Really? The Bill vs Joe lecture? After I already said I understood that equal income does not translate to equal ability to invest? How about this then:
Sara and Jane earn the same amount. Sara’s kids are healthy, graduate college and become productive adults. Jane’s kids are born with health issues, have learning disabilities and require extensive services just to get them through high school. Sara gets a special tax rate on her investment income; Jane never has extra income to invest, so she has to pay normal tax rates on every dime. How dare she be such a drag on the economy?
Spare me the morality play.
I’ve been an entrepreneur myself, and worked for small businesses my whole life. I understand the risks business founders take and their value to the community. But they already have all the incentive they need to take the risk of founding a business – e.g., they can get filthy stinkin’ rich. No matter how extensively or how many times you claim we need a lower capital gains tax rate to incentivize risk-taking, the argument still doesn’t hold water.
When I hear this argument I like to quote “Corporations are people too”. You don’t,or at least shouldn’t, get to have the benefits of a company being legally distinct from yourself for liability purposes and then claim all it’s assets and income are really yours. And that it’s unfair to tax the transfer from the company to yourself.
You are looking at this too broadly. Nobody debates the fact that Warren Buffett is far more financially comfortable than a waitress. That is not the risk that is being discussed. The risk is what is put out in order to make the money.
If I invest $1000 in the hopes of getting $100 in gains, I may get my $100; I may get $200. I may also get $0 or perhaps lose some or all of my initial $1000 investment. That is risk of losing that particular $1000. It doesn’t matter if I am otherwise rich and losing $1000 means nothing to me in the long term; I’m still not going to fritter away my money for the hell of it.
A higher capital gains tax may make me look at the proposed investment and say that it is not worth it. If enough other investors come to the same conclusion then there was a viable business that never started solely because of the higher tax rate.
The waitress making $100 bears absolutely no risk as properly defined. She does not have to risk $1000 to make that $100. If she shows up and does her job, she has a contractual guarantee to her $100.
The risk of getting fired next week is not the risk that is being discussed. Of course that would be devastating for her short term earnings, but getting fired simply puts a person back at square one. Having a business fail means that you will start losing the principal that was invested to start, and possibly assets that you put up as collateral for loans.
When you are fired, you walk away free from all of that.
Some businesses being separate legal entities does not natural lead to limited liability, nor does it naturally have any tax implications. We have chosen to limit liability under certain circumstances because of the benefits of doing so. That doesn’t change the fact that the company’s assets are ultimately owned by a human.
To your first point, the lower capital gains tax rate is not meant to promote or to punish individuals. As investment is crucial to any functioning economy, the government must promote investment through tax policy.
Any tax represents a dead weight loss to society, however, the government also needs money to function. Any tax policy must take into account this careful balance. If you tax investments at the same rate as ordinary income, then there will undoubtedly be many fine businesses that will not get off the ground because the original investor believes that by taking into account the higher tax rate, it is not worth the risk. Tens of thousands of jobs that would have been created are now not created.
That’s not to say that no investment at all would take place, but it would certainly be less. As has been said, the issues lie at the margins.
As to Jane in your hypothetical, the tax system benefits here by providing child care deductions, earned income tax credits, and deductions for excessive health care expenses. She undoubtedly pays far less in taxes than Sara, if indeed she pays any taxes at all.
To your second point, I believe there is the disconnect. Yes, everyone starts a business in the hopes of becoming rich. Those hopes don’t always materialize and you also risk losing your house if things go south. So is it worth the risk? One of the key factors to consider is the tax rate you will be paying. If the rate is too high, you may rationally conclude that the risk is not worth the potential reward. To say that is not a consideration because I could be stinking rich is a recipe for failure.
We’re just going to have to agree to disagree on this. I remain unconvinced that aspiring entrepreneurs need a tax incentive to step out on their own, when their far greater potential earnings are incentive enough to undertake the added risk.
I will grant, as Shodan has pointed out, that I may be seeing this as too binary. It’s not one aspiring entrepreneur deciding yes/no, but thousands. Perhaps out of 1000 aspiring entrepreneurs, 750 will take the plunge at 20% CGT, 650 at 25%, 550 at 30% and only 450 at the normal marginal rate of 37%. That would be unfortunate, if true, but none of the entrepreneurs I’ve worked for would have been deterred by paying a few more cents on the dollar in taxes when they dreamed of making millions.
And starting a business is only one form of capital investment. Many others are more passive, with less impact on job creation. And while the tax code may not be *designed *to “promote or to punish individuals,” in this case I maintain its effect is to reward individuals who, through hard work or pure luck, have already attained greater rewards in life.
You are correct about that, and it is also different in that $100 waiting tables is, well, work. As in productive labor. Being that business depends directly on labor and indirectly on the consumption of laborers, it seems like incentivizing investment at the expense of labor is a losing strategy, long-term.
Correct - you are thinking too binary. It isn’t that entrepreneurs will invest, or not invest, no matter what. Taxes affect ROI and therefore calculations of what risks they will accept and what they will not. The higher the taxes, the less the potential earnings and therefore the less incentive to take the risk.
Because their investments rewarded others as well as themselves.
Successful investment is good for everyone. Therefore you want to encourage successful investment.
ISTM that you were making a moral argument. If you understand the economic arguments, great. I was trying to show how the economic arguments justify the moral ones.
“Incentivizing investment at the expense of labor” is what we’ve been doing, to one degree or another, since the Reagan era. The result? Stagnant wage growth, widening income disparities, and a large portion of the middle class desperate enough to vote for a con man who promises them he’ll turn back the clock.
I’m not a socialist. I believe people who build businesses and create jobs should reap every benefit of their success. But enough already.
This is factually inaccurate. The effectivecapital gains tax rate was in the teens for over 30 years before 1986 when it was raised and it stayed high until 1996 when it started going down to its current level which is historically normal.
Conventional economics says that capital raises productivity of labor which leads to higher wages to labor. See the Solow growth model. Wages tend to follow total factor productivity so the more capital the better for wages.
Incentivizing investment isn’t at the expense of labor overall - it is (mostly) what makes labor valuable in the first place. If people are not encouraged to invest, there will be fewer opportunities for labor in the first place.
See my previous example of the small business founder. How was it at the expense of his employees that he invested in founding the business? It certainly worked out better in the long run, both for him and for his employees.
What do you mean when you say “enough”? Are you saying that we have enough business and enough jobs, and we don’t need to encourage anyone to create any more? No more expansion, no more innovation, no new businesses need be created - that doesn’t seem right to me.
I mean the socioeconomic trends of the last 30 years – stagnating wages, widening inequality, etc. – indicate that whatever we’re doing isn’t working for a huge swath of the population.
As **puddleglum **points out (and thanks for the clarification), CGT rates have been up and down during that era relative to normal rates, so maybe they have nothing to do with these trends. If that’s the case, where’s the evidence that a lower CGT rate actually promotes investment, job creation, etc.? With a lower rate since 1996, it clearly hasn’t remedied these issues.
Which is meaningless wrt to the state of the nation (not meaningless wrt how irrational people vote.) Even in the best of times you will find individuals and individual communities or even broad regions that are doing better or worse than others. There are ~1.7M layoffs and discharges each month! That probably sucks for just about everyone on the receiving end. But that doesn’t negate that we have (net) 155k more jobs in October than in September and (net) 2.4M more jobs than the year before, continuing the (very positive IMO) trend of job growth that started back in 2010.
We’ve been adding so many new people to the workforce and retiring so many experienced people that it’s been masking the wage growth we’re seeing for the others. The Good News on Wage Growth - San Francisco Fed
That doesn’t mean we have an optimal tax structure. But it’s not clear to me what anyone is trying to optimize. Your OP asks us to “justify” the rate, and I’m not sure anyone can justify any specific rate. I think many of the reasons given thus far for having a capital gains rate that is lower than the earned income rate are sound. But whether the specific rate is optimal, too low, or even too high? Fuck if I know.
You make good points, as have many of the other posters since my OP. The situation is a good deal more nuanced than I originally believed. (I know – duh.) Thanks again, everyone – going offline for the weekend!