While I agree that being taxed on inflation is unfair, it would not be that hard to discount inflation when assessing taxes. Surely a tax system could accommodate that.
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But the fact is, it doesn’t and that’s the world we live in. We need to lower capital gains taxes sometime in these next few years.
The fact also remains that the world we live in doesn’t have a lower capital gains tax rate. If we’re going to propose tax changes for the future, all proposals are as good as any other.
I didn't know what part of the world you mean, but in the US the capital gains rate maxes out at 20% for people earning over $425,000 a year and that's pretty darn low.
The question to ask is why capital gains tax should be lower than taxes on wages? If encouraging work is the priority, it should be the other way round.
Not exactly. Long-term capital gains in the US max out at 20%. Short-term capital gains (those investments held < 1 yr) are taxed at your marginal tax rate, which can be significantly higher than 20%.
https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rate...
perhaps the priority is encouraging investment into capital.
Norwegian capital gains tax (no distinction between short and long term) is 30.5% for 2018, with an additional 0.85% of total net worth (mostly minus value of primary residence). I wish lowering capital gains tax was on the radar; if inflation starts increasing then this will be an excellent system for punishing people who have saved money rather than spending it immediately.
Income is income. Why should unearned income get taxed lower than earned income?
Because unearned income is a lot harder to make.
At a 6% return, you need around $800k+ to get the equivalent of a $50k salary before taxes from the interest earned on your savings. When you factor in having to reinvest some of your returns to beat inflation and make up for some years of low or negative returns, you might only draw maybe $20-25k out of that $800k portfolio. Then you get taxed on it at 20% capital gains along with any state taxes, and it all adds up to a lot less money to live off of.
Most people who want higher capital gains do not have a portfolio of this size nor have they explored the reality of living off a portfolio of this size. Work to the grave I guess.
> Because unearned income is a lot harder to make.
You realize that 50k salary is rather close to the median individual income in the US, right? Why should the fact that you've got 800k making money for you mean that you should be taxed less than someone that earned their 50k through wages and tips?
Edit: Another way to think about it: Both the investor and the wage earner added value to their respective markets which was valued by their markets at 50k over the year. Why should one of these market actors be taxed lower than the other?
> Why should the fact that you've got 800k making money for you mean that you should be taxed less than someone that earned their 50k through wages and tips?
the lower rate of taxation incentivizes one to invest that money in legit investments, rather than spend it on discretionary consumption or invest it in an illicit vehicle that provides an untaxed return.
> Why should one of these market actors be taxed lower than the other?
I personally don't think they should but another way of looking at it is that people usually have to work (the enormous pile of cash came from someone somewhere, even if it wasn't the person who has it now). so theres no incentive for the government to cut the worker a tax break. but when you have money in the bank you can do many things with it. a lower capital gains tax allows the government to earn some revenue on the money and helps keep that person from spending it all on fun stuff and driving up the cost of resources with 800k worth of bids.
> Why should one of these market actors be taxed lower than the other?
my prevailing theory is the common belief that an investor's money brings in more economic knock-on effects, and the $50k earned by the wage earner is less "powerful". in order to incentivise the investor, they are given a tax break.
this isn't helped by the fact that those in position to make this sort of tax law are also beneficiaries of said law.
I don't see people passively living off their investments (that is taking a rake while contributing nothing productive to the economy) as a thing to be encouraged, beyond perhaps a retirement age (which has tax shelter status for a significant amount).
As a thought experiment imagine if everyone did this, or it was everyones goal.
If everyone could afford to retire early then this would imply both impressively high productivity while working and an impressively low level of inequality. Seems like a good goal to shoot for?
If everyone was doing it, there would be no returns or even negative returns, and thus people wouldn’t invest. The problem fixes itself.
if there's any segment of the market that's zero sum, then some gains are at the loss of others, and eventually, some actors will fail, leading to an in equality that mimics today's.
If you are talking about retirement, then we have many ways to help mitigate these losses; Roth IRAs or 401ks will let you take money out tax free, and traditional IRAs or 401ks will let you put the money in tax free.
If you are talking about non-retirement people, I don't expecting to live your entire life off of 800k in savings is realistic or something we should encourage. We need people working and producing things.
I’d go a step further and classify income as:
1. Earned income 2. Investment income 3. Gambling/lottery/short term income
Tax rate should increase as you go down that list.
Why?
I believe the reasoning behind it is to incentivize long-term investing.
Though, it should really be a tiered system in that case - different tax rates for holding periods of <1 yr, 1-2 yr, 2-3 and so on, instead of just <1 yr & >1yr
It's one thing to lower tax on investment income. But the problem with capital gains taxes is that they don't just cover investment income, they also cover lots of earned income. Stock options, IMHO, should never be taxed as capital gains since they were "purchased" largely with an employees time. And they're not the only form of capital gains that derive from selling your work product. If we are to cut capital gains, we also need to restrict capital gains to pure financial investments and ensure that every form of compensation for work is taxed as normal income.