discussion...

[Kuciwalker]

Why are you posting here?

Because it's the same topic the thread has been about for 3 pages.

But not Capital Gains tax. Capital Gains can only occur from selling an asset at a value higher than what was paid for it. It's not interest income.

1) Il've been using capital gains tax interchangeably with "unearned income tax"; this is imprecise but the meaning was obvious to everyone here until you started posting.

2) Since the tax on deposit interest is higher than the CG tax, it is even more harmful.

3) There's no meaningful economic distinction between capital gains and deposit interest; it's easy to design an instrument that turns one into the other (which is why they have a big regulatory rule saying you can't).

If you want to talk about the 'fairness' associated with interest income than yeah, you have a point because a tax on interest income does lead to a higher effective TR categorically.

If you'd been paying the least bit of attention you would notice that any mention of "fairness" by me has been derisive. It is not an intellectually coherent standard.

For someone with a supposed better grasp of quantitative systems, you can't seem to understand concepts like expected value.

No, you think I don't understand expected value because you think it's relevant to the conversation, when it isn't and so I ignore your musings about it.

The tax advantages/disadvantages of a CGT associated with losses/gains respectively are nullified (constrained by losses up to the cap on capital losses deducted from earned income) under conditions of uncertainty.

The uncertainty is irrelevant. The downside compensation is strictly less in value than the upside tax. Bob could achieve strictly equal or better outcomes in all situations by purchasing only 80% of the original portfolio and putting the other 20% under the mattress. Not "expected better outcomes", better or equal in every single case. Therefore the earned + unearned income tax is strictly worse for Bob than the earned income tax alone, and we've established that the earned income tax is nondistortionary (because it's equivalent to the consumption tax, which is nondistortionary). Therefore the earned + unearned income tax is distortionary against deferred vs. immediate consumption.

1) it doesn't disappear into the ether. It is re-distributed by market forces

No, it's not, it's redistributed by government taxation. My example does NOT involve a change in consumption patterns based on the tax rate; there is no action by market forces at all. Bob has $109 fewer dollars at T=1 than he would have had there been no tax; the fact that only $104 of those actually reached the government (unless the government invested $100 of the original payment in the same security) has no influence on his outcome.



Simple argument that you should be able to understand if you're worth talking to:
1) a consumption tax produces identical economic outcomes to an income tax
2) a consumption tax results in a 20.39% effective tax rate for Bob
3) therefore, if you define ETR such that an earned income tax produces a different rate for Bob, then your definition of ETR is economically useless

[KrazyHorse]

Consumption tax is not nondistortionary, kuci

It distorts at the margin between work and non-work

The only non-distortionary taxes are taxes on the unimproved value of land (modulo the Dutch solution) and per-capita taxes (assuming they're always paid by the capita and not the parents).

To get serious for a second (for those who aren't nincompoops) the reason unearned income tax + earned income tax is generally thought to be significantly more distortionary than an earned income tax alone (which collects the same amount of money) is that:

(setting, for simplicity, unearned income tax rate at flat U, earned under system without unearned as E and earned under system with unearned as E_U)

a) The capital gains tax provides some distortion at the savings/consumption frontier; let's not bother quantifying it right now; lets take that as D1
b) The marginal earned income tax rate on those not attempting to save will be E_U < E under the relevant systems, while the marginal tax rate on earned income for those attempting to save (this is not the right terminology!) will be E' > E

In other words, even if you discount the distortionary effect unearned income has at the saving/spending frontier, you're left with a tax system which effectively taxes savers' EARNED incomes at a higher marginal rate. Unless the population of savers has a significantly LOWER elasticity of labour supply than the population of spenders (at a given income level) this means that JUST the distortion caused at the labour/leisure frontier for the population as a whole is higher with unearned income tax than with earned income tax (size of distortion generally grows more than linearly with tax rate due to convexity of supply curve). This is an increase in distortion coupled with a DECREASE in inequality (you're reducing the NPV of lifetime consumption of savers more than spenders at EQUAL earnings power!) Again, in order to justify unearned income taxes as sticking to the equality/distortion efficient frontier (efficient here relative to that tradeoff) you have to somehow postulate wildly differing elasticities of labour supply for the two populations.

[Jon Miller]

I am still going to ask, do you have any sort of numbers or evidence that shows what sort of effect this has on investment. Due to the people I know, and due to a little bit of googling I think that it plays a small role.

I haven't seen any evidence that it plays a significant role.

JM

[KrazyHorse]

The key takeaway is that inserting distortions at multiple points along the production -> consumption chain is generally a terrible idea.

There is no conservation of distortion. Taxes which treat one method of turning production into consumption differently than another method (modulo Pigovian taxes) are generally dumb both from an efficiency as well as an equality standpoint. Taxing one person's production -> consumption method differently than another's increases the production/leisure distortion (assuming a homogeneous population) as well as introducing intermediate distortions (causing people to turn production into consumption in suboptimal ways, given their preferences and market conditions)

[KrazyHorse]

I am still going to ask, do you have any sort of numbers or evidence that shows what sort of effect this has on investment. Due to the people I know, and due to a little bit of googling I think that it plays a small role.

I haven't seen any evidence that it plays a significant role.

JM

Jon, there are no good numbers to support ANY real conclusions as to the size of the distortions introduced.

I've laid out quite clearly what conditions you'd have to satisfy in order to make unearned income tax appealing: namely that the saving/spending margin is basically inelastic, and that there is a significantly lower elasticity at the work/play frontier for savers than for spenders.

You've picked a VERY special little corner of parameter space there, dude.

Now, you need to explain to me: why do YOU think that unearned income taxes are a good idea.

To separate the issues, let's start off by pretending that God comes down and wipes the Earth clear of physical posessions (or, even better, distributes physical capital equally among the Earth's citizens).

Now, the only way you can build up more capital than your neighbour is by saving more than he does.

If my neighbour has identical earnings to me, is the same age etc. etc. do you think my lifetime consumption (NPVed) should be taxed at a higher rate than his, simply because I choose to take more of my consumption later in life?

Now add in the extant stock of capital...remembering that a consumption tax effectively EXPROPRIATES the current capital holders. It's a one-time levy on their holdings equal to the rate at which consumption is taxed.

It also taxes extant human capital holders....but they would have been taxed even with earned income taxes due to the inability to separate returns from education/training from returns due to effort/innate ability etc.

[Kuciwalker]

Consumption tax is not nondistortionary, kuci

It distorts at the margin between work and non-work

Thank you, I hadn't realized that.

[Kuciwalker]

It also taxes extant human capital holders....but they would have been taxed even with earned income taxes due to the inability to separate returns from education/training from returns due to effort/innate ability etc.

Can't you do that by providing making education spending deductible?