Are the rich paying their 'fair' share?

[Jon Miller]

What would that be? Love?

Are you stupid?

JM

[Fake Boris]

Good phrasing of the same question in Marxian terms. The "*" operator ends up being a little bit sketchy, but it actually works OK for the simple sort of analysis you want. You're operating from an equation where labor*capital=wage+profit. The wage goes to the provider of the labor, and the profit goes to the provider of the capital.

The reason that wage and profit should be taxed differently is that the profit comes from the capital, which was initially formed by labor. It's not actually "labor*capital", but "labor*(labor*capital)", or even "labor*(labor*(labor*..." like a set Russian dolls.

Imagine that someone builds a shovel, which is used to dig a mine, which is used to get iron and coal, which is used to make steel, which is used to create construction machinery, which is used to make a drydock, which is used to make ships, which are sold to a foreign country. Applying taxes on the capital income side each step of the process ends up diminishing the value of the shovel-creator's labor most by hitting him with a long series of telescoping taxes, just because he happened to contribute very early on in the process - while the value of the shipmaker's labor is diminished the least through taxation.

Brought back to regular econ terms for non-Marxists: each time capital gains are realized and taxed, the present-discounted purchasing power of wage income earned several periods ago declines relative to the present-discounted purchasing power of wage income earned more recently.

That makes sense to me to a certain extent, but shouldn't everything go back full circle for the shovel maker at some point?

Also: it seems to me that if you're taxing the value of labor, nothing's much wrong here, no?

[Jaguar]

But how do you account for all the goods that wealth provides but which are not purchasable in a shop?

JM
(And in many cases you can acquire these goods without even spending your wealth.)

If all consumption is taxed, the effective purchasing power of that wealth has decreased, so whatever intangible benefits you think are there should presumably decrease by a proportionate amount.

[Jaguar]

The distinction breaks down in some cases anyways.

Self employed day trader who makes their income solely from capital gains vs employed trader who makes their income from a paycheck/performance bonuses. In both cases they are (or at least could be) doing the same type and amount of work for the same compensation. But the fruits of their labor would be taxed differently. (Not just in regards to capital gains/self employment/income taxes either. Taxes on the corporation would indirectly affect the employed trader's compensation.)

Better to just move to consumption taxes all around.

Yes.

Consumption taxes can be made progressive through sales tax plus a simple swipeable card, like the food stamps ones, that exempts you from tax fully on your first $X purchases during the year, and then partially on your next $Y in purchases, and so forth. We swipeable cards for food stamps already, so it would be very easy to use them for progressive sales tax refunds.

[Jaguar]

Someone still has to explain me why value resulting from labor*capital-wage should be considered different than value from labor*capital-profit.

Good phrasing of the same question in Marxian terms. The "*" operator ends up being a little bit sketchy, but it actually works OK for the simple sort of analysis you want. You're operating from an equation where labor*capital=wage+profit. The wage goes to the provider of the labor, and the profit goes to the provider of the capital.

The reason that wage and profit should be taxed differently is that the profit comes from the capital, which was initially formed by labor. It's not actually "labor*capital", but "labor*(labor*capital)", or even "labor*(labor*(labor*..." like a set Russian dolls.

Imagine that someone builds a shovel, which is used to dig a mine, which is used to get iron and coal, which is used to make steel, which is used to create construction machinery, which is used to make a drydock, which is used to make ships, which are sold to a foreign country. Applying taxes on the capital income side each step of the process ends up diminishing the value of the shovel-creator's labor most by hitting him with a long series of telescoping taxes, just because he happened to contribute very early on in the process - while the value of the shipmaker's labor is diminished the least through taxation.

Brought back to regular econ terms for non-Marxists: each time capital gains are realized and taxed, the present-discounted purchasing power of wage income earned several periods ago declines relative to the present-discounted purchasing power of wage income earned more recently.

[Jaguar]

Something to consider... If, in a world with no dividend or CG taxes, shares in company X paid a dividend of $5/share in perpetuity were valued at $100. What would be the effect on the share value if all dividends and CG were charged at 20% tax. What would be the effect on return on investment?

Mostly interested in seeing thought processes....

If you did a permanent tax on this company alone, it's simple. The share value would go down to $80 to reflect the fact that five shares under the new system are an identical financial instrument to four shares under the old system. Both give you payments of $20 and cost $400.

If you did this economy-wide, the equilibrium for business investment would shift, and you'd end up with a society that spends somewhat less of its GDP on investments, and somewhat more of its GDP on personal consumption.

[Aeson]

But how do you account for all the goods that wealth provides but which are not purchasable in a shop?

JM
(And in many cases you can acquire these goods without even spending your wealth.)

The same way you account for all the other intangible or unquantifiable benefits in life (looks, intelligence, imagination, health, ect). You don't.

[giblets]

But how do you account for all the goods that wealth provides but which are not purchasable in a shop?

JM
(And in many cases you can acquire these goods without even spending your wealth.)

What would that be? Love?

[Jon Miller]

But how do you account for all the goods that wealth provides but which are not purchasable in a shop?

JM
(And in many cases you can acquire these goods without even spending your wealth.)

[Jon Miller]

But how do you account for all the goods that wealth provides but which are not purchasable in a shop?

JM
(And in many cases you can acquire these goods without even spending your wealth.)

[Aeson]

The distinction breaks down in some cases anyways.

Self employed day trader who makes their income solely from capital gains vs employed trader who makes their income from a paycheck/performance bonuses. In both cases they are (or at least could be) doing the same type and amount of work for the same compensation. But the fruits of their labor would be taxed differently. (Not just in regards to capital gains/self employment/income taxes either. Taxes on the corporation would indirectly affect the employed trader's compensation.)

Better to just move to consumption taxes all around.

[Fake Boris]

Thanks for the explanation.

I'm not really convinced the distinction is all that useful though.

[giblets]

The distinction exists because earned income results from forgoing leisure in exchange for the ability to engage in either present or future consumption while investment income such as capital gains results from forgoing present consumption in exchange for future consumption. The tax on earned income increases the cost (in terms of forgone leisure) of both present and future consumption while the tax on investment income increases the cost (in terms of forgone leisure) of only consumption in the future. The assumption is made that those receiving investment income got their start by earning income, and then saving some of it, so all income was originally earned and taxed as earned income. The effects of these taxes are significantly different so a distinction between earned income and investment income is useful.

[Fake Boris]

Ultimately, no capital could value without labor.

Why then should we make a difference between capital gains and earned income?

[giblets]

could you please explain what those terms are supposed to mean?