You have constructed a hypothetical that compares Romney to Romney. I can say that is not the topic of the thread.
Other than a sale on TVs or something. You can’t assume that every dollar not paid in taxes would have automatically been invested, and therefore, every dollar of tax comes with an “extra” tax equal to the return it would have earned if it had been invested. The hypothetical that you’re comparing reality to may likely have never happened, even if no income taxes were paid in the first place.
See, I don’t buy this at all. Until the tax rate gets much closer to 100%, as long as people can buy something and resell it for more than they paid, they will continue to.
The government didn’t have the money for a long time. They spent it on running the government and servicing their own debt. The money gained from income tax may have existed at one time, but the income it would have earned from being invested doesn’t exist, because it was never invested.
The issue isn’t how much more or less money the taxpayer ends up with, it’s about how much revenue the government actually takes in to run the country. Decreasing the income tax, and increasing the capital gains tax may theoretically increase revenue, since individuals will have have more to invest, but that assumes the extra money will actually be invested, or for that matter, invested wisely.
Lets say a mother has two children, Sam and Dennis. She gives each child an ant farm. Every month the population of an ant farm doubles. In March she gives Dennis an extra 50 ants, and in April she gives Sam an extra 100 ants.
Dennis complains that Sam got more ants than he did, and it was therefore unfair. Is that a valid complaint?
What if instead, she took 50 ants from Dennis in March, and 100 ants from Sam in April, and then Sam complaints that she took fewer ants from Dennis than him. Is that a valid complaint?
(In order to avoid nitpicks, lets say that both were on vacation in March, and the mother fed the ant farms then.)
Are they red ants, or black ants?
Who’s who in this metaphor?
OK so to take this a bit further, if I then take the money and invest it a series of investments that yield 50% every year for the next 20 years, that happy meal cost me about $15,000, is that right?
Yeah and how would you do that? Better yet, how would you prevent me from taking my money and retiring in Mexico or leaving it to my kids in Canada? IOW it doesn’t really work.
Not necessarily here, while we pretend to worldwide taxing jurisdiction we haven’t been able to get other countries to go along with the notion..
Because you think that it has enough of an effect that you think it makes good policy sense.
And the point is that for the most part, you are getting a very small increase in investment for sacrificing relatively significant tax revenue, ESPECIALLY during a recession.
It sounds like you are basically calling anything in excess of a tax on consumption a double tax. I cited this earlier but income = consumption plus increase in wealth. You seem to either want to get rid of all taxes on investment income or just tax people once at the end of their life when we know how much money they have made in their lifetime.
Well there is a compounding effect of deferring taxes versus paying them on an annual basis and the effect can be significant over a significant period of time.
You are making an argument that we should tax income once when earned from labor but not from investment and we should increase the labor tax to make up for the investment tax? You are in effect saying lets tax labor and not capital. You have no idea what sort of returns people will get on their investment, how do you tax income today sufficiently to account for capital gains in the future?
For the most part, Mitt Romney NEVER paid ordinary income tax rates on his money. That is a large part of the outrage, Mitt Romney paid capital gains taxes on what he charged his clients when he took a cut of their gains. And BTW, investment income is still income, you just seem to think that labor income is the only thing that should be taxed. Do you understand how regressive that is?
Is this alternative world anything like this world because in this world Romney NEVER paid regular income taxes on his income. He got paid in the form of carried interest. And there is not way you can predict how much he is going to earn with his investments. To say you want to increase the tax on labor to make up for the elimination of tax on capital is a bit repugnant.
His lifetime salary is quite small compared to his lifetime earnings for managing other peoples money.
If I had to apply my value system to income from labor versus income from capital I’d say that we must respect income from labor more than income from capital but we need to create a reasonable investment environment for people to save and invest their money (of course we have a surplus of capital at the moment, people are literally investing their money at negative real interest rates because they can’t find anything else they want to invest in because noone is buying anything).
You seem to be able to predict how much people will be making investments. How do you do that?
You are taking one person and equalizing results for that one person under all scenarios. Not everyone in the world is Mitt Romney. Some people will have ZERO labor income and other will have ZERO investment income.
We understand what you are saying, you just don’t seem to understand how disconnected that is from the real world and how silly it is to pose the hypothetical you are posing. You are comparing a Romney who paid 30% in year one and 15% in year two versus a Romney that never paid any taxes. If you compared him to a Romney that paid regular income taxes in both years, I think you’d have to admit that the Romney who paid 30% in both years is worse off than the Romney that paid 30% in year one and 15% in year two
Yeah for that ONE taxpayer, you normally don’t shape tax policy around a single taxpayer.
Once again because not everyone is Mitt Romney.
We are honest about how much we are taxing them, you have just come up with a weird way of looking at things. IN your hypo, one taxpayer earns 100K one year and 35K the next year (and is taxed on those amounts) while another taxpayer earns the same 100K one year and 50K the next year (and is taxed on those amounts) and you point to the fact that the second taxpayer ends up with more money as evidence that the first taxpayer has been subjected to a higher tax rate when all you have identified is the compounding effect of deferring taxes. Go ahead try it. Take a $100 investment that earns 10% a year and tax that 10% every year and reinvest it at the same 10% and see where you end up in ten years. Now take that same investment but defer taxation to the end of the ten years. You end up with different returns.
Yeah if everyone is Mitt Romney then sure, there is no difference between the two systems.
And we are all claiming almost in unison that you are wrong.
The margins are very thin and in what way does a capital gains tax discourage work? A tax on labor barely discourage work until you get to confiscatory levels of taxation , how does a tax that does not affect how much you get from your labor affect your labor? Not all taxes discourage labor.
For the most part, capital gains represents almost all the taxes he has ever paid. See taxation of carried interest.
I don’t get your analogy but what we have right now is a situation where the government taxes more money from the folks who earn money from the sweat of their brow than from the people who earn money from letting the use of their wealth to others.
Romney proposes to eliminate taxation of investment income (capital gains, dividends, and interest income) for those who earn less that $250,000 a year.
I only make $11/hr at my job, that is less than 30k a year,…
yet most of my income is from investment income from dividends and capital gains from my stocks and mutual funds. (I am a Poor Capitalist!!!)
I end up paying thousands of dollars in taxes every year on my investments but I am still considered a poor person because I only make 11/hr.
If Romney was President, people like myself (poor capitalists) would be paying zero in investment income taxes and I would save those thousands of dollars every year to reinvest in stocks and mutual funds.
In my own experience, I refrain from investing in the stock market during tax time because of the uncertainty of my tax liability while only making $11/hr wage.
If I had zero tax liability I wouldn’t hesitate to reinvest. It would be a boon to the economy.
Why is mom giving/taking 50 from one and 100 from the other in the first place? Does she like one better than the other?
Did I just walk into a trap? I’m confused.
Considered poor by whom? If you are paying tax on capital gains and dividends, you must be in at least the 25% tax bracket. If you are single, that means AGI of $34,500 or more. Add an exemption and the standard deduction at minimum, and that takes you to $44,000. If you are paying “thousands” in taxes on your investments, then you must be making at least $13,333 (to get $2,000 tax at 15%). Hence you are making at least $57,333 (and could be much more). I don’t think anyone counts that as “poor”.
Poverty is not determined by your hourly wage. Poverty is determined by your yearly income, including capital gains on investments, which is apparently more than your wages. If you are working full time at $11/hr, it works out to about $22,000/yr. Add that to at least that much from your investments, and you are making over $44,000 a year. Which puts you in the 43rd percentile nationwide, easily into the middle class, depend on how many people are in your household.
I think investment income should be counted as regular income, and if you’re making $40K or less in a year total income, you shouldn’t be owing net tax anyway. I don’t see why a special exemption has to be in 6 figures for cap. gains by itself.
Over time, this literally cannot happen. The problem is, capital gains income grows exponentially. That simple fact makes your hypothetical fail; in the long term, not paying capital gains taxes will always overcome the difference of being taxed more on your income.
Let me demonstrate:
You earn $100k. Money you invest gains 10%/yr
Say you pay 30% taxes on income and 15% taxes on capital gains. So Year #1, you have $70k. You invest it all, so in Year #2, you get $7k earnings, from which you pay $1050, hence you now have $75.95k. In Year #3, you get $7,595 in capital gains, from which you pay $1,139 in taxes, so you now have $82,406.
Say you want it to be so that in Year #2, your income is the same, but with capital gains taxes at 0%. In that case, you would pay about 31% on income. However, in Year #3, suddenly you get to keep all your capital gains, so you walk with $83,545 — more than a thousand dollars more than in the previous hypothetical! That difference would just keep growing.
What this all means is, having low capital gains taxes will always give an advantage to people with enough money to invest, even if you try to counteract it by taxing them heavily on their initial income — even if you tax them 90% on the initial income! That makes it a pretty bad idea, IMHO.
How is your buying stock from some other guy a boon to the economy?
The classic argument has been that it wasn’t fair to tax the capital gains at marginal rates because profits earned over a multi-year period was being taxed at the marginal rate that includes all the gains from all those multiple years. This made a lot more sense when top marginal rates were as high as 92%. Then they came up with the argument that we needed to incentivize capital more than we needed to incentivize labor and we were off to the races.
I can always set a sufficiently high income tax rate, so that it works. It might not be a practically good idea to set an income tax rate of 90% (or whatever), but that’s not essential to my argument. The only essential part is that the effect on Romney is identical in the two cases. And you seem to agree with this.
And if the two hypotheticals (one which is the one we have now, and the other one which is possibly not possible in practice) have the same effect on Romney, how can one be “unfair” with respect to Romney, and one be “fair” with respect to Romney.
Well yes. Not in expected value, probably, but in the way things turned out, yes.
Yeah, maybe it doesn’t work with a consumption tax. It’s just a neat idea, but it might not be possible.
This is not the main argument that I’m making. The main argument is that the two hypotheticals are identical for Romney. Therefore its not really correct to say that he pays “13% taxes”, you have to consider the income tax he paid initially too.
(Incidentally I also think that its better to have higher income tax and no capital gains tax. But since I cannot even get a single person to see this first, simpler viewpoint, I prefer not to take that discussion.)
It’s not regressive if the income tax is progressive. In fact, with the right progressiveness on the income tax it will have equal (or higher) progressiveness compared to the current system.
I don’t really want to shape tax policy. (At least not in this argument.) I just want to say that it’s not accurate to say that Romney pays “13% taxes.”
Yes, so you agree! Then if there is no difference between the two systems, then it follows that it’s not accurate to say he pays 13% taxes. Since it’s equivalent to a system where income tax is higher and capital gains tax is 0%, or a system where income taxes are lower and capital gains tax are 26%. So since they are identical with respect to him, and you follow the logic that his tax burden is whatever he pays this year, then you could as well say that he pays 0% taxes or 26% taxes. Which of course doesn’t make sense. The only right way to say how many taxes he pays is to incorporate the income taxes he paid, so the result is somewhere above the income tax rate.
I realise that. But my own logic says I’m right, my economy student peers don’t think I’m wrong, and as I linked above, a professor of economics has made the exact same argument as me. Also many of you don’t really understand my argument, or think I am arguing for something other than what I am arguing for. Especially many of you seem to think that I am somehow pro-rich people, which I don’t think I am by American standards.
All taxes do discourage labor. It’s basic economics I think. If there are taxes, then you get potentially less out of your labor. Remember that we are just talking tendencies, about decisions at the margin. That people respond to incentives is what any economic theory is based on.
I think so. The point is that even though the number of the animals she gives are nominally different, the end result for the kids are the same.
The analogy is that if Romney can be taxed in different ways, and the end result of these is the same, then these different ways have equal fairness with respect to him.
Not necessarily. It’s an incomplete analogy but there are some instances where labor is like a Giffen good, in that the less you get out of each dollar, the MORE you will consume rather than less, if you are in a situation where you absolutely need the money.
Ignoring welfare for the poor and charity, if taxes are increased on people barely scraping by, they will need to work more in order to keep from falling into debt or homelessness.
On the other side of the scale my evidence is more anecdotal. CEOs these days do not seem spectacularly more effective than when they were taxed a lot more marginally. Our economy is doing slightly better than the mid 90s but only once you take the hedonic adjustment of better technology into account. If we had a stable budget and tax situation like we did back then we’d be doing better than we did by throwing our money at questionable management.
And this is the source of all the bad analysis that you present. If this example doesn’t show you how silly that proposition is then I suppose nothing will.
Its not even a neat idea, its just a different idea. One that noone has been able to get to work right despite decades of trying.
No I don’t, (A) because he never paid ordinary income tax on most of that and (B) because its a stupid way of looking at things because other wise you end up with $15,000 happy meals. His tax on his capital gains (or dividends) is 15% whether those gains are made on wealth that had been subjected to a 35% tax or a 15% tax or no tax at all, the tax rate he is paying on increments to income is 15%.
If your point is that the total difference ebtween what he ends up with and what he would have ended up with absent any taxes is higher than 15%, then sure but so what?
We have already defined income, you seem to want to define income to include lost opportunity costs.
Lets say that Romney earned $100 and was taxed $35. He then invested that $65 and lost the whole damn thing, can we say he bore no tax burden?
You can make the argument that we should tax labor more than capital but the only argument I have heard for that position (considering that discouraging labor is not much better than discouraging capital) is that labor is less elastic, in other words labor doesn’t have as much choice as capital. But this is mostly due to restrictions on the mobility of labor and the general inefficiency of the labor market but all we are doing is favoring capital income over earned income and I suspect that this would ersult in a pretty horrible society.
No it wont. Like I said, Romney never paid regular income tax on most of his lifetime income. It was taxed at the capital gains rate because his income from labor was taxed at the capital gains rate. And at some point progressivity in labor taxes discourages labor far more than a tax on capital income would discourage capital activity. The taxes are not fungible.
And you would be wrong. I think you are misunderstanding “what is income”
Income is defined as consumption plus net increase in wealth.
You are defining income as “ability to consume”
You can make your argument that the tax effect on Romney’s ability to consume is measured by the difference in consumption power between what he would have had absent any taxes whatsoever and what he ends up with after paying various taxes. But you are attributing income taxes to income that never occurred.
You might call that semantics but IMHO you are conflating everything into a consumption view of the world.
No thats not what I said. I never have and i never will agree that a 13.9% income tax is actually a 40% income tax because of some prior incidence of taxation. I was saying that everyone earned exactly the income you set out in your example then the end result would be the same regardless of whether the tax was in teh form of capital gains or regular income. Of course in almost any other circumstance, there would be a huge difference. People will not always have the same income/capital gains ratio every year so there is in fact a very real difference between taxing capital income and earned income separately versus trying to jam it all into one of the two.
No I think I understand what you are talking about. You want to compound the tax rate on investment income with teh tax rate on teh source of that investment income. We have shown you where the fallacy of double taxation falls apart and we have shown you how compounding previous taxes to treat opportunity costs as a tax leads to $15,000 happy meals and yet you don’t seem interested in addressing any of those ciricitsms.
If your fellow economy students agree with you then they are either humoring you or they are jsut getting caught up in your logic.
So you are saying that there are some people that will work less because capital taxes will reduce the incentive to save so they will not feel the desire to earn savings as much as before… AT THE MARGINS. And I am saying that labor taxes barely discourage the supply of labor, the taxes on investment income is that much smaller. My point is that the differences **even at the margins
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are almost imperceptible.
This is true. As I was talking about capital gains taxes for the rich however, I don’t think I had to add this exception.
Lets say that you know that tomorrow there will come a guy who will give you $1000 for each dollar that you have. You then decide to use $1. Will you say that the real price for that use of a dollar is $1, or that the real price is $1.001? Do you think it’s ridiculous to say that the real price is $1.001?
What if we lived in a world where income tax was really low, and capital gains tax was more than the income tax, in such a way that Romney pays the exact same taxes. Would you then say: “Oh this is fair world. Romney is rich and he pays more taxes than the rest of us, so that’s better.” (Even though Romney pays the same taxes as he does now.) And what if we lived in a world were Romneys income tax was really high, and capital gains taxes were 0, in such a way that the result for Romney was the same. Would you then say that “This is a much more unfair world. He pays 0% taxes. That is much more ridiculous than if he paid 13% taxes.” Even though, again, the result for Romney is exactly the same.