Investing -- a philosphical question about capital gains tax

[eXcommunicate]

Here's a question, and I hope a more *eh hem* libertarian forum member can attempt to reason this out with me.

On Reddit I had a discussion with a fellow about capital gains taxes. His assertion is that capital gains should always be taxed at a lower rate, because not only does this encourage investing, but also because the money used to invest has already been taxed (preventing a "double dip").

But here's my point: when a millionaire investor invests his/her money in something, usually that investment money has come from previous capital gains (which are taxed at 15%). He conceded this point. Fine.

So me sitting here, an average schlub whose income is usually through earned income (paid through a job), my earned income is taxed at a (much) higher rate than that of capital gains. If I use my earned income, which is taxed at, say, 25%, to invest, my capital gains are still taxed at 15%. I am "double dipped" according to this guy's argument simply because my investment cash was gained through earned income.

So, my question is, why should the multimillionaire investor (who gets his investment cash from other capital gains, which are taxed at a lower rate than my earned income) get a break from this "double dip" and not me?

This doesn't even approach the subjects like low capital gains taxes help fuel investment bubbles or other such issues.

[devogue]

But here's my point: when a millionaire investor invests his/her money in something, usually that investment money has come from previous capital gains (which are taxed at 15%). He conceded this point. Fine.

The thing is, he is not taxed again on the original capital gain that he has invested - he is only taxed on the capital gain that results from its reinvestment (in other words, the original capital gain becomes pure capital after taxation at 15% and cannot be hit again - just any further gains on it).

Therefore, the question is whether the CGT is fair at 15% while an ordinary worker pays 25% on his income - is the ordinary worker's income worth less to the economy than a millionaire's capital? In pure percentage monetary terms, no - therefore CGT at a lower rate is fundamentally wrong, IMO.

[Xamonas Chegwé]

Who makes the laws?
Who do the laws favour?

Spot the difference.

[eXcommunicate]

But here's my point: when a millionaire investor invests his/her money in something, usually that investment money has come from previous capital gains (which are taxed at 15%). He conceded this point. Fine.

The thing is, he is not taxed again on the original capital gain that he has invested - he is only taxed on the capital gain that results from its reinvestment (in other words, the original capital gain becomes pure capital after taxation at 15% and cannot be hit again - just any further gains on it).

Excellent point. I was hoping a closest Libertarian would challenge me though. Don't we have one or two on Ratz?

Here was the reply of the guy I was talking to:

Even in the event of inheritance the original earned income was stilled taxed.

The multimillionaire likely paid more taxes on the start up capital then you (I dont know your tax bracket). A high percentage of millionaires are self employed and the tax rate is higher as there is no employer contribution.

Then there is soc security which is a %. High income earners pay a disproportionate amount then the average wage earner. Not just in % of income but I am talking gross number. The benefit is the same for both once the vesting floor has been reached.

The rich get screwed. If we are equal before the law anyway why are they taxed more if they earn more?

I feel there are many things wrong with this, but in my current state can't give a shit to do the research. But I think his assertion that multimillionaires are "self employed" and thus pay a higher tax rate because of this is absurd. His contention that "high income earners" pay a higher % in taxes is another demonstrably absurd point in the context of the discussion (we were talking about multimillionaires referenced in an article about the top 400 earners in 2007 only paying 16% in taxes due to the majority of their income coming from capital gains). I think he's attempting to switch the subject from multimillionaires and investors to "small business owners." I also think during a discussion on TAX RATES it is a red herring to start talking about absolute numbers.

Am I wrong here?

[devogue]

...a recent report from the Internal Revenue Service (IRS) shows that this is not remotely true. . . in 2006 (the latest year for which data are available), the 400 richest income tax filers paid just 17.2 percent of their adjusted gross income (AGI) in federal income taxes. That is down from 22.3 percent in 2000, and is less than half of the top statutory income tax rate of 35 percent. Almost 65 percent of the income reported by those 400 taxpayers consisted of capital gains and dividends subject to the preferential rates."

http://taxjustice.blogspot.com/2009/04/ ... y-pay.html

The first comment from ebreen is quite interesting, and it's a crock of shite.

The old "CGT has to be low so investors will invest" lie is just that - a lie. He/she doesn't mention the fact that investors make a profit after they are taxed. An ordinary taxpayer works his or her ass off for a year and pays around twice as much tax in percentage terms as the rich who do nothing but move money around.

[Rum]

I don't think this is a 'philosophical' question. It is a political one (though clearly a mind set and a philosophy follow).

Taxation is used, from a social justice perspective to ameliorate the negative aspects of the exploitation one way or another, of those who don't have access to the capitalist money lake. That money lake is fed by rivers which are things like investment, buying low, selling high, finding cheap labour and exploiting it as best you can..etc.

Not to kill the goose that laid the golden egg is the balancing act that 'new labour' tried.

[Ozymandyus]

Claiming that people will not invest if capital gains tax is higher is silly, simply because gains from invested money is basically free money, no matter how much it is taxed. If you stuff it under your pillow you get absolutely nothing - much better to get 70% of something or even 50% of something.

Losses are deductible, and can be taken in such a way to balance out your other taxes and can be used in such a way that even money you earn from a job is only taxed at the lower percentage of capital gains. Granted I believe you can only convert 3,000 a year to the capital gains tax rates in this manner, but still pretty ridiculous.

[Sisifo]

Like they said, capital gains tax, taxes the gains, not the fundamentals, so there is no double taxing.

The tax rate is important, though, as it makes the investment more attractive in one country or another.

[locutus7]

Like they said, capital gains tax, taxes the gains, not the fundamentals, so there is no double taxing.

The tax rate is important, though, as it makes the investment more attractive in one country or another.

I agree. And capital investment entails more risk than earning wages, so lower tax is seen as an inducement to invest in the capital markets. This is the theory. In america (which I'm familiar with), tax law has become so labyrinthine, and investments so complex, that investment risk is difficult to pin down. This is a problem.

[AshtonBlack]

Who makes the laws?
Who do the laws favour?

Spot the difference.

Cynical but true.

[Ozymandyus]

I agree. And capital investment entails more risk than earning wages, so lower tax is seen as an inducement to invest in the capital markets. This is the theory. In america (which I'm familiar with), tax law has become so labyrinthine, and investments so complex, that investment risk is difficult to pin down. This is a problem.

Advantageous tax laws that allow you to take offset losses in subsequent years of gains and even offset some losses against personal income means that making money in investments is all but a sure thing. You have to be incredibly unlucky or a real sucker to lose money on investments in the long term. If nothing else you can invest in absolutely sure things like t-bills or interest bearing accounts, with completely negligible risk, and still only pay 15% on the gains.