Hear, hear!
The result of this will be that wealth is invested back into the economy less frequently and less actively, and probably put into less risky investments overall. It’s fine if that’s your end goal, but you can’t do something that disincentivizes investment without looking at what the secondary and tertiary effects will be.
We have too much capital in the system, we don’t need more, in general. There are place we need more small business in poor areas. But capital for risking investments like tech startups the tens of billions invested in WeWorks, Uber, Lyft, Door Dash, SpaceX, and 50 other unicorns say we are doing just fine in that department.
I keep hearing that giving people money disincentives them to do things, so we should probably just take all the money from the rich. That’ll really motivate them.
(Yes, that’s sarcastic.)
People won’t want to earn gains on their money if those gains are taxable at higher rates is a recurring argument for which all evidence suggests otherwise. Yet the argument remains a zombie that can’t be killed.
You’re missing the “risk” part of the “risk/reward” equation. Gains are not guaranteed; a lot of times, the money invested is lost. When there is a risk of loss, and the government takes a larger and larger portion of any potential gains, people will simply choose not to invest.
Here’s a really simple example: I have a company worth $100, with a 50/50 chance of success. If it succeeds, you get $250; if it fails, you get $0. At a 15% tax rate on capital gains, the potential value of my investment is:
(0 * 0.5) + ((100 + (150 * 0.85)) * 0.5) = 113.75
I risk $100, and my expected return is $113.75, so I invest.
Now let’s change the capital gains rate from 15% to, say, 35%. Now the potential value is:
(0 * 0.5) + (100 + (150 * 0.65)) * 0.5) = 98.75
I risk $100, and my expected return is $98.75. I’m losing money by investing, so I don’t invest.
Your underlying assumption is that as a society, we should encourage you to invest in this risky asset, as oppose to sticking your money into the bank at a reasonable rate of say 5%. The money in bank is also valuable to society.
Simple is the right word for this example.
Over a large period of time with a large amount of bets, what you get should be in the ballpark of the expected value with that simple analysis.
What it mostly doesn’t do is work as an investment in the economy, being just an asset trade between two entities with the broker keeping a fee and the information to plug in it’s HFT algorithm that eats everyone’s lunch. Unless it’s the rare stock emission, it’s not an investment from main street’s point of view.
Well you already missed the concept that investments have a risk of loss, so I figured I should keep it simple enough to make that point.
It’s not an either/or situation: There will always be Investor classes more worried about risk, who will instead focus on keeping their money in the bank. All that would be accomplished by increasing the capital gains rate is pushing investors away from “riskier” investments (you know, like the computer or phone you’re reading this on) and towards the “safe” investments that produce a much lower rate of return.
What dumb Andy fails to realize is that by not taxing capital, we instead have to tax labor, thus discouraging useful work. Anyway glad I could solve this thread.
Add $100 capital gains loss deduction at 35% for the (0 * 0.5) part, and you come ahead in this simplistic and quite silly equation. That’s not how math, probability, or risk/reward weighting works.
I assume that even if you tax capital gains at the same rate as income, you’re still going to be allowed to deduct losses from that income when deciding what you need to pay taxes on.
Anyone have links to an economist modelling the impact of the US matching long-term capital gains to the income tax rates, assuming the rest of the world remains unchanged? The devil’s in the details for these things.
They are currently. I certainly would eliminate the $3,000 dollar per year cap, which hasn’t been changed in years, and allow nearly unlimited deductions.
I don’t, but it is worth noting that while a majority of state give a preferential tax, not all do. Among the states that don’t is California, looking at CA economy over the last 40 years you’d hard press to make the case that it has been hurt, with it’s 12.3% top rate on capital gains.
RAND corp estimates a wealth transfer of a trillion a year from the 90% to the 1% over the past 15 or so years:
On average, extreme inequality is costing the median income full-time worker about $42,000 a year. Adjusted for inflation using the CPI, the numbers are even worse: half of all full-time workers (those at or below the median income of $50,000 a year) now earn less than half what they would have had incomes across the distribution continued to keep pace with economic growth. And that’s per worker, not per household.
Those people are obviously just lazy socialists
Please don’t hit me for asking this:
If everyone made twice as much money, would that affect the cost of goods and services? Is there a sort of diminishing returns?