General Question

rojo's avatar

Can someone explain to me why capital gains should be taxed at a lower rate than wages?

Asked by rojo (14994 points ) November 10th, 2011

Not really much more to add, just interested in peoples’ take on it.

Observing members: 0 Composing members: 0

22 Answers

plethora's avatar

Yes I can. Capital gains should not be taxed at all. Capital gains represent rewards for risk….as in investing in the stock market (which tends to drive the market upward, which seems to be good for the economy over the long run) or starting new companies which employ people. There is huge risk involved and the higher the tax rate, the lower the willingness to take the necessary risk.

rojo's avatar

@plethora thanks for your input. Anyone else care to weigh in?

2davidc8's avatar

I agree with @plethora. It’s to encourage investing.

HungryGuy's avatar

Because rich people contribute to politicians re-election campaigns. That’s why…

marinelife's avatar

Because capital gains are the lure that causes people to invest in the economy.

CaptainHarley's avatar

@HungryGuy

You need to take some basic courses in economics.

zenvelo's avatar

While I agree that real investments that help grow the economy or develop new technologies should not be taxed on their return, I disagree that all investments should not be taxed.

A lot of investments do nothing to help the economy, such as buying stocks in the secondary market. Buying stock after the IPO does nothing for the company, they don’t see a dime of it. Same with buying bonds after they’re issued.

But because of the economic contribution of those investments, I think they deserve a lower tax rate.

The secondary market does serve an economic purpose, but it does not help build new industries or help re-tool factories.

lillycoyote's avatar

I have not made up my mind completely about capital gains taxes, I tend to generally not favor them, but if one of the rationals for not taxing them at all is that investors are taking risks and should enjoy the reward, shouldn’t we stop allowing tax deductions for capital losses? If the government cannot enjoy the benefit of your succeeding in your risk taking, why should it have to help ease the blow when your risk doesn’t pan out?

jrpowell's avatar

There is only one real time that investing in a stock helps a company. That is the first time a share is issued. That accounts for about .001% of trades on the major indexes.

If I buy a single share of Apple for 400 right now Apple gets nothing. All I get is the hope that I will get a dividend (unlikely) or someone will come along and pay me more for my share (capital gains).

I can’t walk into a Apple Store and scream “I own this place bitches” and toss a share on the table and grab an iPhone.

I do invest in stocks and do well. But to think that people gambling (investing) helps anything other then lining the pockets of people that manage hedge funds is naive.

CaptainHarley's avatar

Don’t forget that companies can buy their own stock as well.

Jaxk's avatar

@lillycoyote

Capital losses only pertain to capital gains. If you don’t tax capital gains there is no reason or exemption for losses.

Also shares in the secondary market have a dramatic effect on company investment. When shares go up in prices, the company’s valuation increases which determines interest rates for loans, as well as availability of cash. A company will be helped or hurt dramatically by the trading in the secondary market.

lillycoyote's avatar

@Jaxk LOL. You’re right! That kind of thing is why I don’t do my own taxes. :-)

plethora's avatar

@johnpowell @zenvelo See @Jaxk post for a short lesson in investment economics.

zenvelo's avatar

@plethora Please don’t try to school me on investments. The buyer in the secondary market does not provide capital to the company. I noted that there were economic contributions that validated a lower tax rate, but not enough to be considered tax free.

dabbler's avatar

Of course it makes sense, on an instinctual level, that lower taxes encourage investment, everybody knows that. That’s common sense.

A fair reason for advantageous tax rates on long-term capital gains is based on the longer required holding period that distinguishes it from short-term speculation (also unfortunately termed “investment” by folks who are misinformed or ignorant of its actual meaning). Lower long-term capital gain tax rates encourage disinvest more slowly instead of just trying to extract income from the economy with no thought how they do it. The point isn’t that lower rates are good for investment. The point is that longer-term capital investment is superior to short-term activity and long-term should be encouraged.
But @HungryGuy is correct, the reason for lower taxes on capital gains is :“Because rich people contribute to politicians re-election campaigns.”

The fresh-from-MBA-school crowd wants us all to take an intro economics course, like they did.
I agree enthusiastically, because we will find there, in an economics department highly likely to be dominated by the Chicago School/Friedman/trickle-down cult, the roots of why so many of our current economic policies are so fucked up.
The problem is they’re wrong. “Common Sense”, reasoning with instincts, can be like that. And the continued influence of trickle-down pricks on global economies and the WorldBank and the IMF, has driven several national economies into the ground (Chile – finally recovering, Argentina- recovering after telling the international bankers to take a flying leap, Portugal, Iceland – recovering after letting their big banks default instead of saddling their taxpayers with the side-effects of bank misbehavior, Ireland, Spain, and famously now Greece).
The people who benefit from Friedmanism are few (yep, that less than 1%) and they don’t mind the consequences because they learned in BizSchool the religion that anything that is not a direct cost on the spreadsheet, that doesn’t diminish your own bottom line, doesn’t matter. Their most useful and prudent tool, by their values, is externalizing costs.

So, by all means take an intro economics course, but yo! keep learning y’all !! Take an advanced one or two or three. Read that isn’t based on theory written by the Freidmanism cult that look great on paper and appeal to the gut – and are wrong.
And fer Christ’s sake take a couple history courses. Spend some time outside the ‘financial engineering’ trough.

There are some among us who have already typed “nice liberal rant” into the AnswerThisQuestion. I expect that, robots are like that. Being dismissive is fun but it doesn’t help any of us. If you get all the way to the end of this post, and consider what’s written, then congratulations they have updated your algorithm.

Nobody pays a cent of tax on investment.
They pay tax on disinvestment. When you cash out. When you no longer have your capital working where it was.

If you like a gut-based, instinctual, comon-sense analysis about encouraging investment that’s backed by fact, great, let’s work with our powerful friend, self-interest=GREED in an innocent form (greed is good, woohoo! It is extremely motivating and it can in fact be used to ends that are beneficial to all involved).

The historical fact is that ALL our periods of greater prosperity (unless you ignore prosperity fueled when insane deficit spending is ignored, e.g. the reigns of Reagan and GW Bush, and deficit momentum spilled over into the current term) have been when tax rates are relatively high, (all kinds, capital gains, personal income, corporate income).

How could that possibly be? Our friend greed notices that when taxes are high people should leave their capital where it is to avoid those taxes. They are forced to think longer term to maximize their returns. The capital stays in a company, growing wealth and tangible value, – and creating jobs by the way. Folks will pay a lot more attention to where they put their capital and may even take active management or shareholder activist roles is making sure wealth is getting created and wealth is growing in the companies in which they have invested. This is a fact, this is what happens in periods of higher taxation. Greed demands it.

During periods when tax rates are lower, there are more advantages to getting capital out as soon as a profit is possible. If you are fortunate enough to have large heaps of capital, you also have tax attorneys who will tell you to get your money out while you can. Shareholders will take profits (sell, dis-invest) and CEOs will take huge salaries instead of leaving their wealth in the company and making sure it is cultivated. This forces companies into cost-cutting – killing jobs by the way. This is a fact, this is what happens in periods of lower taxation. Greed demands it.
@zenvelo is correct the secondary markets are largely useless to anyone but the parasite class. The fact that ratings are dependent on market valuations at all, instead of fundamentals or even P&L points to the circular corruption of our system ever since ratings firms stopped being independent of the firms they rate.

Those are facts and there is no period in US history where the contrary is demonstrated.

Tax rates on short-term capital gains should be through the roof to get the parasites out of our systems.

If the intention is to encourage investment, then you want to set tax rates of all kinds high enough to discourage speculation and lower capital churn rates.

plethora's avatar

@zenvelo If I think you are dead wrong, why shouldn’t I try to school you?

@dabbler the secondary markets are largely useless to anyone but the parasite class.
The “parasite class”??? Would that be the “Occupy” class. They are pretty much parasites. Or would that be your class?

Both you boys got a lot of learning to do about how our economy works.

dabbler's avatar

No @plethora get past the intro economics concepts.
The parasite class are speculators who are nothing but middlemen and contribute nothing but extra cost to the rest of us, including you, unless you’re a commodities trader.
In what way are the Occupy class parasites? (whatever that is?? it’s 99% of us. Or the people in the parks protesting neo-con economics? they don’t cost anyone much except police overtime, which the cops here love)
You have no facts @plethora, history and reality do not support your statements. And you confuse being snide with being right.
p.s. “boys” how old are you? @CaptainHarley might be the only one around here who might be qualified to call me that. He certainly conducts himself with more maturity and class, and quite a bit more thinking, than some of the folks who disagree with populist politics/economics.

zenvelo's avatar

@plethora So you think I am dead wrong when I said While I agree that real investments that help grow the economy or develop new technologies should not be taxed on their return ??

Jaxk's avatar

@dabbler

You spin a good tale. But I fear you left out some important points. The capital gains tax is a tax on wealth creation. We like to think that it is only a tax on the rich but it pertains to all of us that have any aspirations of improving our lives or generating a reasonable retirement. Capital gains not only determines when you sell but whether you buy. And capital gains pertain to much more than simply stock.

I know everyone loves to look back at the 50s and 60s and say ‘see the high tax rates were good. But keep in mind that even when the top income tax rate was 91% the capital gains rate was 25%. I have much more but time precludes me from going into it. Maybe later.

dabbler's avatar

@Jaxk “nice liberal rant” got replaced with “spin a good tale” so your dismissive algorithms are intact behind a shallow new coat of paint. But you have no answer to my point that no one pays a tax on wealth created until they disinvest.
Capital gains tax is not a tax on wealth creation. It’s a tax on disinvestment. Anyone who keeps their capital growing in the same place pays no tax on it whatsoever, ever. The greatest examples of wealth creation in history are buy-and-hold, or even more poignant, found a company and build it and keep the wealth in it as it grows. The owners of such a company have created wealth and have every bit of it.

“Capital gains not only determines when you sell but whether you buy.” This is a myth. Another sound-bit that makes instinctual sense, but there is no evidence behind it.
There are no investors who pass us a good investment because of taxes. They have to park their capital somewhere. Decisions are based on quality.

“the capital gains rate was 25%” on long-term capital gains for the reasons I mentioned. I’m glad you agree.

Jaxk's avatar

@dabbler

I fear you’re right about the comment “You spin a good tale”, it was rather hasty. Your clarification shows that it is not a good tale but simply short sighted and naive. Taxes are only paid when the income is realized. That goes for both income tax and capital gains tax corporate tax or any other tax. A capital investment remains an investment until the property is sold. It then becomes a gain or loss. No different than a paycheck. No tax or gain is realized until you are paid. Then it becomes income and taxed. I’m not sure where the confusion is here.

Your assumption on the way capital markets work and their relationship with taxes is quite absurd. When income tax was high in the 50s the capital gains taxes were about 30% of the income taxes. Not surprisingly that relationship is pretty close to the one we have today. It’s done to incentivize investment in our business. You say “They have to park their capital somewhere”. Very true but the options are plentiful. You can park it in the bank, maybe government bonds, maybe gold, or corporate bonds, you may want stock with dividends or without. the decisions are based on ‘Risk and Reward’. After the past 3 years, you have to be deaf, dumb, and blind not to realize that stocks are risky. If you crank up the tax rate on capital gains, you reduce the ‘Reward” part of the equation. Interest starts looking more attractive, bonds look pretty good, especially tax free bonds. Capital markets dry up especially for the most risky investments such as start-ups.

One of the biggest reasons for the Dot Com boom was venture capitalists. The vast majority of start-ups were funded with venture capital. Venture capital firms expect anywhere from 20–90% of their investments to fail. But the ones that succeed return huge profits which compensate for the failures. If you take away the reward, you take away the investment. Venture Capital is designed to be reasonably short term 1–5 years. The capital is then recirculated. 20% of US Public Companies were started with Venture Capital. These are the guys you would have us kill off. The idea that taxes play no role in investment is laughable.

dabbler's avatar

@Jaxk You’re so funny. As usual you adamantly addressed a lot of point I never made, like some relationship between proportions of tax rates, or that I want to kill someone off (?!).

And I made no assumptions about how markets work. Facts are facts, whether or not they’re counter-intuitive or make you laugh. Enjoy!

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