What is the rationale for taxing earned wages at a higher rate than unearned investment gains?

I assume that many here like our current capital gains tax rate or feel it is too high and would like to see it lowered further.

So I wonder, what is your rationale for wanting to tax earned wages at a higher rate than unearned investment gains?

I could see the rationale for doing this as some sort of windfall tax on earned incomes more than 10 times the national average income or something like that. But I don't understand the rationale for taxing all earned income over $34,000 at a 25% rate while unearned capital gains are taxed at the far lower rate of 15%.

Note that FICA & Medicare adds another 15.3% tax on the first $106,800 earned. Since FICA surpluses have been robbed for budget shortfalls for years now and politicians on both sides of the aisle are calling for higher retirement ages and reduced social security payouts, FICA is for all intents and purposes just another federal tax.

Suppose I am a single person who makes $50,000 a year. On the income I make over $34,000, I am looking at an effective federal tax rate of more than 40%. Meanwhile, somebody who makes $1,000,000 a year in unearned capital gains (on assets held over a year) faces a total tax rate of 15% on these capital gains. What is rationale for such a disparity?

Don't you take risks every day you go to work, perform your job and come home?

I would think that infinite ROI is an advantage of capital that mitigates the risk of loss (hence, "risk" is not the only consideration one should have when determining just levels of taxation).

You are only taxed on your actual net capital gains.

If a person makes a billion with capital gains in a year then he should be taxed at a 99% rate.

If a person makes a million tax them at 98%.

I'm tired of the deadbeat rich making huge amounts of money for producing absolutely nothing. An illegal migrant farm worker produces more in one day than everyone who works on Wall Street does in a lifetime. The farm worker picks fruit and vegetables we all need to exist, while the Wall Street gang just pilfers off money through concocted schemes and scams.

you don't pay taxes on gains.

http://www.marketwatch.com/story/the-recession-is-over-the-rich-won-2010-07-20

According to consultants Cap Gemini, the wealthy saw their net worth bounce back sharply last year. And while those with $1 million or more did pretty well, the real story was the boom among the ultra rich: Those with more than $30 million to invest. "Ultra-HNWIs (High Net Worth Individuals) increased their wealth by a striking 21.5% in 2009, far more than the average in the HNWI segment as a whole," Cap Gemini reported, adding: "A disproportionate amount of wealth remained concentrated in the hands of Ultra-HNWIs."

There are fewer than 100,000 ultras around the world. A third of those are here in the U.S. Ultras make up 1% of the high net worth, according to Cap Gemini, but held 36% of the high net worth's wealth. ...

And who pays the top rate anyway? Right now it only kicks in on each dollar of ordinary income over $374,000 a year. A recent study by the Congressional Budget Office found that the top 1% of Americans paid an average federal income tax rate of just 19% in 2007, the last year when data were available. The top 5% of earners paid an average rate of less than 18%. There are ways and means to minimize tax -- like calling your income "capital gains." That's what private equity honchos do, where possible. In many cases, it means people making tens of millions a year are paying lower tax rates than their chauffeurs and receptionists. (There are proposals to change that, with predictable screaming). As for socialism: The Federal Reserve reports that the private sector is doing so badly that corporate profits just, um, rocketed to a new record high. The after-tax profits of corporate America rocketed 43% in the first quarter. ...

And according to an analysis by the Central Intelligence Agency, the U.S. has one of the most unequal income distributions in the world. In this field, most of the developed world is pretty much in line -- Japan, Italy, Australia, Canada, Norway, Great Britain. Some are more unequal than others, but all are comparable. In each case, of course, the rich make more than the middle class, sometimes a lot more. But they generally occupy the same economy. The U.S.? Our income distribution is more in line with Zimbabwe, Argentina, and El Salvador. We think of Russia as the land of oligarchs, but America's inequality is actually slightly greater than Russia's.


So we have an "economic recovery" in which the very richest individuals increased their total wealth by over 21% in a single year, but in which unemployment did not drop and wages did not rise. But, of course, job one is to make sure those poor Ultra-HNWIs making 21.5% per year on their investments don't hide all their capital under their mattresses because their gains are taxed the same as our wages! I mean, sure their already outrageous wealth increased 21.5% in a single year. But since they potentially could have lost all that money (in a bizarro world in which they did not have every investment advantage), they all would have kept their billions hidden under their mattresses if they were not incentivized to invest by a capital gains tax rate far less than half of the rate the rest of us are taxed!

all capital gains were treated as income?

Would they all stop trying to realize gains on investments? How? Where would they hide their money? In giant vaults? Buried in their backyards? In the walls of their summer mansions? Under their beds?

I'm just wondering why rich people need to be incentivized to want to see a return on their wealth. I'm not saying that no reasonable rationale exists. I just don't know what it is.

Union pension funds also do it, for instance. Yes, there are some extremely rich people and a good number have gotten their wealth through investing, but they are not the only ones.

But wouldn't you want the people with more wealth to burn to be the ones taking risks with it?

I guess it would depend on the individual investment and how risky it is, but you can never really know that in advance.

Or even for raising capital gains taxes, but I do understand why they are less than ordinary income (actually short-term capital gains are still taxed as ordinary income).

you just don't have to pay taxes on those losses.

they pre-BRIBED and pre-OWNED . . .

Some people don't agree with that:

Capital gains are taxed at the regular income rate in Australia and Thailand.

In Denmark, gains over DKK 45,500 are taxed at a 43% rate.

In France, the rate is 31.1%. In Sweden, it is 30%. In Britain, Finland and Norway, it is 28%. In Germany, it is about 28%. In Ireland, it is 25%.

When you have nothing left to purchase, purchase the government. After doing so, tax rates and regulations are for you to decide.

Pick your term. Its all the same to me, as it all promotes disparity, ultimately leading to a politically entrenched elite.

They used to be taxed as such, but the rate was lowered to induce them to invest their money into business and create jobs.

Didn't work very well anyway, and perhaps should be dispensed with. Among other effect, it should help encourage people with a lot of money to quit putting it into Treasuries or speculating with it and shovel it back into a business where it will be protected from taxes while it grows.

'Course, they might decide to invest in business in markets where they have a better chance of making returns, such as China or ...

Why, it works fine enough for the owners of capital--just not for everyone else.

In the context you speak, of course not. When demand is lacking, investment is not a sound idea. Capital will clearly withdrawal to coincide with the business environment far more than with the tax rate.

With that said, I would imagine the investor class would prefer to invest in more stable economic environments; hence, if one is really wishing to promote private investment, perhaps a valid method would be to tax these gains more appropriately and use those funds to stabilize and stimulate in efficient manners.

despite being sold the idea that giving all the nice folks a tax break to stimulate investment would increase business and trickle all over everyone, and despite lots and lots of demand through most of those half-dozen years or so, we still lost millions of
jobs, and the investments became a windfall for China who have been doing their own version of a stimulus program for some time. And today, with no demand, much investment is still moving to China, despite the reported problems in the business environment.

I agree with you, the tax needs to be restructured, and as you said the wealthy won't be spending without demand. So the only way to get the $$$ is to tax it and invest it for them.

My biggest problem is how to avoid having it wind up in China, et al. We can feed and house some folks by running it through their household budgets for a while, but China and Mexico will be big beneficiaries in our global society, and eventually they wind up with most of it. I think there is some value in working with them, but where we are doing it to our own detriment, I really, really do mind.

And I know people want to build walls and enact tariffs, but that is just going to start a reactionary fight, and given our economic condition the outcome for the US is uncertain, 'cause that will certainly raise prices and cost those who have the least most of all.

But if we invest in American in ways that improve things for everyone, training for 21st century jobs and financial literacy, as well as rebuilding manufacturing, and a few other things, perhaps we could come out ahead...

was the fantasy that rich people would invest all the money they "saved" from the tax giveaway and we'd have jobs for everybody, happy days are here again!

What actually happened is a lot of market shorting by institutional investors, a completely rigged market through HFT, the rich investing in companies that sent American jobs offshore to cheaper labor markets to goose their profits (and dividends) and just plain hoarding.

I welcome a hike in the capital gains tax. Since I hold most of my stuff long term, it won't be a problem. In any case, I have enough carry over tax losses from the last three years to write them off for many, many years.

Cutting taxes on the hoarding class always requires a lot of magical thinking on the part of ordinary people. I sincerely hope more of them are waking up today to the reality that the rich aren't our friends and they don't hand out jobs as personal welfare programs, no matter how much is lavished upon them.

Sock it to 'em, fellas, and put a transaction tax onto them, as well. That should cut down the profitability of HFT and partially un rig the market.

are generally not deductible but the expenses to obtain those capital gains generally are fully deductible (like transaction fees or broker commissions).

but there are gigantic screws sticking through every single working person in this country.

I figured that part out when I was a kid, back when working people got a relatively better deal.

40 years of conservative mismanagement and skewing the benefits toward the top have not improved things.

In fact, if things don't start to get better soon, we're going to start seeing the kind of violence I hoped I'd never live to see.

this one gets my goat. Surely you'd think it would be at least the same? I see no reason to punish financial acumen as a source of wealth and I certainly do see the need for freedom of capital to move, but the bloody stuff moved just fine when capital gains taxes were the same as income.

that's all I can think of

and focusing on the already progressive income tax rate while ignoring capital gains.

:)

Since my investments have only just barely started to recover I have had to really cut my costs. I ain't making that much money off of these investments but I don't want to sell at a loss at this point in my life when I can no longer go out and work at the same salary level I once did. I'm in a different boat but I'm certainly not doing that great...

will result in an overall tax break.

So what's the picture there?

So you would take a hit if this were taxed as income, but it would not be a big hit.

Your total tax for the year as income would be about $4,200 (7%) if everything were taxed as income. Right now you are better off with the cap gains the way it is because you are paying only 5% on the cap gains and probably a lot less than 5% (if anything) on your income taxes.

But trust me, I'm not out to raise taxes on people in lower income tax brackets. If it were up to me, the first $30,000 every individual makes a year by any means would be completely tax free and the shortfall would be made up by taxing inheritance, wealth and financial transactions.

of money on small investments, such as mine? I mean, we are not these hugely wealthy people but we had the misfortune ofinvesting a while back in the stock market as small investors. We are not getting rich off of people's misery...

worst tax system in the world. Wouldn't you agree? In addition, if the cap gains of the richest were taxed at the regular income rate we could use the money generated to reduce the income tax rate of the poor and middle class.

Of course zero tax is optimal for every individual, but then the government would have to operate on debt completely.

Personally, I would not care if the cap gains rate for those in the lowest income brackets were reduced to zero. My discussion is about the cap gains rate of those making far more than they need to just to get by vs. the income tax rate of those just trying to get by.

$60K taxable =

10% on first $16,700 = $1,670.
15% on rest = $6,495. Total taxes = $8,165
Effective tax rate = 13.6%

That would be more almost triple what he currently pays on capital gains @ 5%.

If you want to include standard deduction & exemptions to lower one tax bill you need to do it for both tax bills.

I figured out the effective rate if it were all considered income would be about 7%.

For the amount that was capital gains, the rate would be 5%. As long as the amount in the form of capital gains was significant, the income tax rate would probably be even lower than 5%. I can't do any better than that without knowing the income breakdown, and I made that clear.

What is your purpose with your nitpicking here? Do you wish to argue that all capital gains need to taxed at 5% forever (versus the 40% or so we are taxed on our income) because otherwise the tax liability of a few seniors will go up a few hundred dollars a year?

Third strawman.

Your proposal is essentially tripling income taxes paid on $60K. That is thousands not few hundred dollars a year.

You are aware that SHORT TERM capital gains ARE taxed as regular income (investment of 364 days or less).
It is only long term capital gains which are taxed at a lower rate. This is to encourage long term investment over speculation.

same age who has to work at Walmart to supplement his or her social security gets hit up with a much higher rate on his or her earned income?

If cap gains were taxed at the same as earned income for the richest individuals, earned income tax rates could be reduced to the point that the difference would only be a few hundred dollars even for those currently enjoying the ridiculously skewed 5% cap gains tax rate. If the excess tax revenues collected from the rich were used to offer income tax relief to the lower and middle classes, they would probably end up paying less.

Again, I have to ask you, what is your purpose with your nitpicking here? Are you trying to hide the fundamental inequity of prioritizing capital over labor behind the handful of old couples enjoying a tax preference that rips off everyone who works for a living to reward those few lucky enough to be living off their investments?

nitpicking.

With decline of pensions the overwhelming majority of Gen Xer will be living off their investments (or working until they die).

The idea that it would only affect the rich or only a few or it would only be "a few hundred" in taxes are all equally false.

Short term capital gains ARE taxed at same rate as regulary income. There is a cut on long term capital gains (investments held a year or longer) to encourage long term investment and discourage speculation and trading.

Let's see a breakdown of who exactly is benefiting here, please.

You sound like an advocate arguing for the elimination of all inheritance taxes hiding behind the loss of a handful of family farms.

The vast majority of capital gains realized every year are realized by individuals accumulating wealth rather those who use these gains just to get by. This is typical trick of the rich to throw out a little bone for a small subset of the population just so people like you can make an argument like this.

We could simply adjust the system by saying that, for example, the first $10,000 in capital gains for any individual or $20,000 for any couple over 65 are untaxed and the rest are treated as income. Then the people you are ostensibly advocating for here would pay less if their cap gains were treated as income. What do you think of such a plan? Would it satisfy your agenda here?

Still that wasn't your original proposal. Your proposal was lets double capital gains taxes on middle class. Don't worry, take one for the team it will only be a "few hundred dollars". While it doesn't affect me today in 30 years I will likely be living off of my investments.

"Would it satisfy your agenda here? "

Put down the tinfoil. I have no agenda here. I simply will never support a proposal that raises capital gains taxes on middle class. It is impossible to move from middle class to wealthy by wages alone.

If you want to tax the uber rich ..... then tax the uber rich.

by treating capital gains as income?

Do you think it is fair for those with investments to get their first $50,000 tax free while those who have to work for that same $50,000 to be taxed over $8,500?

Long term gains should be taxed at a long rate to encourage long term investment not short term speculation.

No I see nothing wrong with long term investments being taxed at lower rate especially not for the middle class.

Explain your rationale.

How do you reach that silly conclusion?

See my corrections above.

However I see no reason why your investment income should be treated differently than some person also on SS who is working to make ends meet.

Howz that reaganomicsy thing workin' out for ya?

And since thats an economic boom, we aren't allowed to point at such instances as examples of gross disparity enabled by an unjust economic system.

:evilgrin:

I question just how many bank tellers the Cayman Islands actually wants in their citizenry, but who am I to question.

I heard on NPR this week that while profits are now going up, wages are not, and new hiring with these lovely profits is not taking place. So there goes that argument.

Capital gains should be taxed at a much higher rate than sweat-wages, imo.

Nobody is forcing the wealthy to "risk" their money, so it's senseless to think they deserve to pay less tax on this income.

I thought better of you until this post.

Propose a solution that people can adopt on their own, not just on behalf of everyone else. It's a little harder than playing verbal games with leading statements and bizarre assumptions.

for any poop flingers, this is a continuation of a conversation from another thread.

Uch.

Yes, it's leading. Read your OP sentence and tell me it's not a passive aggressive form of communication. Have you stopped beating your wife?

:nopity: :nopity: :nopity: :nopity: :nopity:

than capital gains. But that implies that capital gains should be taxed at the same rate as ordinary income across the board. I inverted that, and said that for people in lower income brackets who do risk their earnings on investments, that they should pay an accordingly lower capital gains tax. For people with higher earnings, they should pay a blended rate if that blended rate ends up creating more tax revenue than a split rate. Kind of like the AMT.

So again, why is it you think I'm proposing something harmful? You must understand I think we're arguing the same point but I get the impression you think I'm proposing an exception or loophole for "the rich". That is the rationale for my tone the last couple of posts.

Or more to the point, I don't have a wife, I don't beat my life partner, so the question about whether I've stopped is irrelevant, kind of like the OP question.

But that implies that capital gains should be taxed at the same rate as ordinary income across the board.

Yes.

I inverted that, and said that for people in lower income brackets who do risk their earnings on investments, that they should pay an accordingly lower capital gains tax.

Yes, if cap gains are treated a regular income and you are in a lower tax bracket when you combine your cap gains with your earnings, you will get a break versus those in a higher tax bracket.

For people with higher earnings, they should pay a blended rate if that blended rate ends up creating more tax revenue than a split rate. Kind of like the AMT.

Now you lost me. If you are taxing capital gains like ordinary income, then why would you need to blend any rates? Are you imagining a world in which the cap gain tax rate at least approaches the highest income tax bracket rate in percentage? Are you trying to close a loophole for those who might otherwise be able to deduct away their massive capital gains? If so, sounds good to me.

Or more accurately, they own such a negligible fraction of the total net financial worth that it makes your "point" irrelevant.

Better yet since they make up such a negligble fraction why not make capital gains taxes 0% for both short & long term gain for those in the 15% bracket or lower?

But investments gains are their gods. And the disgustingly wealthy generally get their way.

But the SS surplus is invested in government bonds, so the spending of these revenues is not a general federal tax, rather additional government borrowing, albeit debt that does not get recorded as such.

(1) To encourage investment. Investing in capital assets is inherently more risky than simply earning a paycheck, so gains from it are taxed at a lower rate.

(2) Inflation. Let's say you buy $1000 worth of stock in 2010. Ten years later, that stock is worth $1400. You have a gain of $400; minus 15% capital gains tax, it's $340. But, at 3% annual inflation, you've really only broken even on your investment, you haven't really made money. The lower tax is partially designed to account for this.

(1) You are only taxed on realized net gains (minus realized losses). People work for free all the time in order to gain employment and/or contract work. People invest hundreds of thousands of dollars into education and training to get decent jobs for themselves. People are generally employed at the will of their employer. People who own their own businesses hopefully realize income from these businesses at tremendous risk. How is any of this inherently "less risky" than investing in, say, a government bond?

(2) Doesn't this effect encourage investment in itself? Furthermore, how is this effect any different for wage earners? By this rationale, shouldn't wage earners get tax credits if their wage increases don't keep up with inflation?

You can't lose any money from wages that you have already earned (unless your company went bankrupt before you cashed your check). This element of risk plus the fact that investment creates jobs is the reason for the lower tax rate. Whether you agree or not those are the reasons the people writing the tax code have always used.

But investing sure sounds a lot riskier than working as a policeman, in the military, on an oil rig or on a fishing boat! Thank God we have incentivized the real risk takers for their altruistic desire to realize huge returns using their excess funds vs. people who take no risks whatsoever except to work their butts off for a living just to make ends meet!

And losses can be used to offset gains as well.

And since the free market system doesn't work, we need to "incentivize risk" lest all billionaires keep all their billions hidden under their mattresses!

Please save us, billionaires, by trying to get even richer! We beseech you to save us! Please don't suddenly stop trying to increase your wealth by hiding your billions under your mattresses! We'll lower your tax rates even further if only you promise us to keep trying to increase your wealth!

and a stable economy along with it. Now we have the problem of billionaires investing overseas because an industrial economy can make more profits per dollar invested than a service/information economy.

--can be rationally described as "risk." Real risk is making an investment that could lose you your house, your retirement, or your kids' education, not blowing a few extra bucks that you won't miss if you lose every penny and which has the possibility of large gains.

properly, so it needs to be funneled into the hands of those who have experience spending money earned by the labor of others.

:shrug: and who wants that job.

The liars on the far right argue that if you don;t give these gains a break, no one will invest. Its a HUGE lie.

Look ... let's say you could make 100k carrying heavy boxes or 100k in capitol gains and both are taxes the same ... which would you pick?

Hope it did not take you long to answer that question.

The GOP claims that it values HARD WORK. They LIE. They value WEALTH. If you have wealth, you can get income via capitol gains.

You would think that the party that claims to value hard work would create tax breaks for people who work hard ... but they do not ... they demand tax breaks for people who's income comes via exiting wealth.

The GOP 's focus is on the protection of wealth.

This is why Reagan, the God of GOP tax cuts RAISED taxes on the middle class and removed the deduction on student loan interest. A middle class family with little WEALTH lost the deduction ... a wealth family shifted its dept structure, move their college costs to home equity or other tax protected vehicles, and they maintained the deduction.

The GOP 's focus is on the protection of wealth.

Nail on the head, it's their prime directive. Everything else is about getting the votes to get the power to make this possible. And while the rich screw us all, they get us turned against each other.

it's an ages old class hatred

But that excuse is like saying inheritance tax needs to be totally rescinded because 3 people lost family farms.

It just seems so obviously skewed toward the rich that I am still wondering how anyone ever bought whatever rationale the conservative think tanks presented to pretend that this was a justifiable public policy decision.

And you know who's winning, right?...

(Hint: they are the only ones unilaterally fighting the class war... and they've been hugely successful for the last 30 years or so... but even more so recently.)

...using their power to feed on the class that lacks power. In doing so they also define themselves-- they're the ones who do not have to "work" for "wages," but rather "create wealth" by investment, i.e. by finding someone willing to pay them for being wealthy already. It boogles the mind when you think past the surface.

The same people who will prattle nonstop about "the free market and its wisdom," will turn around and argue compellingly that investors need an incentive to invest their money. That's wrong. If people have money, they can save it or spend it. If they spend it, the object of the spending - investment or new house or new car - really doesn't matter to the rest of us. If they don't spend it, if they save it, then it's money that becomes available to others in the form of loans. While all savings doesn't directly contribute to availability of loan funds, savings help make loan funds available.

Capital gains rate is a gimmick to create a lower tax rate. It's a shell and pea game. If the free market advocates really believed what they say, they wouldn't accept tax credits for purchase of items, accelerated depreciation, or any of the myriad of tax benefits that allegedly help the market. If the free market really works, why are incentives needed that are created from tax manipulations?

When an average middle class worker saves or invests money, it is usually what he/she has left over from a paycheck from which state and federal tax has already been withheld. That is one argument.

Give us the breakdown of the percentage of capital gains whose principle comes exclusively from previously taxed income vs. that which comes from previous capital gains, inheritance and life insurance policy payouts. LOL. For the richest people, almost all of their income is in capital gains, which are then reinvested to make more gains.

Most money invested comes from previous investment gains (taxed at the lower cap gains rate), inheritance (completely untaxed if less than $3 million), life insurance benefits (also untaxed) or the earnings from the sale of your first home (also untaxed). Why is it only earned income that you wish to invest that gets screwed by such a high initial tax rate? What makes all these other forms of income more desirable to incentivize than earned income?

If you want to give a break to just those capital gains based on principles that were already taxed at personal income tax rates, wouldn't it be far simpler to just equalize the rates to give everyone earning income a break?

After all, the money spent on goods and services is far more likely to be earned and taxed income than money spent on investments.

I think the government has specific duties that are assigned to it through legislation and the Constitution. 90% of the tax money being spent today is on nonsense. If all tax on income and capital gains was eliminated, the government would still find some way to make money, since it existed just fine until the early 20th c. without income tax.

But the tax code was used to institute laws that constituted social engineering: The Harrison Act started the War on Drugs, and started as requiring tax stamps on marijuana and putting doctors in jail. Then this expands into interstate commerce laws.

To me, with taxes, the glass is always half empty. Sorry. So when I see tax breaks being made for the rich, I consider that to be an attack on the less wealthy, and likewise, when I see tax breaks being instituted for the poor, I see an attack on the rich.

I would be more positive about things if the government kept their word on things, but all of the New Deal social programs were raided through out of control spending, unnecessary wars, and contracts. People appointed to important public positions are usually somebody's friend from high school that doesnt necessarily know what theyre doing. That being said, I would support completely abolishing the income tax over time. This would correspond with less spending by the federal government overall, but people would be able to have more choices in what they can accomplish in life.

The way it is now, some people who don't reach a certain level dont have to pay any taxes, and every tax year people try to find ways to get rebates. This is a good thing, because who the hell wants to pay for this mess? Sorry if this is not a Democrat position - but its just my POV on the subject. I think its strong armed robbery at this point, so long as we are seen as occupiers of other countries.

It's the "trickle up, piss down" theory of economics. x(

I think that is the general idea. All wrapped in some fine neolib bullshit of course.

because large gains usually occur for very long-term holdings. It flattens out gains that took years to develop.

So there goes that theory.

Pure speculative WS gambling for short term gain gets the same preferential treatment as long term investments and has for many years now.

Long term capital gains (assets held for >364 days) are taxed at a lower rate. Short term capital gains are taxed as regular income.

It has been this way for very long time (20+ years).

Where did you get that idea.

http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

2008-2010
regular income   short cap gain   long cap gain
10%              10%              0%
15%              15%              0%
25%              25%              15%
28%              28%              15%
33%              33%              15%
35%              35%              15%

That's why special rates and deductions have pretty much ALWAYS been around for LT gains.

those who make most of their money off investments are Big People

and make Big Political campaign contributions

get your priorities straight!