9 ms·

Why is labor income taxed so much more than capital gains? Effectively those with large fortunes are paying a way lower effective tax rate than most salaried em

• paganel 12y ago
  > Why is labor income taxed so much more than capital gains? Like most of the regressive taxes, I think it's because of power imbalances. The vast majority of people paying 40% on labor taxes do not have the same power influence as those with far greater fortunes who benefit from capital gains. The same thing held true in "Ancien Régime" France in the 18th century and even in my small East-European country, where, according to a book which I'm just reading, the local rulers used to "absolve" rich people from paying taxes because they "had been helpful" to said rulers in the past (mostly they had lent money in times of distress to those rulers), while most of the taxation felt on the poor people. As for a solution to all this, I honestly don't know which one might be best. Right now democracy and universal suffrage seems like the best we can do, but IMHO we're always just a couple of steps away from reverting to other solutions which we tried in the past, the ones that involved people like the Jacobins or those that started the October Revolution. Time will tell.
• dkyc 12y ago
  Because the capital that you invest has been taxed before, when it was earned. Kind of harsh to tax 40% on your income, and when you save it, tax again the same amount on your returns.
  • nasmorn 12y ago
    So is Sales tax which regressively Hits the poor the hardestas they spend 100% of income. This is a non argument. Tax what least inhibits growth or like alcohol and cigarette taxes things that you would like to be used less.
    • yummyfajitas 12y ago
      If savers eventually consume whatever they saved, they too will be hit by the sales tax. Their tax rate will be 1-(1-Income tax)(1-savings tax)(1-sales tax), compared to the consumer who will pay only 1-(1-Income tax)(1-sales tax). If they never consume what they saved, they have effectively given it to society anyway. The idea that a sales tax is regressive (w.r.t income) is simply an artifact of your measurement period. It's strictly speaking a flat tax over the long term, but it becomes regressive for a single individual if you break his lifetime up into year-long chunks and if his income or consumption isn't stable. tl;dr; do the math, the "sales tax is regressive" meme is silly. Any true regressivity is solely an artifact of progressive income taxes and vanishes when you measure progressivity w.r.t. after-tax income.
      • Retric 12y ago
        You don't pay sales tax on services. Weathly people spend more of there income on ex maids than poor people. At the extreme a bum might pay sales tax on all of there income. Also of note 'charitable' giving is just another form of spending and avoids both sales and income taxes. Feel like Promoting Scientology to dogs? Feel free to avoid paying taxes.
        • yummyfajitas 12y ago
          I agree that taxing different forms of consumption at different rates may have a non-zero effect. That's orthogonal to the point I was making and applies to taxes on saving and production as well. You don't pay sales tax on services. Weathly people spend more of there income on ex maids than poor people. Poor people spend a larger fraction of their income on doctors than rich people. If you have numbers present them, but singling out a single stereotypically rich category of spending is silly.
          • Retric 12y ago
            Depends on what you mean by poor and rich. Plenty of people avoid seeking medical attention because they really can't afford it. Statistically, those in the bottom 20% of income earners spend significantly more of there income on sales tax than the top 50% or top 1% or top 0.1%.
  • yequalsx 12y ago
    All money is taxed ad infinitum so to speak. Reagan believed the tax on capital should be more than the tax on labor. On this I think he was right. That wealthy people pay a smaller effective tax rate that someone making $50,000 a year is quite unfair to many people.
  • rayiner 12y ago
    How so? The $100 you invest that turns into $120 isn't taxed again. Only the gain of $20 is taxed.
    • harryh 12y ago
      You might enjoy: http://www.thebigquestions.com/2010/01/27/a-quick-economics-lesson/ http://www.thebigquestions.com/2010/01/27/a-quick-economics-...
      • rayiner 12y ago
        I remember doing that calculation in my tax class, and obviously the logic there is sound given the implicit premise that over a long enough time interval, all saving is just deferred consumption. My nit is: if that's what we're going to do, we might as well just have a consumption tax. The U.S. income tax isn't designed to be a consumption tax, it's designed to be a tax on gains in wealth.
        • harryh 12y ago
          I'm not convinced that the US income tax is really designed at all. I think it mostly just grew out of what was politically feasible.
          • rayiner 12y ago
            Taxing income as opposed to something else was the result of political feasibility, and of course most of the additions to the basic framework don't really have a good rationale. But there is a framework there that has some internal logic to it: https://archive.org/stream/cu31924020062935#page/n7/mode/2up https://archive.org/stream/cu31924020062935#page/n7/mode/2up.
• pcrh 12y ago
  The theory is that taxes should not distort the operation of a free market. Since most people are tied to their jobs and the country they live in, taxing income in progressive manner does not normally deter people from seeking to earn more, unless they are at the lowest end of the income bracket and subsist mostly on social security payments. Capital, on the other hand, is very mobile and will seek higher returns as soon as they are available elsewhere. Higher taxes on capital therefore quickly distort the operation of a free market and causes a fairly quick dis-investment from jurisdictions with higher taxes, with a subsequent loss of jobs.
  • deleted 12y ago
    [deleted]
  • capisce 12y ago
    So in a way you could say the economy is held hostage by capital? We have to play by capital's rules or suffer the consequences.
    • danielweber 12y ago
      You can tax people saying "Hello" at $1000 each, minor edit but they could just stop saying it. So in a way you could say the economy is held hostage by people who can change their speech. For the record, I'd generally be happy with the trade of killing the corporate income tax and then taxing capital gains and income taxes the same as wages.
      • capisce 12y ago
        Well, I much prefer a democracy to a capitalocracy (the rule of capital). Maybe that's hard to achieve on a local level though, without making some sacrifices in order to become self-reliant. Only globally could we deal with the threat of capital fleeing when faced with unfavorable policy.
        • danielweber 12y ago
          Any system that has a property of "people could run away from it, so let's expand it so they can't escape" is very suspicious to me.
• hikarudo 12y ago
  People often assume that higher tax rates result in higher tax revenues. But in fact often the opposite happens, because people respond to (dis)incentives. For instance, when the federal tax rate on capital gains was lowered from 28 percent to 20 percent in 1997, the revenues rose from $54 billion in 1996 to $372 billion over the next four years, way above the projected $209 billion before the tax rate cut. [0] [0] Basic economics, Thomas Sowell, Chapter 14.
• harryh 12y ago
  Because of the Chamley Judd result.
• prostoalex 12y ago
  It's a predictable way to raise revenues. Capital gains tax is more or less voluntary - if the tax decreases my ROI too much I simply won't sell.