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Oh dear - Input Junkie
February 2nd, 2012
01:21 pm

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Oh dear
Is it possible that low taxes on capital gains are one of those silly intrusive manipulative government programs that never work out as planned?

This entry was posted at http://nancylebov.dreamwidth.org/525497.html. Comments are welcome here or there. comment count unavailable comments so far on that entry.

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From:madfilkentist
Date:February 2nd, 2012 06:48 pm (UTC)
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That's a very odd definition of "intrusive."

Inflation is a very useful thing to governments. On the one hand, it lets their debts decrease in value. On the other, it lets them tax the "income" from selling an asset at the same real-money value (but higher paper value) than it was bought at.
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From:nancylebov
Date:February 2nd, 2012 07:07 pm (UTC)
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Maybe "intrusive" isn't the best word. The concept I had in mind was that people can't be trusted to use their judgement to do good things, so the government has to build incentives and punishments into the tax system.
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From:whswhs
Date:February 2nd, 2012 07:44 pm (UTC)
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How on earth could not taxing something count as intrusive? That seems like saying that if I scrupulously don't read chorale's mail or computer files I am invading her privacy. Or like saying that not buying health insurance is a form of commerce. Semantically it makes no sense to me, I'm afraid.
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From:caper_est
Date:February 2nd, 2012 10:09 pm (UTC)
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Selectively lower taxes on particular taxed things, on the other hand, are just another perspective on selectively higher taxes on the other taxed things. Choosing the tax rate on the basis of how much the authority likes the taxed activity, seems significantly more invasive - albeit not necessarily more destructive - than a flat rate across all taxable transactions. For that matter, it seems to me more invasive than any single function of income, not affected by the tax-authority's opinion of that income's source.

For instance, a special low tax-rate for income derived from writing articles judged 'libertarian' - because, you understand, they constitute a social good - would strike me as very intrusive indeed.
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From:st_rev
Date:February 2nd, 2012 11:30 pm (UTC)
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What about a special low tax-rate for income derived from writing articles judged 'libertarian' because they're art?
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From:caper_est
Date:February 3rd, 2012 05:42 am (UTC)
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I may not know much about art, but I know what I £ike...
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From:sethg_prime
Date:February 3rd, 2012 01:12 am (UTC)
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The technical term for this kind of shenanigan is tax expenditure.
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From:caper_est
Date:February 3rd, 2012 05:46 am (UTC)
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Thanks!
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From:whswhs
Date:February 3rd, 2012 04:09 pm (UTC)
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I think you've changed the focus of the discussion. I wasn't trying to discuss whether a tax exemption for a favored thing is fair, or is good policy; I was discussing the choice of vocabulary. "Intrusive" sounded strange to me and still does.

In fact, I think calling the tax exemption "intrusive" has things backward. Consider two scenarios:

* Government leaves income from specific source P untaxed. It taxes all other income at X%.
* Government leaves income from specific source P untaxed. It also leaves all other income untaxed.

I think that in the second case, it's clear that you could not call the government's leaving P untaxed "intrusive." And that suggests that in the first case, the "intrusion" is not in leaving P untaxed, but in taxing not-P. The intrusion is not against the recipient of P, but against everyone else. And if you take away the exemption for P, you have not ceased to have intrusion; you have intruded on P as well as on everything else.

There is, of course, a sense in which government intervention in the economy to dictate specific economic outcomes is intrusive. If the government leaves P tax-exempt, while taxing everyone else so heavily that they cannot survive, then government is totally controlling which economic activities take place. But if government collects a modest tax on all non-P activity—say, 2%—that difference is not going to determine who stays in business and who shuts down, except in rare and marginal cases; it does not give government the power to control which economic activities take place. The degree of pattern-imposing intrusion seems to be roughly proportional to the level of taxation, which goes back to the previous point.

Secondarily, I'd also suggest that the degree of pattern imposition depends on how specifically the taxes are applied or excused. A tax or tax exemption for one specific economic actor can shut it down or make it profitable (that's where the idea of "implicit subsidy" fits in), and such point-targeted taxes can work to determine which individual actor wins or loses. A tax or tax exemption for a broad general category of activity, such as wages and salaries, or sales, or profits on investments, does not impose specific winners or losers and thus has less of a pattern-imposing effect. The capital gains rates are an example of the latter; they don't even dictate whether you make your gains on your personal residence, or your art collection, or your portfolio of stocks and bonds.

As to the question of fairness or good policy in this case, there really are reasons to treat long-term capital gains differently.

Say that you invest in real property. You put, let us suppose, $200,000 into it. Ten years pass. Significant inflation has occurred, and that same property is now worth $300,000. You sell it, and pay taxes on the $100,000 increase. But if the rise in real property has kept pace with inflation, then you could take that $300,000 and use it to buy exactly the same package of goods and services that your $200,000 could have bought at the outset; you have not in fact made any gain—the taxes you pay in fact leave you worse off than you were at the outset. That's questionable both in terms of fairness and in terms of sound policy, assuming you think that capital formation is a good thing for the economy.

Certainly, lower tax rates on long term capital gains are a clumsy instrument for avoiding this problem. It would really be better to apply a present value multiplier to the original purchase price, based on the year of purchase, and then tax any excess gain at the normal rates. But tax breaks on long term capital gains are arguably an attempt to provide greater equity to taxpayers, not an unfair special privilege. (And after all, capital gains are not confined to a small coterie of rich people. Many people own houses; even more people have retirement funds in investment portfolios of various sorts. In the aggregate they may well benefit more from capital gains rates than the smaller population of incredibly rich people.)
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From:subnumine
Date:February 5th, 2012 03:36 am (UTC)
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Or to put it another way, it's a subsidy.
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From:nancylebov
Date:February 3rd, 2012 05:12 pm (UTC)
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"How on earth could not taxing something count as intrusive?"

Because you have to tell the government whether you're doing it. This especially applies if it's taxed at a low rate rather than not at all.

Edited at 2012-02-03 05:13 pm (UTC)
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From:whswhs
Date:February 3rd, 2012 05:30 pm (UTC)
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I wouldn't call that specially intrusive. After all, if there were no special capital gains tax, you would still be required to report your capital gains as income, and pay tax on them. The special rate doesn't increase the intrusion beyond what's inherent in having an income tax.If you want to call all taxation intrusive, I'm with you, but I don't think we can look to abolish it in the foreseeable future.
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From:dcseain
Date:February 4th, 2012 05:20 am (UTC)
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Won't be abolished in the forseeable future not least due to our first government (Articles of Confederation) having collapsed in no small part due to its inability to tax.
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From:agrumer
Date:February 2nd, 2012 09:10 pm (UTC)
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Pretty sure it's working out exactly as planned.
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From:ndrosen
Date:February 4th, 2012 07:16 am (UTC)
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The case, or part of the case, for low taxes on capital gains, is that it will encourage people to invest in the next Microsoft, or even the next corner grocery. The trouble is that it also rewards people for buying land on the edge of town, sitting on it while people waste time and gasoline commuting past it, and then selling it at a higher price.
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From:subnumine
Date:February 5th, 2012 03:34 am (UTC)
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And it doesn't work particularly well at either; if it did, our national savings rate would have increased as the preferential rates on capital gains diminished.

It does do two things. It gives a tax break to investors, whether they are free-riding on the increase of land values or investing in Microsoft. It also gives a tax break to those powerful enough that they can arrange to have their income so packaged (as options, for example) that it counts as capital gains when turned into cash.

Needless to say, it is populsr with both groups; equally needless to say, they're voting for Willard M. Romney, who likes them too.


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