# Eliminating Capital Gains taxes **URL:** \ **Category:** Factual Questions\ **Created:** [February 9, 2016, 1:34am UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581 "2016-02-09T01:34:59Z")\ **Posts on this page:** 20\ **Page:** 4
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [February 11, 2016, 10:04pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/61 "2016-02-11T22:04:06Z")
> [@Sam\_Stone](#): > > The larger point is tat for every level of capital gains tax there are investments that will go from positive expectation to negative, at no point will taxation make a investment go negative. It can result in lower profits, but the way taxes are set up, a loss mean no tax. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [February 11, 2016, 10:09pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/62 "2016-02-11T22:09:13Z")
You’re missing his point. Any individual investment can’t turn negative based on CG taxes. But the expected value of the investment can. Imagine an investment which has a 55% probability of making $1M, and a 45% probability of losing $1M, and assume a 20% tax on capital gains. Before tax the expected value of this investment is 55% x $1M + 45% x (-$1M) = $100K. After the 20% capital gains tax the expected value is 55% x $1M x 80% + 45% x (-1$M) = -$10K. ---
**Author:** ![Deeg](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/deeg/32/2955_2.png) [@Deeg](https://boards.straightdope.com/u/Deeg)\ **Post date:** [February 11, 2016, 10:15pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/63 "2016-02-11T22:15:44Z")
I largely agree with you here: > [@Sam\_Stone](#): > > The ideal case is to have money flow reflect economic fundamentals outside of the tax system - ie we would like to incentivize people to move their money to the place where it is used most efficiently. The problem is that no one knows where that is, so you can’t plan to do it - you can just try to make the tax system as transparent to economic decision-making as possible while still raising the amount of revenue you need. But I strongly disagree with you here: > [@Sam\_Stone](#): > > Capital gains should not be taxed as income for one simple reason - the price of risk. Income is guaranteed: Capital gains are not. Two points: 1. For most people, income is guaranteed for a few weeks. If I lose my job and have a mortgage to pay then I’m losing money. 2. Even if we define income as guaranteed I’m not sure why it matters. > [@Fotheringay-Phipps](#): > > Imagine an investment which has a 55% probability of making $1M, and a 45% probability of losing $1M, and assume a 20% tax on capital gains. Before tax the expected value of this investment is 55% x $1M + 45% x (-$1M) = $100K. After the 20% capital gains tax the expected value is 55% x $1M x 80% + 45% x (-1$M) = -$10K. That seems like a unreasonable scenario. Who’s going to risk a 45% chance of losing $1m if the expected “win” is $1m? I’m not interested in tax codes that protect morons. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [February 11, 2016, 10:17pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/64 "2016-02-11T22:17:20Z")
I was just trying to illustrate the general concept and how the math works. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [February 11, 2016, 10:35pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/65 "2016-02-11T22:35:46Z")
> [@Fotheringay-Phipps](#): > > You’re missing his point. > > Any individual investment can’t turn negative based on CG taxes. But the expected value of the investment can. > > Imagine an investment which has a 55% probability of making $1M, and a 45% probability of losing $1M, and assume a 20% tax on capital gains. Before tax the expected value of this investment is 55% x $1M + 45% x (-$1M) = $100K. After the 20% capital gains tax the expected value is 55% x $1M x 80% + 45% x (-1$M) = -$10K. Except you get to write off your losses. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 11, 2016, 10:48pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/66 "2016-02-11T22:48:38Z")
> [@Deeg](#): > > That seems like a unreasonable scenario. Who’s going to risk a 45% chance of losing $1m if the expected “win” is $1m? I’m not interested in tax codes that protect morons. Are you kidding? People make investments like that all the time. Did you miss the chance that you have a 55% chance of making a million dollars? For clarity, a ‘win’ of $1m means you get you get your million back, plus another million. That would actually be a crazy good investment, assuming a short enough time frame. If you could invest in 100 of those, you’d lose your million 45 times, and earn a million 55 times. Your expectation is then (55 million - 45 million)/100, or $100,000. So you’re getting a 10% return on your capital. Assuming the time frame is small enough that this represents a better return than you could get from a safer investment like a T-bill, people will choose to make this investment. Now, let’s say you’re a ‘speculator’, and constantly making investments like this. You can write off the losses against the gains, and you only pay the 25% tax on the net, or the $100,000. You still make $75,000. But if you’re a one time investor (your own business), the expected value is EXACTLY THE SAME. But if you ‘win’ you get a million extra dollars. Now you pay 25% on that, or $250,000. Your expectation just dropped to -$150,000. Or look at it another way: Take a community of 100 entrepreneurs who are unconnected and unrelated, making exactly the same kind of investment with the same risk as one speculator who can afford to make 100 identical investments, but who can write off the capital losses of the failed ones. The community of entrepreneurs will pay the government ten times as much tax as the individual does. That punishes entrepreneurial investment. And the disparity between that community and a single large investor grows as the risk increases, as does the punitive cost of every additional point of capital gains tax. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 11, 2016, 10:49pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/67 "2016-02-11T22:49:42Z")
> [@DrDeth](#): > > Except you get to write off your losses. Are you even reading this thread? The whole point is that entrepreneurs who fail have no capital gains that can be offset by their losses. They’re done. Or were you under the assumption that a capital losss without a capital gain would result in the government cutting you a cheque? ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [February 11, 2016, 10:55pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/68 "2016-02-11T22:55:57Z")
> [@Sam\_Stone](#): > > Are you even reading this thread? The whole point is that entrepreneurs who fail have no capital gains that can be offset by their losses. They’re done. Or were you under the assumption that a capital losss without a capital gain would result in the government cutting you a cheque? Indeed it does. Well, are you assuming these entrepreneurs have no other income at all? That if their investment fails- BOOM, their only asset is a shopping cart stolen from Kroger? :dubious: You get to offset capital losses vs ordinary income. Not to mention- investors are in the business\* of being investors\*. They offset the gain from one with the losses from another. One time investors- those who build their own business- do not normally do so for the entire purpose of selling it. They often hope to make profits off the annual income/sales. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [February 11, 2016, 11:53pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/69 "2016-02-11T23:53:55Z")
> [@Sam\_Stone](#): > > Are you even reading this thread? The whole point is that entrepreneurs who fail have no capital gains that can be offset by their losses. They’re done. Or were you under the assumption that a capital losss without a capital gain would result in the government cutting you a cheque? Good thing you saw my early point about Sec 1244. 🙂 Small business owners are able to write off 100,000 of business loses as ordinary. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [February 12, 2016, 3:49am UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/70 "2016-02-12T03:49:40Z")
I’m going to pass over ideal tax systems as non-topical, as the OP inquired about “Cutting capital gains taxes”, and it’s an election year. > [@watchwolf49](#): > > Additionally, there is a thing called “like-kind exchange” which allows investors to defer their capital gains tax if they re-invest the proceeds into similar securities. If one sells stocks and buys more stocks, then there’s no tax event at that time, not until one sells the second set of stocks. The IRS has been restricting what actually qualifies as like-kind, but generally one can ditch their loser stocks and buy winner stocks without having to pay the capital gains taxes until later. Blink. I hadn’t heard of this. It’s probably because it doesn’t apply to stocks according to dracoi. Still, interesting. There’s something a little similar that happens when you sell a security at a loss, then buy the same security or one that’s virtually equivalent in less than 30 days. Then you run into [wash sale rules](http://www.investopedia.com/terms/w/washsalerule.asp). You don’t want to do that, because they say under those circumstances you _cannot_ take the tax benefit (you cannot take the capital loss). > [@Really\_Not\_All\_That\_Bright](#): > > Proposed solution: waive CGT for investors who reinvest in securities within one year of selling (as we do for homeowners who buy a new primary home with the proceeds of the sale of the old one). That would be a lot like removing the annual limits on money put into an IRA. The rich would love this. Incidentally there is a way to dodge capital gains taxes. It happens at death: when your heirs inherit, the cost basis is adjusted upwards to the time of death. All those potential taxes evaporate. That said, for estates over something like $10 million there is an estate taxes to consider. Though those also can be dodged to some extent by setting up trusts. > [@Damuri\_Ajashi](#): > > The argument I have heard is that raising capital gains rates will lead to a flight of capital as money seeks more hospitable environments. I suppose that’s possible, but note that if a US citizen purchases and sells an asset abroad, he is liable for US taxes. The US tax code differs from most countries in their treatment of foreign income. So this sort of capital flight might involve illegal activity, which is frowned upon by the IRS. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [February 12, 2016, 3:59am UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/71 "2016-02-12T03:59:52Z")
> [@Sam\_Stone](#): > > Capital gains should not be taxed as income for one simple reason - the price of risk. Income is guaranteed: Capital gains are not. Really. So you want to privilege stocks over junk bonds. Because junk bonds are not risky. Oh. Now personally, I don’t see why the government should subsidize risky behavior. Because freedom. If somebody wants to buy risky Exxon shares rather than buying a AAA Berkshire Hathaway bond then god bless. But there’s no efficiency argument here: _the market rewards (beta) risk with higher returns_. There’s no reason for the government to subsidize it in one way or another. Now there are actually some justifications for the status quo where capital gains are treated a little differently than ordinary income. But I’m a little dubious about unqualified risk arguments. > [@](#): > > You might say, “So what? Risk is bad. There’s too much risk in society already.” But a healthy economy needs a mix of activities, including high risk/high reward activities. And innovation requires entrepreneurs taking big risks. For every Mark Zuckerberg there’s a thousand people who tried to set up a web business and failed and lost everything. Sad for them, but necessary for a healthy economy. And those are the very people who will be most incentivized to stop taking risks when the capital gains tax goes up. The great majority of capital gains are paid on share issued long ago. So this argument is a bit of a red herring. Now there are actually special tax breaks for entrepreneurial capital gains in the US. But those aren’t being discussed this election season. So your example is highly unrepresentative. ---
**Author:** ![Deeg](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/deeg/32/2955_2.png) [@Deeg](https://boards.straightdope.com/u/Deeg)\ **Post date:** [February 12, 2016, 4:50am UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/72 "2016-02-12T04:50:26Z")
> [@Sam\_Stone](#): > > Are you kidding? People make investments like that all the time. Did you miss the chance that you have a 55% chance of making a million dollars? For clarity, a ‘win’ of $1m means you get you get your million back, plus another million. Anybody putting all of their investment money into a single make-or-break investment like that is a moron. If one has a $1m to invest they break it up and spread it across multiple make-or-break investments to diversify the risk. At the and of the year 40% of the investments fail and another 55% win; in the end they pay reasonable taxes because they subtract the losses. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [February 12, 2016, 1:49pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/73 "2016-02-12T13:49:31Z")
> [@Deeg](#): > > Anybody putting all of their investment money into a single make-or-break investment like that is a moron. If one has a $1m to invest they break it up and spread it across multiple make-or-break investments to diversify the risk. At the and of the year 40% of the investments fail and another 55% win; in the end they pay reasonable taxes because they subtract the losses. That’s not my understanding. What you write would be correct if they sold all the winning investments, but not otherwise. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [February 12, 2016, 5:05pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/74 "2016-02-12T17:05:47Z")
> [@dracoi](#): > > I’m sorry, but you’re wrong on most of these points. Many of the oil and gas operations in the US are currently operating as publicly traded partnerships. Here is one of their investor information pages: [http://www.buckeye.com/InvestorCenter/PartnershipTaxK1Info/tabid/85/Default.aspx](http://www.buckeye.com/InvestorCenter/PartnershipTaxK1Info/tabid/85/Default.aspx) I was thinking of something else. You’re correct. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [February 12, 2016, 5:25pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/75 "2016-02-12T17:25:24Z")
> [@Sam\_Stone](#): > > Which is why I said ‘ideally’. Just because you can’t get to zero is not an excuse for ‘anything goes’. The less distortion we introduce through the tax system, the better. And why is capital gains tax more distortive than tax on ordinary income? Don’t you lose some labor at the margins as tax rates increase as well? ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [February 12, 2016, 5:29pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/76 "2016-02-12T17:29:40Z")
> [@Sam\_Stone](#): > > Wait a minute… You are clearly advocating that you are NOT entitled to all your capital gains, because you want to tax a pretty good chuck of them away. And you refuse to acknowledge that you can go from ‘subsidizing risk’ to ‘punishing risk’ if you make the tax high enough. By your own logic, you can’t ‘subsidize risk’, because the investor is entitled to the capital gains from the investment. > > You are also flatly not addressing the very simple math I posted to show you how this can change investment behavior. You don’t get to just decide that math ‘isn’t valid’. If you disagree with it, show me how. Explain why the scenarios I outlined aren’t valid. If you can’t, then you’re just stamping your feet and demanding that the rich folks pay more, regardless of the consequences to investment, innovation, etc. So why do capital gains deserve preferential treatment over other types of income? Isn’t capital gains just a reflection of the increase in the present value of future ordinary income? Wouldn’t the ordinary income tax on dividends paid by your restaurant pose the same problem as the capital gains tax? why is the problem different enough to justify a preferential rate for when you sell the restaurant but not when you get ordinary income from the restaurant? ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [February 12, 2016, 5:32pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/77 "2016-02-12T17:32:52Z")
> [@DrDeth](#): > > Except you get to write off your losses. What benefit does a large write off give you if you’re broke? ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 12, 2016, 5:34pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/78 "2016-02-12T17:34:04Z")
> [@Damuri\_Ajashi](#): > > And why is capital gains tax more distortive than tax on ordinary income? > > Don’t you lose some labor at the margins as tax rates increase as well? The tax system is supposed to be set up so that every additional dollar you earn improves your life. Some other countries have had marginal rates go over 100%, but that’s really rare. Again, the difference here is risk. Risk must be priced, or else no one would ever invest in risky ventures. Junk bonds return more for their investment than AAA bonds, or else no one would ever buy them. The problem with capital gains tax is that it only prices risk properly when a single entity makes many trades, where capital losses offset capital gains. For small investors making one big play, the capital gains tax can actually change a positive expectation into a negative one - something the income tax doesn’t do. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [February 12, 2016, 5:35pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/79 "2016-02-12T17:35:32Z")
> [@DrDeth](#): > > Indeed it does. Well, are you assuming these entrepreneurs have no other income at all? That if their investment fails- BOOM, their only asset is a shopping cart stolen from Kroger? :dubious: > > You get to offset capital losses vs ordinary income. $3000/year I suspect that small businesses going broke might give you ordinary losses that you can write off against your income as a line cook somewhere. But that just moves the needle back a bit > [@](#): > > Not to mention- investors are in the business\* of being investors\*. They offset the gain from one with the losses from another. he was positing someone using their life savings to start a small business. A lot of small business are started this way. > [@](#): > > One time investors- those who build their own business- do not normally do so for the entire purpose of selling it. They often hope to make profits off the annual income/sales. That’s probably true but you have to retire sometime. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [February 12, 2016, 5:44pm UTC](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581/80 "2016-02-12T17:44:56Z")
Another common way small investors lose everything is to invest in a friend’s or relative’s venture. There, your investment is not treated as your own small business so you get none of the advantages. How many parents have mortgaged a house to help a grown child start a business with a promise of payback that never happens? Then there are people with investments in the company they work for through stock purchase plans, who may have no other investments. They sell the stock due to a financial crisis and pay a huge capital gains tax. On the other hand, if the company goes bust they not only lose their job but their invested capital, and they may not have any other investments to use the capital loss against. [Previous page](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581.md?page=3) [Next page](https://boards.straightdope.com/t/eliminating-capital-gains-taxes/745581.md?page=5)