Obligatory tax day post

Taxes.

Spending.

Huh, that’s encouraging that the “bulk of state spending goes to education and health care”.

I wonder what the percentage of the “other” in California goes to pensions?

Are all states as “free” with their pensions as California?

As long as capital gains is 15%, the top 1% will pay less than the rest.

Capital gains, of course, is risk capital. So it boils down to how much investment the government is hoping the private sector will make into the economy.

This. I get SO much stick from the right in the UK for suggesting that capital gains be taxed at the same rate as wages.

(Actually, as a mutualist ideally I’d like unearned income to attract higher tax, but realistically a harmonised rate…)

Capital gains CAN be risk capital, but it doesn’t have to be. By diversifying, etc, people who get capital gains can minimize their risks and yet still pay less taxes. It’s also not clear that capital gains stimulate the economy, is it? Any stats back that up?

That’s an ugly ugly question. There’s tons of stats that back it up, and tons of stats that completely disprove it. Economics can be like that, depending on which theories/models are currently in vogue.

I think the existence of capital gains and the whole investment framework does, all other things being equal, stimulate the economy. That a 50% tax on capital gains would have a negative impact on the economy I sort of doubt.

Is the main obfuscating point that capital gains on initial investment, i.e. buying the first issue of stock from a company going public, is a negative influence since the transaction is growth-positive but capital gains on further transactions is neutral or positive since it doesn’t affect actual businesses and the tax revenue finds its way back into the economy through spending?

That first graph is bloody awful. Not only does the y-axis not start at zero but it’s left unlabelled so this is obscured… It’s like the beano book of manipulating numbers.

Edit: Or does it start at zero? First eyeball suggested not, second eyeball suggested yes :)

Do you think it’s misleading, or just a bad graph design?

Is the question ‘bad graph design or deliberately misleading’? If it isn’t, I don’t think there’s a difference.

If it is, I would lean toward the latter-- designing a decent graph is easy, and political entities of all stripes have a habit of deception-by-numbers.

Well the theory is that reducing the amount of capital available by taxing gains decreases the amount of money that might be invested into other companies down the line so it’s a net negative for the economy. Accepting that theory involves buying into several assumptions about where investment capital comes from, how much is needed, etc. I’m no econ heavyweight so I’ll leave it to some more knowledgeable posters to fill in the details.

The graph is fine, though. It doesn’t need numbers on the Y axis, because they are written on each data point. I don’t get the complaint.

It would be a dead-easy fix, just excuse the capital gains tax on gains derived from purchasing stock in an initial or company-held offering. Voila, tons of money pours into growth and subsequent investments are geared towards more growth, rather than gains protection and held wealth.

Not labeling the Y axis and starting above 0 messes with the perceived size of the differences. It’s not as bad as, say, scaling circles based on radius rather than area, but it’s still something you shouldn’t do in honest information visualization.

Well as some of you know, my day job involves dealing with a lot of investment capital.

I can say, with certainty, that if you raise the capital gains to a certain threshold, you will get people who won’t invest because it is a risk capital.

9 out of 10 things I invest in fail. Sometimes, spectacularly :). That risk capital is gone forever. The 1 out of 10 that does succeed is generally enough to make up for the failures. But capital gains + state taxes (most people forget that part) means that you’re looking at 20+% of your gains going away leaving the remaining 80% to cover all the investments you lost in.

Now, let’s say capital gains was 50% or even 30%. The math starts to work out that you’d be better off putting money into “safer” investments (like a CD) which would have a measurable, negative effect on economic growth and tax revenue.

But economic growth isn’t the only variable involved here. This is where “social justice” comes in. What kind of society do we, as a people, want to have? Those same arguments come up when talking about estate taxes and other kinds of taxes that have a social cost.

Capital gains conflates a lot of different things. Private equity, venture capital, dividends, common stock, etc, etc… The risk, and potential reward, for these things are not all the same. They’re treated the same with regards to taxes, though. What I, and I suspect many others, generally think of when we’re talking about capital gains tax rates are dividends and stock market gains. It does make sense to consider most of them as similar in many ways, as when it gets right down to it, the main differences are matters of degree and not kind.

While in a broader sense, I agree with you that societal goals are also a relevant consideration, there’s quite a lot of disagreement, even amongst the experts, even when the discussion is limited to the economic impact.

True. We can all admit that if the capital gains tax were raised to a certain level, no one would invest, just as we can say that if taxes on income were 100% no one would work. But the more fair question is whether raising capital gains taxes to the same level as income taxes would have a huge effect on investing. I’m not sure it would.

What math are you using to suggest that 30% capital gains would mean it is better to invest in a CD? The numbers you are using are anecdotal, but let’s assume they are good for an average. 10% of projects people invest in are going to have gains. The others aren’t taxed then. It still seems like those spectacular gains (and we are talking really really big returns) would still make it better than a CD.

I guess it depends on how much return you get from that 10% of projects, though.

But Brad, I think you are talking about capital investments, like businesses and risky ventures. I agree that those are different than the standard Romney’s diverse portfolio went up situations.

How does this square with the near-independence of capital gains taxes to overall investment rates and GDP growth? Remember that in aggregate there’s only so many safe assets to go around; everyone can’t invest in T-bills. If they try, it drives down returns on safe assets, which makes the higher-taxed risky assets a better option. Capital gains taxes, like other taxes, effectively function as a deadweight loss between investors and businesses; the “price” of a given return will rise. That may result in less overall investment, it may result in more (with a worse rate of return), depends on the overall structure.

It’s kind of like that “if you raise taxes rich people work less” theory - at the tax levels seen in practice there’s not much evidence for it in the data.