Taxpayer earns $100,000. Pays 30% tax and has $70,000, which he invests in a long term investment. The investment gains 50% and he gets back $105,000. He is taxed on the $35,000 gain at 15% or $5250 so he ends up with $99,750. You seem to think that the taxpayer would get taxed on that $70,000 again.
You are basically calling the money he could have earned with the money that he paid in taxes as an additional tax. If your point is that once he pays taxes on the $100K that he should never have to pay any taxes on income he earns from investing what is left then I disagree. Its a rather unique perspective, you should take that up with every taxing jurisdiction in the world that seems to disagree with you (which would be every taxing jurisdiction in the world).
Guy B earns $100.000. $70.000 is left after tax. He invests it, earns 50% which increases it to 105.000. Then he pays 15% capital gains tax and ends up with 70000 + 35000 * 0.85 = $99.820. Compared to guy A, guy B has paid (150.000 - 99.820) / 150.000 = 33.5% in tax.
The point not being the exact numbers, the point being that given that he invests a certain proportion of his income, a world with capital gains + income tax is fully equivalent for him to a world with no capital gains and a higher income tax.
And if that is equivalent, then it wouldn’t be right to say that his taxes are higher in one world than they are in the other.
Your math is still wrong. Guy B had a total of of 135,000 to invest. Guy A had 150,000. Guy B never had 150,000 to invest; he only had 135,000. Of course he makes less, but that is not due to double taxation. That is due to having a lower principal. If that is what you wanted to prove, that those who pay taxes have a lower principal to invest, thus they have lower capital gains on that prinicipal, I will yield the point.
Yes, you are right. I don’t think it works like that, but I confused it in my example.
I’m not talking about what he should or shouldn’t pay taxes on. I’m just saying that he paid the taxes he paid, which are really not 15% but somewhere above the income tax rate. Since compared to a world with no taxes he would’ve been that much wealthier.
Guy has a total income of $150,000. Guy B has a total income of $135,000, because he has a smaller principal to invest. But that is not due to double taxation. People who pay taxes have less to invest; if that is your point, I concede it. But your math does not prove there was double taxation.
There is an economic problem with capital gains tax, namely that it discourages investment. Compared to an income tax that would garner the same income, they would have the same discouragement against work, but the capital gains tax would have the additional discouragement against investing.
Supposedly, since we have a capital gains tax, there is some sort of argument for it. I guess if we don’t assume rationality of people in an economic sense, then it might be better to tax people more if they actually turn out rich than when they are on their way.
I think that the best solution in theory is a consumption tax. It would tax rich people more, and it wouldn’t discourage investment.
So my answer is, you should pay 40% or whatever, on each dollar you spend.
I don’t find it that difficult to spot it? It’s the guy who isn’t selling a service, but is getting return on an investment made with money that were already taxed.
If I earn $100,000 after taxes, and invest that money in a college education, then get a job as a professional in my field of study, should I be taxed on the income from that investment?
Capital gains is new income. All new income should be taxed.
Equity investments are their own reward. What do you think the investor class will do with their money if capital gains was taxed like ordinary income? Buy bonds at 2% ? Bank accounts, at less than 1% ? Stuff it in the mattress? The worst that could happen is they would spend it all, providing the most efficient stimulus to the economy.
Taxes on capital gains don’t discourage investment, any more than income taxes discourage labor for hire.
I can see the similarity. But I don’t see how it means that capital gains should be taxed. Couldn’t it as well mean that investment in an education shouldn’t be taxed? In fact I don’t even know if it is currently taxed in the US?
Yes, it would increase the tendency to spend the money rather than invest it. They wouldn’t necessarily spend it all, but overall more would be spent rather than invested, according to economic theory.
And if they spend more, they use more resources, leaving less resources for the rest of us to consume. An investment is a far better stimulus for the economy than spending it would be.
Isn’t that they way the free market is supposed to work? Do you think people are entitled to resources, regardless of income? Sounds like communism to me.
Completely wrong, especially in a bad economy. Investment cannot create jobs or ecomomic prosperity in the absence of demand. Spending creates demand. Investing just adds to the cash on the sidelines, waiting for demand.
Let’s say we have a guy A, who has earned enough money to pay another guys wages. Now he can either (1) consume those money. In that case he pays a guy B to walk around watering his plants. Or (2) invest them. In that case he pays the guy B to make wooden shoes. The guy receives the same wage, and the income from selling the wooden shoes stays in the company (IE. guy A doesn’t consume that either.)
In (1) Guy B now has the money, and there is no extra value to the rest of society.
In (2) Guy B also has the money. In addition there is customer surpluss for each wooden shoe sold. And in addition to that the income the investment makes can eventually be used to hire a second wooden shoe maker.
So if guy A invests the money, that is better for the rest of the society. Although not necessarily better for guy A, since he doesn’t get his plants watered.
Unless no one has money for wooden shoes. That is where we are today. No jobs, no wages; no wages, no spending; no spending, no selling; no selling, no manufacturing. Your investment is useless. Why would a manufacturer add capacity to make more wooden shoes, when he can’t sell the wooden shoes he still has in his warehouse, which is why he laid off shoe-makers in the first place? Capital investment without demand is barren. Spending creates demand. We need more spending, not more investment.
