How can the US justify a 20% long-term capital gains tax rate?

Great Debates
81

I can’t speak for Akaj, but one thing I haven’t seen brought up yet is the fact that a healthy majority of capital gains investment is probably going into Fortune 500 companies, and the recent trend for them has NOT been in fact to invest and create more jobs and spend on R&D and such, but instead to amass gigantic dragon-like hoards of cash that they then just sit on.

A lot of the “expand and create new businesses and improve communities” arguments are from a small business lens, but I doubt most small businesses are funded by retail investors.

And as above, the biggest businesses that ARE funded by retail investors are just growing and sitting on gigantic hoards of cash without putting that cash to any particularly good use, arguing there are indeed inefficiencies in the current system.

The argument can be made that this is more an issue of multi-nationals who made the money overseas and don’t want to be taxed by repatriating a lot of that cash, but if they have gigantic cash hoards, they don’t necessarily need the retail investor money they’re soaking up anyways.

82

“Capital gains investment” is not a term of art, so I’m hoping you’ll return to explain what you mean by it, as well to share your sources for the claims that Fortune 500 companies are neither creating more jobs nor spending on “R&D and such”.

83

I meant something like “investments the returns from which are going to be taxed at the capital gains rate,” which for the vast majority of people is going to be in publicly traded stocks and bonds.

My claim was more that companies are accumulating vast reserves of cash, which I think is pretty well attributed and non-controversial.

But the only reasons companies do that (beyond repatriation worries) is because they literally have nothing better to invest it in internally. Any internal investments are exactly those things like R&D and job creation for new/expanding divisions, so the fact that many companies are growing and hoarding cash indicates that their “create jobs and R&D” spending isn’t keeping pace.

84

Thank you. This gets complicated, because most shares in publicly-traded C corps held domestically are held either in tax-advantaged accounts or by entities that aren’t taxed (institutions, pension funds). I always have a devil of a time finding that cite but will do my best to dig it up if anyone is curious. And inherited shares get a basis reset. So I was hoping you had some special insight into the origin of most taxed realized capital gains.

Gotcha – so you didn’t actually know or look up any numbers before posting that. Here’s where you can find them:
Fortune Magazine (for employment figures)
NSF Business R&D and Innovation Survey (for all business R&D spending, since I don’t believe Fortune tracks this for their list)

Best of luck on your educational journey.

85

I just looked for data, and found that the % of people employed by Fortune 500 has remained stable for the last 20 years.

On the NSF business R&D and Innovation survey, all I could find looking for this survey was conclusions about R&D in the period 2006-2008, which is 10 years out of date and outside of the window of major cash accumulation.

Perhaps you could pull out some choice tidbits supporting your point from these sources?

Because right now, I’m not seeing anything contradicting what I said. I’m willing to be convinced otherwise if you actually point me to data refuting the fact that cash reserves have been growing while job creation and R&D have remained flat, though.

86

Which means Fortune 500 companies employ approximately 3.9 million more people now than they did 20 years ago. (0.17 x 22,652,000, see BLS CES0000000001). And therefore your statement that “the recent trend for them has NOT been in fact to invest and create more jobs” is false. The recent trend for them has been to create more jobs. Not disproportionately, mind you; the recent trend for most everyone has been to create more jobs.

Oh you want me to pull out some choice tidbits when you’re the one who made the original unsupported claim without having even bothered to look anything up. You’ve been here nearly 9 years and should know better. But the data tables are here: https://www.nsf.gov/statistics/srvyindustry/#tabs-2
That’s $375 billion in 2016 vs $356B in 2015, $341B in 214, etc., etc.
And here’s a plot from last year, courtesy of Science, for those of who like pretty pictures (I know I do): http://www.sciencemag.org/news/2017/03/data-check-us-government-share-basic-research-funding-falls-below-50
Conclusion: businesses are spending more on R&D.

87

Wrong. What is capital worth without labor? Without someone to do the work, your capital is worth nothin.

  1. The OP is talking about the appropriate percentage of capital gains. Profits and wages are a zero-sum gain between owners and workers. The lower the cap gains tax, the more the investor is incentivized to pocket the profits (and not pay better wages or grow the business).

  2. Not everyone subject to cap gains tax is a founder. Many of these people were born on third base and do nothing but cash checks on the way to home plate.

88

It should be pointed out that there is a thing called malinvestment. And our system is rife with it. Malinvestments, like most derivatives (bets), do not produce anything for the economy, they just shift wealth around from the losers (of bets) to the winners.

Right now, we incentivize about as much malinvestment as we do “real” or actually useful activity. Capital expenditures are at parity with stock buybacks. Stock buybacks don’t create more factories or jobs, they just transfer wealth. That’s mostly from the poor to the rich, because (stick with me):

Stock buy backs drive up the price, allowing the rich to sell on the rise while rising prices cause 401k’s/TSPs/mutual fund managers to be forced (by way of losing customers if their return is “below the market” or below competitors) to buy the inflated stock. Unfortunately, because these buybacks are usually fueled by debt or one off gains like Trump’s tax cuts/repatriation for example, the actual value of the company has either not changed or decreased due to rising liabilities and eventually the stock price must revert to the mean. Because the stock price is going up, the rich CEO/board member is rewarded with more stock. This continues in unlimited fashion until the reversion hits, and when it does, whatever sucker (usually a 401k or mom/pop stock holder) that’ still holding it gets left with an asset that’s worth far less than they paid for it - a material loss of wealth. If by some rare chance that sucker is a major financial institution, mom and pop still get stuck with the check either through a tax-payer bail out, or the newly pioneered bail-in (wherein your bank deposits become shares in a now worthless institution).

Stock sales by the rich (CEO’s and board members are often rewarded in stock), if timed right, are major beneficiaries of a lower capital gains tax rate, and the lower rate actually encourages them to do this wealth transfer as opposed to capital expenditures.

TLDR: A lot of people are arguing that investment = capital expenditures = growth. In the past, this was totally true and is how Capitalism Conquered The World, but in the current economic conditions, this isn’t usually true - it’s more profitable to “invest” in things other than capital expenditures.

Raising the capital gains taxes would discourage this particular mechanism.

89

How much is your labor worth if you can’t get hired?

You are confusing profits, wages, and investment. Your second sentence is incorrect - raising capital gains taxes reduces profits, and de-incentivizes risk-taking.

So what? Their investments have the same overall effect. You are again confusing capital gains taxes with something else - possibly inheritance tax or a wealth tax.

Regards,
Shodan

90

This does not address the point that capital is worthless without labor. Additionally, you’re very confused (more likely brainwashed) if you think capital is a prerequisite to job creation.

Nope. Explain your theory if you think I’m wrong.

Nope. Explain your theory if you think I’m wrong.

Again, no. Here I specifically refer to people who inherit large amounts of money and spend their lives doing nothing but investing. Many don’t found anything, many just make bets and the winnings go to whoever wins that bet, endlessly doing no work except inflating the holdings of people who already have them.

You think every capital gain involves the creation of value, but that’s wishful thinking employed by people who want to convince themselves they’re doing everyone else a favor by having a lot of money.

91

I am not sure what you mean.

I want to work and earn money doing something like, say, mowing lawns. I need a lawn mower to do that. Either I buy - that is, invest in - a lawn mower, or I find someone else with a lawn mower and use that. That is, I get someone else to invest his lawn mower in my business. Maybe I can’t find any lawns to mow, so I go out of business. I might be able to sell the lawn mower, if I bought it, or return it to whoever let me use his, but the lawn mower is worth less because it has been used, or just because it aged. The investment thus lost money.

Or I am successful, so I want to expand. I want to hire someone else to also mow lawns. I need another lawn mower for my new employee to use. So, I have to invest.

Unless you were talking about something else.

You seemed to be saying that if capital gains taxes were lower than those on ordinary income, people would pocket the profits instead of investing, or paying higher wages. I assume by “pocket” you didn’t mean “invest”. Raising capital gains tax cuts into profits. I don’t see how lower profits means more or the same level of investment, nor how lower profits mean higher wages for employees.

Again, if you were talking about something else, feel free to clarify.

Markets don’t care about who made the investment. And investments by the laziest investor in the world have the same effect as those made by anybody else.

I loan the lawn mowing guy above $500 to buy another lawn mower. I don’t do anything else, except collect a part of the profits of the lawn mowing business. I just sit on my ass and cash the checks. It doesn’t make any difference from if I were actually mowing lawns myself - my $500 has created a job.

Not by “having a lot of money” - by investing.

Regards,
Shodan

92

When a corporation sells shares of stock to their first owner, the corporation get money. But how does the corporation benefit when the first owner of that stock sells it to another person for a gain?

One way government influences behavior is by offering tax incentives. Even if you are hoping for higher capital gains tax, it would be wise to take advantage of this opportunity while you can. Lower income people can’t always benefit from incentives (can’t get a break on solar panels for the home, if you are a renter, or for an electric car when you don’t own a car), but 0% tax rate on long term capital gains should be a good motivator to save. An individual taking the standard deduction can earn up to around $50,000 per year in long term capital gains and owe nothing in federal income tax or social security or medicare taxes.

93

So what? If the reason for a lower tax rate on capital gains is risk, why aren’t gambling winnings taxed at a lower rate than salaries?

94

Because, as dumb as our legislators might be, most of them probably understand the difference between risk and gambling. Not everyone does.