phil_20686, on 2010-December-08, 16:44, said:
I am not sure about that adam. Agree the actual measures taken are absurd, but capital gains tax should always be preferential rates compared to income tax to account for inflation: If your investment rises in line with inflation you have made no real gain but you still have to pay CGT when you liquidate which has two negative effects:
1) Because you need more lucrative opportunities to invest it will decrease entrepreneurial investment in general, and will also tend to encourage pension funds and other long term institutional investors to rebalance in terms of riskier (and higher paying) investments. Also most ordinary people have significant savings via their pension funds, which will be among the biggest losers.
2) In the long term it will tend to de-capitalise the economy by extracting capital from every investor who makes a marginal decision.
Having said that, while it should be given preferential rates does not necessarily mean that it should be taxed at a very low level. What the optimum should be I am not qualified to say, and doubtless depends on both the rate of inflation and the rate of income tax, but I am certain the optimal level is significantly below income tax.
Dunno about these. For inflation, note that investing money in a bank requires you to pay income tax (not capital gains) on the interest. Here the interest is often much closer to the level of inflation (bank interest rates are lousy). So how come the "safe" investment is not inflation-adjusted but the capital gains are? Heck, even a fixed salary devalues because of inflation, but I don't get to pay less in taxes on my work income if inflation goes up.
For the first one, having lower capital gains rates encourages risky investments, not vice versa. For example, suppose I can invest my money in a company that actually produces products and pays dividends, and make a safe $100K. Or I can invest in a much riskier stock hoping it goes up, figuring about a 10% chance I can sell in a year and make $1M and a 90% chance I break even. If there were no taxes, my expected money is a wash. Under current tax law, the $100K in dividends will be taxed as income (I think about 20% averaging out the brackets) whereas the $1M will be taxed at the 15% capital gains rate. Thus my after-tax values look like $80K in the "safe" investment and 10% chance of $850K in the risky investment. If everything was taxed at income tax rates it would be more like 10% of $700K in the risky investment (paying something like 30% tax on a million in income rather than 15%). I dunno why we want to encourage speculative investing over investing in solid companies that pay regular dividends.
For the second one, investing will always be better than stashing the money under your bed, because investing has a positive expectation. Marginal taxes reduce that positive expectation but they won't take it from positive to negative. Raising capital gains taxes will encourage people to invest in safer ways -- the current system penalizes things like putting your money in a bank account or a dividend-paying company, and encourages speculating on high-risk stocks where the payout (if any) will be in capital gains (thus much lower tax rate). Certainly if people start stashing the money under beds that is bad for the economy, but if instead of stashing my money I play a series of high-stakes poker games with my other very-rich buddies (so our money moves around from one mattress to another after each game) I don't see how that's any better for the economy than the stashing plan. Certain types of stock market investments (particularly of the hedge fund variety) seem an awful lot like just taking a series of bets -- it's hard to see how a high rate of flux in a company's stock price helps that company any if the long-term average stays pretty constant, but my friends working at hedge funds assure me that a high rate of flux makes their investors billions through high-speed trading schemes.
Adam W. Meyerson
a.k.a. Appeal Without Merit