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You tax capital gains differently than earned income to incentivise investment over consumption. This is because consumption today is always more valuable than

You tax capital gains differently than earned income to incentivise investment over consumption. This is because consumption today is always more valuable than consumption in the future (the discount rate).

extra88 10y ago
Can you explain that? How does does the source of the money affect what I do with it (dividends & interest vs. pay from the sweat of my brow & intellectual output)? If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?
- grinnbearit 10y ago
  You'd always prefer $100 today vs $100 in a year. In order to convince someone to invest you need to offer them more than that in the future. If the discount rate is 10% (not bank interest, just how much I personally value time) then unless you offer me more than $ 110, I'd rather spend the money now. For people to invest, discounted_expected_return[1] - capital_gains should be higher than the money in their wallets. You can play around in excel to understand this better, with a 5% return, a 20% tax on both income and capital gains and a 10% discount rate, $ 100 in income is either $ 80 today or $ 76 in a year. [1] Discounted for Time, Expected for Risk.
  - lotharbot 10y ago
    I just want to emphasize something you hinted at: "expected return" usually involves an additional discounting factor which relates to risk and risk tolerance. An investment with a fixed return of 5% (a predictable $76 equivalent in a year) is very different from an investment with an expected return of 5% but a standard deviation of +-10% (anywhere from about $68 to $84). A lot of investors would treat that as worth a little bit less, because if it happens to go down, that is felt more keenly than if it goes up.
tomp 10y ago
No, capital gains taxed less than wages incentivises investment over working. Which IMO is the wrong thing, because it's fundamentally regressive - young, poor but intelligent and educated people can only work, not invest, so we should encourage them by taxing them fairly.
- Godel_unicode 10y ago
  And you think if you remove the incentive to invest, thus reducing the capital available to corporations, the same number of jobs will exist for those young poor people to work in?
- aaronchall 10y ago
  I'm pretty confident that we do tax the poor fairly - in fact, thanks to credits, the poorest get a negative tax rate that nets them sizable "refunds".

extra88 10y ago

Can you explain that? How does does the source of the money affect what I do with it (dividends & interest vs. pay from the sweat of my brow & intellectual output)? If consumption today is more valuable than consumption in the future, why would you want to favor doing something else today, e.g. investment?

grinnbearit 10y ago
You'd always prefer $100 today vs $100 in a year. In order to convince someone to invest you need to offer them more than that in the future. If the discount rate is 10% (not bank interest, just how much I personally value time) then unless you offer me more than $ 110, I'd rather spend the money now. For people to invest, discounted_expected_return[1] - capital_gains should be higher than the money in their wallets. You can play around in excel to understand this better, with a 5% return, a 20% tax on both income and capital gains and a 10% discount rate, $ 100 in income is either $ 80 today or $ 76 in a year. [1] Discounted for Time, Expected for Risk.
- lotharbot 10y ago
  I just want to emphasize something you hinted at: "expected return" usually involves an additional discounting factor which relates to risk and risk tolerance. An investment with a fixed return of 5% (a predictable $76 equivalent in a year) is very different from an investment with an expected return of 5% but a standard deviation of +-10% (anywhere from about $68 to $84). A lot of investors would treat that as worth a little bit less, because if it happens to go down, that is felt more keenly than if it goes up.

tomp 10y ago

No, capital gains taxed less than wages incentivises investment over working. Which IMO is the wrong thing, because it's fundamentally regressive - young, poor but intelligent and educated people can only work, not invest, so we should encourage them by taxing them fairly.

Godel_unicode 10y ago
And you think if you remove the incentive to invest, thus reducing the capital available to corporations, the same number of jobs will exist for those young poor people to work in?
aaronchall 10y ago
I'm pretty confident that we do tax the poor fairly - in fact, thanks to credits, the poorest get a negative tax rate that nets them sizable "refunds".