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**quorceopporce** · 04-17-2012, 08:17 AM

In the case of somebody who has earned income, paid taxes on it, then paid additional taxes on the time and risk values accruing to his investments, it is stupidity generated by the idiotic and financially nonsensical definition of "income" currently in use

I'm actually making this argument on facebook right now. Among my friends, I feel like you on Apolyton

This is what I wrote in response to 'the rich avoiding tax on certain incomes'. For you/Jaguar, it'll sound sophomoric but I have to approach this slowly like a teacher, not confound people with algebra/terms they wouldn't understand

Kindly correct any mistakes I made so I can keep looking smart to my peers.

Well yes but we already have a progressive income tax system. The effective tax rate for the richest is higher than the ETR for poorer portions of the population. What complicates it is when a rich person has a large share of their income coming from capital gains which is taxed at a lower rate; that is how Romney pays a lower tax rate than some other millionaires. Here's the problem. Capital gains lower the tax rate some rich people pay but bumping up the capital gains rate is problematic for a few reasons: 1) Capital gains in the US are double taxed in two ways: Corporations are taxed (with Japan's recent cutting of their corporate tax rate, the US now has the highest corporate tax rate in the world) and because the money used to purchase an asset was income at some point and was taxed BEFORE the investment was made; 2) Capital gains, especially with long-term assets like land, are largely due to price inflation and may actually represent no gain in value; 3) Taxing capital gains at a rate equal to or higher than income tax would dis-incentivize investment in favor of consumption; consider, making an investment and achieving a return means you borne risk and put off current consumption. Increasing the capital gains tax rate would discourage such behavior. What these problems mean is that increasing the capital gains tax to 'correct' ETR's would be foolish.

The rich avoiding taxes on investment income isn't a valid criticism. Let me expand on the idea of double taxation; not just from the fact that corporations are taxed first, then dividends are taxed on individuals (remember also that the price of a share is the present value of all future dividends, even if a company doesn't currently offer dividends), but also because the money used to make an investment was taxed as income of some sort before the investment. Let's say I earn $100,000 as ordinary income (for simplicity's sake, let's suppose I have no expenses). That's taxed at a 25% rate. I put my remaining $75K in stock and sell later for $85K (13.3% return). I've realized a capital gain of $10K. This $10K is taxed at 15% so I make $8500. In net, I earned $110K, paid $26.5K in taxes, and made $83.5K in profit for an ETR of 24%, slightly lower than my nominal tax on ordinary income. I look like I'm UNDERpaying my taxes but what is forgotten is that I IMPLICITLY paid a 25% tax on my capital gains income because I could not invest $25K that was paid in ordinary income tax. To illustrate, suppose there was no capital gains tax and instead, I am taxed on total end of year income at a nominal rate of 25%. I'm now able to invest my full $100K at 13.3% return so now I earn $113.3K, paid 25% of it in taxes ($28.3K in taxes), and made $85K in profit. Note now that my ETR is 25% but I actually made more money; I paid a higher tax rate but I'm now richer because I was NOT implicitly taxed on my foregone investment income. This disparity is the effect of double taxation.

04-17-2012, 08:17 AM	#5
quorceopporce Join Date Oct 2005 Posts 597 Senior Member	In the case of somebody who has earned income, paid taxes on it, then paid additional taxes on the time and risk values accruing to his investments, it is stupidity generated by the idiotic and financially nonsensical definition of "income" currently in use I'm actually making this argument on facebook right now. Among my friends, I feel like you on Apolyton This is what I wrote in response to 'the rich avoiding tax on certain incomes'. For you/Jaguar, it'll sound sophomoric but I have to approach this slowly like a teacher, not confound people with algebra/terms they wouldn't understand Kindly correct any mistakes I made so I can keep looking smart to my peers. Well yes but we already have a progressive income tax system. The effective tax rate for the richest is higher than the ETR for poorer portions of the population. What complicates it is when a rich person has a large share of their income coming from capital gains which is taxed at a lower rate; that is how Romney pays a lower tax rate than some other millionaires. Here's the problem. Capital gains lower the tax rate some rich people pay but bumping up the capital gains rate is problematic for a few reasons: 1) Capital gains in the US are double taxed in two ways: Corporations are taxed (with Japan's recent cutting of their corporate tax rate, the US now has the highest corporate tax rate in the world) and because the money used to purchase an asset was income at some point and was taxed BEFORE the investment was made; 2) Capital gains, especially with long-term assets like land, are largely due to price inflation and may actually represent no gain in value; 3) Taxing capital gains at a rate equal to or higher than income tax would dis-incentivize investment in favor of consumption; consider, making an investment and achieving a return means you borne risk and put off current consumption. Increasing the capital gains tax rate would discourage such behavior. What these problems mean is that increasing the capital gains tax to 'correct' ETR's would be foolish. The rich avoiding taxes on investment income isn't a valid criticism. Let me expand on the idea of double taxation; not just from the fact that corporations are taxed first, then dividends are taxed on individuals (remember also that the price of a share is the present value of all future dividends, even if a company doesn't currently offer dividends), but also because the money used to make an investment was taxed as income of some sort before the investment. Let's say I earn $100,000 as ordinary income (for simplicity's sake, let's suppose I have no expenses). That's taxed at a 25% rate. I put my remaining $75K in stock and sell later for $85K (13.3% return). I've realized a capital gain of $10K. This $10K is taxed at 15% so I make $8500. In net, I earned $110K, paid $26.5K in taxes, and made $83.5K in profit for an ETR of 24%, slightly lower than my nominal tax on ordinary income. I look like I'm UNDERpaying my taxes but what is forgotten is that I IMPLICITLY paid a 25% tax on my capital gains income because I could not invest $25K that was paid in ordinary income tax. To illustrate, suppose there was no capital gains tax and instead, I am taxed on total end of year income at a nominal rate of 25%. I'm now able to invest my full $100K at 13.3% return so now I earn $113.3K, paid 25% of it in taxes ($28.3K in taxes), and made $85K in profit. Note now that my ETR is 25% but I actually made more money; I paid a higher tax rate but I'm now richer because I was NOT implicitly taxed on my foregone investment income. This disparity is the effect of double taxation.
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