# How can the US justify a 20% long-term capital gains tax rate? **URL:** \ **Category:** Great Debates\ **Created:** [December 11, 2018, 4:45pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950 "2018-12-11T16:45:22Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![Akaj](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/akaj/32/145_2.png) [@Akaj](https://boards.straightdope.com/u/Akaj)\ **Post date:** [December 12, 2018, 4:46pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/41 "2018-12-12T16:46:16Z")
> [@puddleglum](#): > > Exactly, this loss of economic activity is called deadweight loss and should be the primary factor in the type of taxes leveled. Conventional economic theory is that the deadweight loss of taxation varies by the elasticity of what is taxed and is proportional to the square of the tax rate. > > Most economists agree that the elasticity of labor supply is less than it is for capital because it is much harder to change jobs than it is to sell a stock. Thus the deadweight loss for capital gains is much higher than loss from income taxes. Since the loss is proportional to the square of the rate this means that the rates for capital gains should be much lower than for income. In [theory](https://en.wikipedia.org/wiki/Optimal_capital_income_taxation)the optimal tax rate on capital is zero, however it is probably not actually zero because reality is not fully matched by the model. Interesting. Let me see if I understand. Since it’s much harder for me to change jobs (or quit working altogether) than it is for me to sell a capital asset, taxation on my work-derived income is less of a disincentive than taxation on selling capital assets. In other words, you can go ahead and tax my income at a higher rate because I don’t have the option of not working, but you have to sharply reduce capital gains taxes because I have the option of not investing in capital at all. Makes sense as a model. In practice, isn’t it kind of perverse? ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [December 12, 2018, 4:47pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/42 "2018-12-12T16:47:00Z")
Its really the inflation argument. And we should index it, in the modern world where nearly everyone who invests uses software to file their taxes, creating index tables and applying them to capital gains wouldn’t even be hard. ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [December 12, 2018, 5:16pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/43 "2018-12-12T17:16:31Z")
> [@Akaj](#): > > Makes sense as a model. In practice, isn’t it kind of perverse? It depends on your definition of “perverse”. The idea of taxing something for which demand is more inelastic is that it tends less to lead to people avoiding the tax. That’s why we tax cigarettes and liquor, because demand for those doesn’t vary as much. The government needs to collect revenue. Therefore, it makes sense to tax things with inelastic demand because people are less likely to engage in unproductive behavior just to avoid the tax. As you point out, people in general have to work, whereas they don’t have to invest. Regards, Shodan ---
**Author:** ![Akaj](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/akaj/32/145_2.png) [@Akaj](https://boards.straightdope.com/u/Akaj)\ **Post date:** [December 12, 2018, 5:20pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/44 "2018-12-12T17:20:04Z")
> [@Dangerosa](#): > > Its really the inflation argument. And we should index it, in the modern world where nearly everyone who invests uses software to file their taxes, creating index tables and applying them to capital gains wouldn’t even be hard. **Ludovic** explained this perfectly in post #25. It’s the fairest proposal I’ve heard yet. ---
**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:** [December 12, 2018, 8:18pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/45 "2018-12-12T20:18:31Z")
> [@Akaj](#): > > The explanation for why the capital gains tax rate should be lower than that for standard incomes basically (AFAIK) boils down to two arguments: > [ol] > [li]Income from investments has already been taxed once, so taxing capital gains is double taxation[/li][li]The lower capital gains tax incentivizes investment, helping create jobs and grow the economy[/li][/ol] > > I call bullshit on both: > [ol] > [li]It’s not double taxation, because, while the money I invest may already have been taxed, the money that investment earns is new. If I earn $100 on an investment of $1000, it’s no different than earning $100 waiting tables.[/li][li]People don’t need extra tax incentives to invest money that would otherwise sit idle – the prospect of earning money on money is incentive enough. Would people really just stuff their money in mattresses if they had to pay full income tax on its earnings?[/li][/ol] > But I am not an economist. Can anyone here justify a top capital gains rate that’s barely half the top income tax rate? Another common rationale for the capital gains tax is that you earned the capital gains over several years but taxing them at the marginal tax rate. Considering the generous exemptions for home appreciation and tax free savings vehicles (and corporate dividends received deductions) almost every rationale for the capital gains tax has been undermined over the years. Its hard to justify a large capital gains rate differential these days. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [December 12, 2018, 8:37pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/46 "2018-12-12T20:37:08Z")
> [@Chronos](#): > > When Warren Buffett makes an investment, his risk is extremely small. When a single mother works as a waitress, her risk is extremely large. Nothing that Warren Buffett does could possibly lead to him losing his home, for instance, but the waitress could lose her home just from one capricious decision by a manager. That’s what real risk looks like. The analogous risk is not being fired, it’s things like not being paid for the labor she had already put in. Which is nonzero. ---
**Author:** ![CurtC](https://avatars.discourse-cdn.com/v4/letter/c/ce73a5/32.png) [@CurtC](https://boards.straightdope.com/u/CurtC)\ **Post date:** [December 12, 2018, 11:04pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/47 "2018-12-12T23:04:51Z")
> [@Akaj](#): > > [ol] > [li]Income from investments has already been taxed once, so taxing capital gains is double taxation[/li][/ol] Who says this? I’ve never heard anyone say that taxing capital gains is double taxation. I HAVE heard it said that taxing _dividends_ is double taxation, and have some sympathy for that argument. But it doesn’t apply to CG. If I sell stock for more than I bought it for, the company that issued the stock has not paid taxes on any money I get, because that money comes from another investor that I’m selling it to. I was around and paying attention back when they lowered the capital gains rate, and from my memory, the justification was solely to encourage investment in industry. ---
**Author:** ![OldGuy](https://avatars.discourse-cdn.com/v4/letter/o/3bc359/32.png) [@OldGuy](https://boards.straightdope.com/u/OldGuy)\ **Post date:** [December 12, 2018, 11:24pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/48 "2018-12-12T23:24:38Z")
> [@Shodan](#): > > It depends on your definition of “perverse”. The idea of taxing something for which demand is more inelastic is that it tends less to lead to people avoiding the tax. That’s why we tax cigarettes and liquor, because demand for those doesn’t vary as much. If that’s the case, I’d suggest a wealth tax. You either give it to a charity benefiting people or spend it paying sales tax and stimulating the economy or keep it and get taxed on it. I’m sure yo’d support a wealth tax, right? ---
**Author:** ![Akaj](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/akaj/32/145_2.png) [@Akaj](https://boards.straightdope.com/u/Akaj)\ **Post date:** [December 12, 2018, 11:32pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/49 "2018-12-12T23:32:58Z")
> [@CurtC](#): > > Who says this? I’ve never heard anyone say that taxing capital gains is double taxation. > > I HAVE heard it said that taxing _dividends_ is double taxation, and have some sympathy for that argument. But it doesn’t apply to CG. If I sell stock for more than I bought it for, the company that issued the stock has not paid taxes on any money I get, because that money comes from another investor that I’m selling it to. > > I was around and paying attention back when they lowered the capital gains rate, and from my memory, the justification was solely to encourage investment in industry. **Riemann** offered up a more accurate “double taxation” argument in post #36. Nevertheless, I have heard people say things along the lines of “I already paid taxes on the money I earned, so why should I have to pay more taxes on the money that money earns?” Your rebuttal to that argument aligns with mine. ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [December 13, 2018, 2:00am UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/50 "2018-12-13T02:00:17Z")
I believe the LTCG tax is only 15% if earning under $425,000 ---
**Author:** ![Wesley\_Clark](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/wesley_clark/32/20581_2.png) [@Wesley\_Clark](https://boards.straightdope.com/u/Wesley_Clark)\ **Post date:** [December 13, 2018, 2:06am UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/51 "2018-12-13T02:06:08Z")
> [@Ravenman](#): > > Wealthy investor-type people have better lobbyists than those who rely on ordinary income. Thats my assumption. Being in the top 1% is around 500k a year in income. That is very high income, but not rich. Thats what a good doctor or maybe lawyer makes. They pay about 40-45% of their gross income in taxes while someone who lives off investments pays 10-20%. ---
**Author:** ![Batano](https://avatars.discourse-cdn.com/v4/letter/b/b487fb/32.png) [@Batano](https://boards.straightdope.com/u/Batano)\ **Post date:** [December 13, 2018, 2:51am UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/52 "2018-12-13T02:51:06Z")
The risk argument is bullshit. Starting a business is more risky than buying property, but we tax business income at a higher rate. Historically, capital gains taxes have been higher than they are now and the number of years to qualify as “long term” was higher. People with money have just gotten better at convincing people to vote against there own interests. Same as the estate tax. Taxes are too complicated for most people to understand. How many times have you heard “I’m in a higher tax bracket so my paycheck is smaller”. Utter nonsense. ---
**Author:** ![Manlob](https://avatars.discourse-cdn.com/v4/letter/m/96bed5/32.png) [@Manlob](https://boards.straightdope.com/u/Manlob)\ **Post date:** [December 13, 2018, 3:27am UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/53 "2018-12-13T03:27:08Z")
> [@Akaj](#): > > There are lots of investments other than stocks that qualify as capital gains. If I buy a Van Gogh and sell it ten years later at a profit, the Van Gogh wasn’t paying taxes all those years. Why should my profit be treated differently from ordinary earnings? Although selling a Van Gogh for a long term gain is treated differently than ordinary income, the tax rate on collectibles, such as art and even gold bullion, is 28%, not the lower rate mentioned in the OP. As with other capital gains, there is an additional tax of 3.8% for those with taxable income over $200,000 if single ($250,000 if married). The higher rate on collectibles is evidently because the government believes a collectible sitting in a closet is of less value to the economy than investing in employers and innovators. Still, the rate on collectibles is lower than the maximum rate on ordinary income, and this may be due to the inflation effect. ---
**Author:** ![Akaj](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/akaj/32/145_2.png) [@Akaj](https://boards.straightdope.com/u/Akaj)\ **Post date:** [December 13, 2018, 2:16pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/54 "2018-12-13T14:16:56Z")
> [@Saint\_Cad](#): > > I believe the LTCG tax is only 15% if earning under $425,000 That’s correct. I used the highest CG and normal rates in my examples. ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [December 13, 2018, 2:26pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/55 "2018-12-13T14:26:50Z")
> [@OldGuy](#): > > If that’s the case, I’d suggest a wealth tax. You either give it to a charity benefiting people or spend it paying sales tax and stimulating the economy or keep it and get taxed on it. I’m sure yo’d support a wealth tax, right? That kind of misses the point. If a wealth tax applies equally to wealth you got from earnings and to wealth you got from investments, then you incur the same deadweight loss earlier described. A wealth tax incentivizes spending. If investment stimulates economic activity, and the consensus among economists is that it does, then a wealth tax would tend to work against investment in the same way that taxing capital gains as ordinary income would. It can be done - property taxes are used to fund schools and so forth in many states - but the effect exists. I am assuming that this would be a wealth tax _instead of_ capital gains taxes - otherwise it would be even more of a double taxation objection. And a wealth tax has other problems. For many people, their major asset is their house. Do you exempt houses from the wealth tax, so that you don’t have to pay 10% of the value of your house every year (or whatever rate is proposed)? And a wealth tax would have to be progressive, so working class and lower middle class people are hit less than wealthy people, and that means exemptions and loopholes. There’s a reason that a good tax lawyer can earn six figures. And it is virtually impossible to write a tax code that will do what you want, instead of what actually happens. As I said above, people will adjust rather than simply pay up. Regards, Shodan ---
**Author:** ![Akaj](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/akaj/32/145_2.png) [@Akaj](https://boards.straightdope.com/u/Akaj)\ **Post date:** [December 13, 2018, 2:58pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/56 "2018-12-13T14:58:32Z")
> [@Manlob](#): > > Although selling a Van Gogh for a long term gain is treated differently than ordinary income, the tax rate on collectibles, such as art and even gold bullion, is 28%, not the lower rate mentioned in the OP. As with other capital gains, there is an additional tax of 3.8% for those with taxable income over $200,000 if single ($250,000 if married). > > The higher rate on collectibles is evidently because the government believes a collectible sitting in a closet is of less value to the economy than investing in employers and innovators. Still, the rate on collectibles is lower than the maximum rate on ordinary income, and this may be due to the inflation effect. Aaargh. I am undone by my laziness in choosing examples. Thanks for the clarification! ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [December 13, 2018, 5:28pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/57 "2018-12-13T17:28:01Z")
> [@Akaj](#): > > Interesting. Let me see if I understand. > > Since it’s much harder for me to change jobs (or quit working altogether) than it is for me to sell a capital asset, taxation on my work-derived income is less of a disincentive than taxation on selling capital assets. In other words, you can go ahead and tax my income at a higher rate because I don’t have the option of not working, but you have to sharply reduce capital gains taxes because I have the option of not investing in capital at all. > > Makes sense as a model. In practice, isn’t it kind of perverse? Perverse, in what sense? Taxes should raise as much money as necessary with as little economic destruction as possible. Knowingly having taxes that cause more economic damage than is necessary because you don’t like rich people seems more perverse to me. ---
**Author:** ![Ravenman](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ravenman/32/2929_2.png) [@Ravenman](https://boards.straightdope.com/u/Ravenman)\ **Post date:** [December 13, 2018, 6:14pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/58 "2018-12-13T18:14:23Z")
> [@Wesley\_Clark](#): > > Being in the top 1% is around 500k a year in income. That is very high income, but not rich. You have got to be kidding. ---
**Author:** ![Akaj](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/akaj/32/145_2.png) [@Akaj](https://boards.straightdope.com/u/Akaj)\ **Post date:** [December 13, 2018, 8:03pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/59 "2018-12-13T20:03:20Z")
> [@puddleglum](#): > > Perverse, in what sense? Taxes should raise as much money as necessary with as little economic destruction as possible. Knowingly having taxes that cause more economic damage than is necessary because you don’t like rich people seems more perverse to me. Broadly speaking, the money many people earn is money they need for normal, near term expenses. If they set aside money for investing, it’s money they don’t need right away, a.k.a. surplus. So it seems perverse (to a non-economist) that people who earn well enough to have surplus money pay a lower tax rate on that money’s earnings than people who don’t have a surplus pay on their earnings. Or, to be utterly simplistic, rich folk pay less than poor folk. (Yes, I’m aware two people with identical earnings can have more or less surplus based on their life decisions or various other life events.) I get the economic argument, which has been explained better in this thread than almost anywhere else I’ve seen. (Thanks again, all!) But income has been flat for a good chunk of the population for several decades while the top tiers of the population have seen much stronger income growth. Maybe it’s time we asked if there isn’t a flaw in the way the economics are being applied. ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [December 13, 2018, 9:27pm UTC](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950/60 "2018-12-13T21:27:05Z")
> [@Akaj](#): > > Broadly speaking, the money many people earn is money they need for normal, near term expenses. If they set aside money for investing, it’s money they don’t need right away, a.k.a. surplus. > > So it seems perverse (to a non-economist) that people who earn well enough to have surplus money pay a lower tax rate on that money’s earnings than people who don’t have a surplus pay on their earnings. Or, to be utterly simplistic, rich folk pay less than poor folk. Again, ISTM that you are being too binary in your thinking. It isn’t two groups of people, one of whom has extra money to invest and the other doesn’t. There are certainly people who **do** fall into those groups, but economics operates at the margins. Imagine two guys, Joe and Bill. Both earn the same amount. Joe buys a new car every two years. Bill buys used cars, and drives them into the ground before he drives another. Stuff like that - both live within their means, but Bill moreso. And Bill invests what Joe spends. Fast forward thirty years. Bill is much better off than Joe. He invested more, and, overall, what he invested stimulated the economy more than Joe’s immediate spending. What you seem to imply is that Bill has done Joe an injustice - that somehow it’s not fair that Bill delayed gratification and let other people use his money to create businesses and hire people and produce stuff. He should have to pay the same level of taxes as Joe, who didn’t do any of those things. Yes, you need consumers to buy the goods. But you also need investors to build up the companies that produce the goods and invent new goods and figure out more efficient ways of producing old goods so that more people can afford more goods. > [@](#): > > (Yes, I’m aware two people with identical earnings can have more or less surplus based on their life decisions or various other life events.) Then you get it. > [@](#): > > But income has been flat for a good chunk of the population for several decades while the top tiers of the population have seen much stronger income growth. Maybe it’s time we asked if there isn’t a flaw in the way the economics are being applied. I think this is a basic disagreement. People who invest their money eventually tend to have more of it than those who don’t. That’s not a bug; it’s a feature. A gentleman of my acquaintance founded a small business. He didn’t come from wealth. His father sold furniture in a retail store. Then he founded the business, lived on a lot less than he could have, plowed a lot back into the business and built it up until eventually he was employing people from about twenty different families, and paying them all well. He also invested pretty heavily. He could have spent the money, but he didn’t. And the business could have failed, but it didn’t. Now he’s retired, having sold the business. And he is quite well off, by most standards. The risk paid off, not only for him, but for everyone who worked for him and for the community in general. (His business was selected as Civic Improvement of the Year a few years after he founded it.) The point of capital gains taxes being lower than for ordinary earnings is to get people to do that. And the more we say “OK you took all the risks and did all the work and benefitted all your employees and clients, but you don’t get anything more than the guy who treated it all as easy come, easy go” the less of it you are going to get. All the time? No. Enough of the time to make it worthwhile to treat them differently? IMO, yes. Regards, Shodan [Previous page](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950.md?page=2) [Next page](https://boards.straightdope.com/t/how-can-the-us-justify-a-20-long-term-capital-gains-tax-rate/825950.md?page=4)