When You Gotta Go, You Gotta Go...Galt?

by Eric Martin

Following in the fine tradition of tax allergic Colorado Springs, the government of the State of Arizona has penned one peculiar "Dear John" letter to its constituents:

The people of Arizona kept their upper lips stiff when officials mortgaged off the state’s executive office tower and a “Daily Show” crew rolled into town to chronicle the transaction in mocking tones. They remained calm as lawmakers pondered privatizing death row.

But then the state took away their toilets, and residents began to revolt.

“Why don’t they charge a quarter or something?’” said Connie Lucas, who lives in Pine, Ariz., about a two-and-a-half-hour drive from here. “There was one rest stop between here and Phoenix, and we really needed it.”

Arizona has the largest budget gap in the country when measured as a percentage of its overall budget, and the state Department of Transportation was $100 million in the red last fall when it decided to close 13 of the state’s 18 highway rest stops.

Just don't raise taxes on the uberwealthy - who pay a much lower effective rate than working class, middle class, upper middle class and upper upper middle class Americans.  Or create new tax brackets at higher rates at the top.  Or anything really. 

Also, government is the problem, never the solution, Atlas Shrugged changed my life, socialism, tea parties, Europe is a decadent hellhole, etc., etc.

Comments

[Slartibartfast]

Frist!

[cleek]

the proles can suck it. it's their fault they're poor, after all. if they'd just get off their lazy asses and inherit a bunch of money, or find a way to suck on the military-industrial teat - like productive Americans do - they wouldn't have to worry about toilets. they could hire someone to poop for them.

[russell]

you don't miss the water 'til the well runs dry.

[chmood]

cleek, you left out 'extort money from people with no option'.

Heard recently that Rand modeled her "heroes" after a serial-killer / sociopath who fascinated her. LOVE it.

[elm]

chmood: I have a hard time believing that any serial killer/sociopath could be so dry, boring, and stiffly-characterized.

Say what you will about serial killers, but they usually don't deliver boring 50-page long speeches.

[ThatLeftTurnInABQ]

"you don't miss the water 'til the well runs dry."


The pump don't work 'cause the vandals took the handle.

[bobbyp]

Perhaps Say's Law is indeed valid. The supply of publicly funded toilets has created a demand for them.

We best disband our military establishment immediately.

[tomaig]

Wow...the top 5% of wage earners already pay almost 60% of all tax revenue but that's not enough?

It's not fair?

How much of their income would you take away before you thought it was fair?

How about all the folks who pay NOTHING in taxes and actually (with the E.I.C.)come out ahead? They get all their withholdings back as well as a nice little bonus, courtesy of the taxpayers. Is that fair?

BTW, once - just once - would I like to see one of you "tax the rich, feed the poor, till there are no rich no more" lefties come out and state that you have REFUSED the evil Bush tax cuts and that you intend to pay the IRS at the older, higher rate.

Put your money where your mouth is.

[Phil]

The strawmen . . . the smoke . . . the misinformation . . . can't . . . breathe . . .

[Eric Martin]

Wow...the top 5% of wage earners already pay almost 60% of all tax revenue but that's not enough?

Heh. You didn't list how much they earn. It's kind of important.

How much of their income would you take away before you thought it was fair?

They currently pay an effective rate of roughly 16%. I would be willing to double that (which is the effective rate most people pay). How's that?

How about all the folks who pay NOTHING in taxes and actually (with the E.I.C.)come out ahead?

Not too many people pay "nothing in taxes." You're confused.

BTW, once - just once - would I like to see one of you "tax the rich, feed the poor, till there are no rich no more" lefties come out and state that you have REFUSED the evil Bush tax cuts and that you intend to pay the IRS at the older, higher rate.

That is an incredibly ignorant statement. That's not how laws work. Please refer to the free rider problem, then come back once you've done your homework. Kthxbai.

[Sleeping Dog]

Dammit, cut the other guys services. That's where the waste is.

[McKinneyTexas]

Eric, your usually broad brush is even broader today. Do all 400 top incomes live in Arizona? Are the Federal income tax rates to blame for Arizona's budget woes? Seriously, how will raising Federal taxes put more money in Arizonan's pockets so that they can be taxed more locally to cover the local shortfall?

Progressives just love taxes, and the top 400 incomes are just the bloody shirt that is waved to promote taxes on everyone. The current progressive target is people earning over 250K a year. When that well runs dry, it will be incomes over 200K. Even the current bloody shirt is misleading to the point of being BS. The top incomes have lower effective rates because their income is capital gains, i.e. sale of capital assets in which these fricking pirate/thieves have invested. The whole idea behind cap gains, as Eric well knows, is to encourage investors to take long term risks with their capital. Capital, by the way, is money that people have left over after they pay their income tax. Capital gains are earned on invested, after tax dollars.

This is populist rant, and not even very good rant. Eric, you can do better.

[russell]

They get all their withholdings back as well as a nice little bonus, courtesy of the taxpayers. Is that fair?

Ask Milton Friedman.

[elm]

Wow, tomaig, that's the most original argument I've ever seen.

A few of your more basic mistakes:
1. You wrote "all tax revenue" when you meant "Federal Income Tax revenue".
2. You wrote almost 60% when you meant 55.2%
3. The top 5% take 25.2% of income.
4. Taking together Social Security and Federal Income taxes, the top 5% pay 38.5% of those taxes.
5. Their share of all taxes (adding sales taxes, property taxes, etc...) is even lower.
6. The top 400 earners have an even lower average tax rate.

When come back, bring evidence.

[Phil]

Are the Federal income tax rates to blame for Arizona's budget woes?

If you are not aware, after nine years, of the connection between the 2001 Bush tax cuts and the states' lack of ability to adequately fund programs, I don't think we can help you. Maybe Google can.

Progressives just love taxes

Strawman.

The current progressive target is people earning over 250K a year.

A group which comprises only 2% of American households but makes more than 24% of all household income.

The top incomes have lower effective rates because their income is capital gains

So some income is more equal than others. Got it.

[russell]

Capital, by the way, is money that people have left over after they pay their income tax.

Yes, and capital gains are assessed on brand new, fresh, shiny income derived from investing that capital.

Personally, I don't understand the motivation for taxing any and all capital gains at a lower rate.

If you have surplus money, you can stuff it in your mattress, making zero additional income, or you can invest it, making whatever additional income you can.

Are there folks who would invest their money if the income would be taxed at 15% who would refuse to invest it if it were taxed at 30%?

I'd like to see a preferential tax rate limited to investments that actually provide net new capital to specific businesses. IPO stock offerings, venture capital, direct investment in business.

Maybe bonds issued to fund specific capital projects.

In other words, investment that directly contributes to some productive effort.

I don't see why people who basically speculate in the equity market deserve a tax rate lower than people who get up every day and do something tangibly productive.

You know, actually freaking work.

Maybe you can explain the fairness of it to me, I don't see it.

[Eric Martin]

Are the Federal income tax rates to blame for Arizona's budget woes? Seriously, how will raising Federal taxes put more money in Arizonan's pockets so that they can be taxed more locally to cover the local shortfall?

Two responses: First, states in general have less revenue from the Fed Government due to shortfalls after Bush's series of tax cuts. So, in part, yes. Second, Arizona should probably raise taxes as well, as they are left to cut basic services as the alternative.

Progressives just love taxes

And conservatives just love all government services, but don't want to pay for them.

The current progressive target is people earning over 250K a year.

No, it says right in the post that the current progressive target is more tax brackets with higher rates at the top. And, as you know, I speak for all progressives.

The top incomes have lower effective rates because their income is capital gains

First, this is not entirely true. They also have lower effective rates due to the regressive structure of payroll/FICA/medicare taxes. Secondly, the resulting inequity seems like an excellent reason to raise income tax rates.

The whole idea behind cap gains, as Eric well knows, is to encourage investors to take long term risks with their capital.

See russell's response.

[hairshirthedonist]

Arizona, of all places. Most of Arizona, particularly the southern and more populated part, doesn't even have good trees to hide behind. I'm not particularly inclined to expose my particulars anywhere near a Saguaro.

[russell]

don't forget to watch for scorpions!!

[Eric Martin]

I'm not particularly inclined to expose my particulars anywhere near a Saguaro

that could be a prick-ly situation ;)

(yeah, I suck)

[Jacob Davies]

The idea that capital investments would decrease if capital gains taxes were increased doesn't seem to have much real support. The idea is to encourage investment over consumption. The problem is that the filthy rich aren't making a choice between investment and consumption. At a certain level, there just isn't anything left to consume. You can only have so many jets and houses and yachts and crystal statues of little boys that pee champagne; for one thing, it's expensive to maintain all that junk, so spending all your money on crap is a good way to stop being filthy rich.

So the rich don't really have a choice. If you have $100 million, you can't just spend it - by the time you've spent $50 million you'll be looking at huge maintenance costs on all your toys sufficient to eat up the other $50 million within a few years - so your choices are really between investing it and sitting on a big pile of money like Scrooge McDuck. The latter is fun but pays very poor returns. So you invest it. You invest it whether you get 50% of the gains back after taxes or 84% or 20%, because the alternative is no gains at all.

Not to mention that what we lack in this economy (national, global, whichever) is not investment funds. In fact there is so much damn money floating around that its main function is as a serial bubble-inflator and consequent cause of massive malinvestment. What we lack is consumption - demand for products produced by the enormous overcapacity in productive industries that exists around the world. If rich people actually did spend 80% of their income on crystal statues that pee champagne, we'd be a lot better off than we are in the situation where their massive floating piles of money just drift around distorting or destroying whatever part of the economy they come into contact with.

[Jacob Davies]

Er, also, what russell said, which was kind of the same thing.

Although he didn't have any statues that pee champagne, so.

[Carleton Wu]

Capital, by the way, is money that people have left over after they pay their income tax. Capital gains are earned on invested, after tax dollars.

Sales taxes are also on post-income-tax dollars. The government takes money out at various points in its flow through the economy. Not sure if your point is moral or pratical here, neither make particular sense to me.

The whole idea behind cap gains, as Eric well knows, is to encourage investors to take long term risks with their capital.

As opposed to what? Stuffing it in their matresses? There is some marginal pressure towards lower-risk investments, but that's pretty small potatoes I suspect at the rates we're talking about.
If anything, the world has been suffering from an excess of liquid capital for the last 15 years or so. Fast-moving capital seeking high returns has given us the Asian/Russian financial crises, the dot-com bubble, and the housing bubble.
Under normal conditions, low interest rates = easy access to capital. If we were suffering from high interest rates and businesses in normal times had difficulty finding financing, Id be sympathetic to the idea that we needed to encourage investment. When interest rates have been pretty low for decades and the markets have been suffering from boom-bust cycles driven by bubbles, then I don't see the rationale. Other than "capital should be privileged."

[Carleton Wu]

You know, actually freaking work.
Maybe you can explain the fairness of it to me, I don't see it.

It's the opposite of Marxism; Capital is the real source of wealth, labor is basically unimproved scum. Another feedstock for the factory.
You see this attitude in the words of those who talk about 'providing jobs' to their employees. An economist sees a bargain to provide a service for a payment, where each provides something essential to the finished product. The capitalist sees himself as something more like a medieval lord or a Medici-era patron. (To complete the view, the Marxist worker sees himself as being exploited by someone who is providing nothing to the equation).

[xanax]

Wow, Eric, you were up early reading the Arizona papers. As a Tucson resident, what struck me even more this morning was an editorial about our esteemed Junior Senator John Kyl's take on what a disincentive unemployment benefits are for those out of work (like me, still, arrrgghgh). The piece is here but it may be behind a subscription wall. In case you can't access it, here's a tidbit:

"It's only fair to point out that out-of-work Arizonans will receive at most $265 per week - which is about $50 per week less than even a senatorial page in Kyl's office is paid.

And finally, assuming Kyl accepts his full salary, he is paid $3,346 per week in our tax dollars, plus he receives health and retirement benefits. That's how much he is receiving for the privilege of standing on the Senate floor and offering the "expert" analysis that extending unemployment benefits to people who are out of work in the worst economy since the Great Depression would be a "disincentive" for them to find a job.

Now that's just too rich to ignore."

[efgoldman]

Can't tell anymore what's real and what's The Onion

Oh, BTW, one thing those weenie, decadent Europeens have is... soclialist public restrooms.

[Jacob Davies]

efgoldman: one thing those weenie, decadent Europeens have is... socialist public restrooms

Yeah, well, America has STARBUCKS, we don't need no public restrooms.

Sure, you have to buy a $3.50 latte to take a whiz, but that's capitalism in action. Actually, one of my crackpot theories is that provision of restrooms is Starbucks' secret sauce. Forget the coffee, it's the relatively clean toilet that is the big draw. Due to the distinct lack of public restrooms in the US, and the combination of suggestibility and the social norm that you don't use a restroom without buying something, Starbucks profits from providing something that in most countries is a public service.

Speaking as a caffeine addict, I'm basically okay with this except in those benighted places where there are no goddamn Starbucks for thousands of miles and you have to pee in some run-down gas station's stinking bathroom that hasn't been cleaned since Eisenhower put in the freeway. AND they don't have any goddamn coffee worth the name. Which describes much of the mountain west and the high plains, unfortunately.

But yeah, coming from Europe, I had to adjust to a completely different availability of restrooms. In Europe you can count on a public restroom (maybe not a very nice one) being available in any city center, but that's not true at all in the US.

[Marty]

"Not to mention that what we lack in this economy (national, global, whichever) is not investment funds. In fact there is so much damn money floating around that its main function is as a serial bubble-inflator and consequent cause of massive malinvestment. "

This is very insightful, however what we do need is a tax policy that creates the investment of this money in what we see is good social policy. The problem is that we disagree on what that is (not me and you, the more generic we). I would like to see huge tax breaks for capital investment in almost any kind of manufacturing, or any other trade related business development.

We have, for at least thirty years, made huge tax concessions at local and state level to create technology centers in places like Austin and Raleigh. These centers have tended to provide jobs for college educated and up white collar workers, where the bulk of any associated manufacturing keeps being shipped overseas.

It is clear that the innovation required to create jobs has been fostered by our tax policy and investment focus, unfortunately those jobs have been shipped overseas as they have been created.

So, what does the government do? In complete backwards prioritizarion they start clamping down on people coming here from other countries looking for those white collar jobs, all the time letting the blue collar jobs go away.

John Kyl is a ninny. Unemployment benefits are not a disincentive to get a job, they are a disincentive to take the job that only pays you what unemployment does, or, more positively stated, it gives you the time to look for a decent job.

[elm]

Marty: I think I agree with you on those points. The only thing I'd add is that there's no reason to overpay for the social benefit created (a principle which applies to both direct expenditures and expenditures via preferential tax treatment).

If Warren Buffet pays a lower average tax rate than I do, then we're probably overpaying for that benefit. It's unlikely that top income-takers would invest significantly less if capital gains tax had additional, higher-rate brackets.

[McKinneyTexas]

The idea that capital investments would decrease if capital gains taxes were increased doesn't seem to have much real support. The idea is to encourage investment over consumption. The problem is that the filthy rich aren't making a choice between investment and consumption.

This pretty much captures the flavor of the other responses I got and is a fair reflection of progressive economic thinking.

The subtext of Jacob's statement is that (1) investors do not gauge risk against anticipated return, (2) investment in the private sector doesn't accomplish anything (but government investment is a wonderful thing) and (3) people who invest are filthy rich.

Investors are simply another source--actually the principle source--of private equity. At the extreme, they bet big on longer shots with a higher potential rate of return. More modest investors buy stock or bonds. The tax code encourages any long term investment by taxing returns off of that investment. Losses, except to a very limited extent, cannot be offset against ordinary income, only against other capital gains.

If people with substantial savings simply held their money or spent it on themselves, progressives would criticize their selfishness and demand tax code revisions to promote investment and job creation. When people invest successfully, progressives want to tax that success even more than it is already taxed.

When people successfully invest, and thereby 'save or create' X number of jobs, progressives disregard the benefit conferred by investors and instead resent the monetary success. No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business (not so much, though, for artists, actors, certain trust fund babies, athletes and a particular SEC basketball coach).

Another example of progressive antipathy for capitalism passing as policy proposal is Russell's comment:I'd like to see a preferential tax rate limited to investments that actually provide net new capital to specific businesses. IPO stock offerings, venture capital, direct investment in business.

I don't have time to address each subcategory, so let's take the rather amorphous direct investment in business. Assuming this means putting cash into a new or existing operation, this only happens by either lending money to the business (banks, private equity) or buying an interest. Now, for either party, the lender or the purchaser, to have any motivation to invest, there has to be a reward that exceeds the risk. Do you give banks a break for lending their money? That would be new for progressives: tax breaks for lending institutions. If the investor buys an interest, does he/she get to sell that interest to someone else with favorable tax treatment? What about the next purchaser? Buying an ongoing business, if not as risky as starting one up, still is plenty risky. A principle reason why otherwise sane people run that risk is the hope of selling out someday and getting to keep most of what they make off of the sale. Progressives are fine with every part of this except for the keeping most of what they make part. Finally, unless an investor has a ready market for his/her investment, i.e. someone willing to buy and assume the risk, there will be no investment in the first place. And, in order for their to be a market for the first investor's return, there has to be an incentive for any downstream investors. As much as Russell and everyone else would like to prefer only certain kinds of investment, you won't even get those if the investors can't sell their property and keep what they've made, at least for the most part, which means downstream purchasers have to be incentivized to invest. Part of the incentive is taxing capital gains at reduced rates.

[cleek]

When people invest successfully, progressives want to tax that success even more than it is already taxed.

conservatives are puppy-abusers - every last one.

When people successfully invest, and thereby 'save or create' X number of jobs, progressives disregard the benefit conferred by investors and instead resent the monetary success

and, conservatives hate babies.

i wonder what kind of wild, dissonant, psychopathy must go on inside the head of successful progressive investors ?

[Uncle Kvetch]

But then the state took away their toilets, and residents began to revolt.

Life imitates art.

[Jacob Davies]

McKinneyTexas: When people invest successfully, progressives want to tax that success even more than it is already taxed.

But the "success" part of it hasn't been taxed. If you have $100 post-tax, invest it and get $15 back a year later, the $15 hasn't been taxed before, and you aren't taxed on the $100.

I respect investing successfully, and I don't want to disproportionately burden the rewards from it. But I also respect workers, and I don't see why low-to-moderate income workers should pay a higher effective tax rate than investors do on their capital gains. I'm also not really sold on the idea that it is solely investors who take the actions that create new jobs. Workers (which includes salaried managers) expand the businesses they work for, produce innovations, and manage the day-to-day work that's actually involved in improving productivity and creating new products and services. For all that they might be slowed by having to do that from retained income rather than taking money from investors, investors can't get anywhere at all without workers.

So why do workers see a bigger chunk of the share in this enterprise that they negotiate taken by taxes? Capital needs labor and labor needs capital, it's true, but why is labor supposed to subsidize capital? What is equitable about that? Is there evidence that in the end it produces more gains for everyone? I'd say that the evidence is exactly the opposite: the last few decades of giving tax breaks to capital at the expense of labor have led to stagnation in incomes for labor and large increases in income for capital. Why should workers continue to agree to this deal?

[Phil]

McKinneyTexas, with those madd mindreading skillz you clearly have, can you please tell me tonight's winning Ohio Mega Millions numbers? I'd like to become one of the idle rich so I can pay fewer taxes.

No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business

I'll tell noted progressive Warren Buffett that when I see him in May at the Berkshire Hathaway shareholder meeting.

(NB: Yes, I actually will be there. No, I am not a shareholder. BH is my company's corporate parent.)

[Phil]

I mean, dude, there are actually for-real, in-person, living, breathing people commenting here who consider themselves progressives, if not even something farther left than that. Why don't you ASK them what they think instead of pretending to know? Is that too hard to do?

You and Sebastian seem to be masters of this trick. If it helps you feel better about yourselves, OK, but you aren't doing anyone else any favors.

[russell]

(1) investors do not gauge risk against anticipated return, (2) investment in the private sector doesn't accomplish anything (but government investment is a wonderful thing) and (3) people who invest are filthy rich.

Let me clear a couple of things up.

I can't speak for Jacob, but the three things you say here bear no relationship to my point of view, or to most folks I know who share my political and economic views.

I'm an investor. I have significant (for me, anyway) funds in equities and other financial investments. I plan, or at least hope, to live on the gains from them at some point.

My wife is a corporation. She has been self-employed for most of her working life as a marketing consultant and as a designer. Her work has been reviewed favorably, above the fold, on the front page of the Wall St Journal.

Can you say that?

My wife is also very frugal, and has been an investor for quite a long time. A non-trivial amount of her income comes directly from gains on capital investments.

Between us, we know a generous number of people who are entrepreneurs. By "entreprenuer" I mean people who have started and built successful businesses. Many of them have made themselves and lots of other people very wealthy. I see what they do as being very valuable and worthy of reward, and I have no resentment whatsoever toward any of them.

I am *most definitely* a lefty, but it has nothing to do with class resentment, or resentment of people who are wealthy.

People who contribute capital to the overall economy provide a valuable service. They deserve a reward for putting their money at risk, and for making it available to use in building productive businesses or other productive uses.

People who work for a living *also make a valuable contribution to the economy*. They deserve a reward for investing their time, thought, skills, and effort into building productive, successful businesses, or other productive uses.

I'm making one point and only one point.

The tax regime we currently have treats income derived from capital investment more generously than it derives income from labor.

In some cases, in particular where that capital *actually is invested in some specific productive enterprise*, I can see an argument for favorable tax treatment.

In cases where people are, literally, simply speculating in equities, I don't. Because that money doesn't actually increase the productive capacity of businesses.

There are people who are, literally, billionaires, who pay a lower effective tax rate than people who do actual, useful, productive work for a living. They pay a lower effective tax rate than cops, firemen, teachers, small business owners, factory workers, and the guy who cleans my office building every night.

They achieve that by deriving their income from investment, rather than working.

I think that's f**ked up.

Not because they're rich, but because the value they create through what they do is not greater in kind than the value created by the folks who work for a living.

So I don't see why the rewards for their contribution to the economy as a whole should be treated favorably, as compared to that of folks whose contribution is *actually doing the things that businesses get paid for*.

And I gotta say, the argument that people *will not invest their money at all* if their gains will be taxed at a rate comparable to labor income is bizarre.

[Eric Martin]

McTex:

Have I mentioned before that I'm a successful lawyer, working at a Madison Avenue law firm - which, I was told at this year's review - will make me partner next year.

In addition, my wife works at a high paying, white collar job. Combined, our salary is well over the "progressive aim" threshold that you mentioned upthread.

So, am I a self-hating success?

Feh, yours was a rather pathetic attempt at reading minds, a knee-jerk ad hominem and a theory totally misses the point.

I am well aware that there is a point of diminishing returns on taxation. I, myself, invest and make money and am happy with that notion, and do not want to tax all of my money awway - income, or investment.

But when Buffett, Gates and Trump are complaining that the tax system benefits the rich too much, maybe we should listen. And not assume that they are just progressives who must have "antipathy...for people who make a lot of money in business."

Clearly, there are other explanations.

PS: Gains made from investment have not already been taxed. The money invested has, which is not taxed again as JD so ably pointed out.

[Phil]

Sorry, Eric, but McKinneyTexas has declared that you hate rich people and success and businesses, and he clearly knows what he's talking about.

[Marty]

"But the "success" part of it hasn't been taxed. If you have $100 post-tax, invest it and get $15 back a year later, the $15 hasn't been taxed before, and you aren't taxed on the $100."

Jd, This is really confusing. So if I have after tax dollars of $100, I should get taxed again if I invest it in something? The $15 hasn't been taxed before, but it will be, and the point is of course "How Much"?

The idea of tax breaks "for the rich" from an investment standpoint is to make the reward of investment in job growth greater than the risk and that ratio greater than buying Treasurys (or cd's or even blue chips that pay dividends that provide little value to economic growth). Focusing these breaks in areas where we as a country would like investment is important. Assuming the value proposition is the same to the investors no matter what the tax consequences is just wrong.

[hairshirthedonist]

Assuming the value proposition is the same to the investors no matter what the tax consequences is just wrong.

That explains all the calls for 100% taxation on all capital gains. What were these people thinking?

[Jacob Davies]

I don't want to explain the ins and outs of my situation, but I work at a (very, very) small software startup and if we succeed, low capital gains rates would mean I got to keep a much larger share of whatever it winds up being worth.

That has very little to do with why I'm doing it. The capital gains rate could be 90% and it wouldn't change my calculation - admittedly I am not a direct financial investor, but while I'm far from hurting, I am drawing substantially below-market salary in exchange for equity.

I think that's some useful context for comments here. As for "filthy rich", even though investors exist at all income levels, the upper few percentage points invest the most and reap the largest rewards for what is, after all, the same amount of work as everyone else. (There's only so many hours in the day.)

[Jacob Davies]

Marty: The $15 hasn't been taxed before, but it will be, and the point is of course "How Much"?

I'd say, "About the same as other income".

And one excellent reason for this is to discourage accounting maneuvers that reclassify what is effectively wage income as capital gains.

Too much screwing around with the tax code is exactly the kind of government interference I thought conservatives didn't like. And if we want to direct industrial policy - and I think we should - we can do that directly through grants and spending, not through tax breaks that may or may not ever accomplish the thing they're aimed at.

[Phil]

So if I have after tax dollars of $100, I should get taxed again if I invest it in something?

So if I have after tax dollars of $100, I should get taxed again if I buy something at the mall?

[Phil]

So if I have after tax dollars of $100, I should get taxed again when I pay my cable bill?

So if I have after tax dollars of $100, I should get taxed again when I fill my car with gas?

[Marty]

"we can do that directly through grants and spending, not through tax breaks that may or may not ever accomplish the thing they're aimed at."

So here it is in a nutshell, what you leave out of this sentence is:

"We can do that by TAXING, grants and spending....."

Conservatives believe that there is a greater value in encouraging individual and private investment over government DIRECTED investment. I have never seen a bureaucracy as rife with abuse as government grant programs. Those grants and spending things have a greater chance of not accomplishing their purpose than targeted tax breaks.

Now, if you want to take all of the social engineering out of the tax code then that will certainly stifle investment ihn the short term, perhaps drive a lot overseas, and then start from even and make the decisions you are talking about. But discounting the effectiveness of providing the right incentives for targeted capital investment is ignoring both the dot com and mortgage bubbles. Both were the results of targeted investment incentives targeted poorly.

[Carleton Wu]

No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business

No objective reader at this site can avoid the antipathy that convservatives have for nonwhites.

You're right, lumping everyone on the other side together and ascribing objectionable views to them that are probably only shared by a minority of that group is way fun.
But let's get back to the debate.

[Carleton Wu]

The subtext of Jacob's statement is that (1) investors do not gauge risk against anticipated return, (2) investment in the private sector doesn't accomplish anything (but government investment is a wonderful thing) and (3) people who invest are filthy rich.

The *text* of Jacob's statement is really at issue, not some attempt to find strawmen that bear a passing resemblance to it.

Investors gauge risk against return. In the simplified case where all returns are subject to the same capital gains tax, that may have some marginal effect on investment choices. It might even push *small* amounts of investment over into consumption.

If people with substantial savings simply held their money or spent it on themselves, progressives would criticize their selfishness...

Actually, we would say "whats wrong with these crazy rich people, rather than getting 85% of an 8% return, they'd rather stick their money under a mattress."
Because that's what you're postulating- crazy rich people who don't want to make money. Or punatively high cap gains rates.

Progressives are fine with every part of this except for the keeping most of what they make part.

The only concrete suggestion Ive seen is that cap gains be taxed at the same rate as other income. Which is nb less than 50%. More than 50% is, in fact, most of something.
You appear to be arguing against 100% cap gains. I think you'll find that almost everyone here would agree with that position. But your burst of outrage came in reaction to a suggested cap gains in the 35% range. Perhaps you'd like to tailor your arguments more specifically?

As much as Russell and everyone else would like to prefer only certain kinds of investment

Where did everyone else come from? Man, you are so full of straw you need a septic tank. (Man, that joke just does not work in translation).

I would offer a seminar in distinguishing "russell" from "russell and everybody else", but I don't imagine Id have more than one student.

[Marty]

"So if I have after tax dollars of $100, I should get taxed again when I fill my car with gas?"

Great argument against a sales tax, not even remotely related to the discussion.

How about "So if I have after tax dollars of $100, I should get taxed again when I deposit it in the bank?" Thats closer at least.

[Carleton Wu]

My wife is a corporation.

I knew this Citizens United thing would get out of hand. And yet, where is the conservative bible-based outrage? Adam and Eve, not Adam and Exxon!

[McKinneyTexas]

But I also respect workers, and I don't see why low-to-moderate income workers should pay a higher effective tax rate than investors do on their capital gains,

First, low-to-moderate income workers (which I assume means family income of less than 60K) pay roughly the same tax rate as capital gains. Second, this same class of workers bears no risk of losing anything other than their jobs if the owner's business fails. The owner not only loses his/her job, but his/her investment and, in most cases, credit rating and other assets pledged to secured the business' operating line of credit. Third, most businesses value their employees through things like 401K's, insurance, bonuses and in the case of employees who make extraordinary contributions, either significant pay/bonuses or even an interest in the operation. Fourth, at any time, any worker who chooses is free to put his/her life savings on the line and start a business. He/she will find its much easier said than done.

The difference between earned income and income through capital investment is the risk attendant to the initial investment and the time the money must remain in the investment. No such risks/limitations are imposed on earned income.

In cases where people are, literally, simply speculating in equities, I don't. Because that money doesn't actually increase the productive capacity of businesses.

This is an entirely subjective and, IMHO, class-envy, statement, in addition to being wrong in its fundamental premise. How does one differ between 'speculating in equities' and investing in a publicly traded company? The subtext here seems to be that buying stock in a going concern only benefits the seller of that stock and doesn't provide any investment in the concern itself and therefore isn't the kind of productive investment Russell would have the government approve of. The flaws here are (1) you wouldn't get the initial investment, the initial public offering, etc. if there wasn't a downstream market (2) the publicly traded company is operated for the benefit of the shareholders (at least in theory) and (3) the downstream investor bears the risk of poor management, superior competition etc..

Eric, congratulations on making partner or, at least, being in line. And also, congratulations on your and your wife's success. As for the rest, first, your post mixes and matches and comes to the conclusion that higher federal tax rates for everyone making over 250K, justified by the fact that the wealthiest 400 pay mostly cap gains, would have prevented the rest stop in Arizona from closing. That is your post. It is not well thought out and saying so is not ad hominem.

Second, when three of the wealthiest men in the world opine that my taxes aren't high enough, I don't see the Oracle at Delphi having a particularly insightful day, I see three bastards who've already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together. Screw those guys. More to the point, suppose they said taxes were too high, would you give them the same consideration? Not likely. You hold them out because they validate your view and their extraordinary, over the top success gives the appearance of credence to your position. What I see is sanctimonious a-holes pulling up the ladder.

Third, did I say that Buffet et al were progressives with antipathy for people who succeed in business? I don't think so. I referred to a number of progressive posters here who seem to feel that way. Some take this observation as an insult which totally baffles me. Progressives typically are not market friendly and routinely rail against the privileged.

Finally, you and Jacob both misread my statement, "When people invest successfully, progressives want to tax that success even more than it is already taxed." The idea here is that progressives want to increase the tax on capital gains, i.e. taxing success more than it is already taxed.

[McKinneyTexas]

And one excellent reason for this is to discourage accounting maneuvers that reclassify what is effectively wage income as capital gains.

Another thing that is bothersome when progressives talk about other people's money and what they'd like to do with it is statements like this. What accounting maneuver converts income into a long term capital gain, i.e. the only capital gain that is taxed at reduced rates?

[russell]

So if I have after tax dollars of $100, I should get taxed again when I fill my car with gas?

Or, as perhaps a better analogy:

If I have after tax dollars of $100, I should get taxed again if go back to work on Monday and make some more money?

The owner not only loses his/her job, but his/her investment and, in most cases, credit rating and other assets pledged to secured the business' operating line of credit.

My brother-in-law owns a fairly successful printing business. If it goes under, all of the things you describe may well happen to him.

I own a piece of god only knows how many for-profit corporations. If any one of them goes belly up, I'll lose a few bucks, which I will then write off against whatever I make on the other ones.

"Own" is a very flexible word.

This is an entirely subjective and, IMHO, class-envy, statement

Everybody's entitled to their HO.

Look McKinney, there's a difference between the kind of ownership that my brother in law has in his printing business, and the ownership I have in Microsoft.

It's called skin in the game.

Skin in the game deserves a reward.

My brother in law employs 50 people and built his business himself with his own money and money he borrowed by putting his own name on the line.

I probably own some Microsoft stock. I don't know how much, I don't know what it's worth, my broker handles all of that. I have absolutely no input into any operational decision made at Microsoft. If Microsoft tanks tomorrow, I'll write it off.

I can see an argument for giving my brother in law's capital gains from his business preferential treatment tax wise.

I can't see a single damned reason why my investment in Microsoft should receive more generous tax treatment than the wages of the guy who cleans my office.

Got it?

Seriously, if I hear another word about class envy I'm gonna get pissed off.

By any reasonable definition of the word, I *am* upper class.

I'm gonna go home now and spend my bonus.

Where did everyone else come from?

I am large, I contain multitudes.

[russell]

What accounting maneuver converts income into a long term capital gain

At the moment, if more than a year passes from the time you bought it until the time you sold it, it's long term.

I think this stuff is less squishy than you seem to think it is.

[Jacob Davies]

What accounting maneuver converts income into a long term capital gain?

If you can forgive that the link comes from the HuffPo: Obama Seeks To Kill Hedge Fund Tax Break

That gives a little overview. Basically if you're a fund manager you get to take your slice of the customer's profit as capital gains instead of earned income, even though none of your own money was at risk. If you imagine an individual investor engaging the services of a private consultant to advise on investment, that investor would be paying the adviser earned income, not capital gains, because it's not the adviser's money that's at risk. So why does it work differently for fund managers?

Some take this observation as an insult which totally baffles me. Progressives typically are not market friendly

Assuming facts not in evidence. Which progressives here are not "market-friendly"? I love markets. I've only ever worked at private companies. I don't think you should be surprised that calling people who work in private enterprise Communists for wanting a bit of tax equity doesn't go down too well. I don't want a socialist economy. I want a mixed economy with a slightly larger government share to supply some important public goods, and much more tax equity. That's pretty far from modern-day Europe, let alone the USSR.

No such risks/limitations are imposed on earned income.

Which is why salary income is generally lower - pre-tax - than income that goes to the owners. The owners take on risk in exchange for rewards, workers take lower salaries in exchange for lower risk. The question is what happens after everyone gets paid. The government says workers get to keep a smaller slice than investors. What's up with that?

the rest of us who are trying to hold our little operations together

You don't hold your operations together with capital gains income. You hold them together with retained income, which is not subject to capital gains taxation. Am I wrong here? Capital gains comes into play after the holding-together part has already happened. I am no way diminishing the effort involved in holding said operation together. I'm just saying that I don't see what capital gains has to do with it.

low-to-moderate income workers (which I assume means family income of less than 60K) pay roughly the same tax rate as capital gains

Not counting the employer side of the payroll tax, that's about right, maybe 15%. If you throw that in as compensation that is effectively 100% taxed - and to be fair throw in other untaxed goodies that are part of total employee compensation, like health insurance and retirement plans - the rate is a bit higher.

So it would be fine if the rate for capital gains income of $60k/year was 15%.

Unfortunately, the rate for capital gains income of $600k/year is also 15%, and for $6m/year, and for $60m/year, and so on.

[Jacob Davies]

Marty: I have never seen a bureaucracy as rife with abuse as government grant programs. Those grants and spending things have a greater chance of not accomplishing their purpose than targeted tax breaks.

I'd like to see some quantitative analysis of that, but I don't have it to hand either.

I certainly agree that government grant programs are full of waste and abuse. The question is, compared to what? Private corporations are full of waste and abuse too. And tax breaks scattered in the vague hope that they might encourage a particular behavior seems like a triumph of optimism over experience. If you want something done, pay someone to do it. Scattering candy to the wind in the hope that some of the recipients might (or might not) do something useful with it is not my idea of efficient government.

[Carleton Wu]

The difference between earned income and income through capital investment is the risk attendant to the initial investment and the time the money must remain in the investment. No such risks/limitations are imposed on earned income.

First, Im not sure how this has any bearing on your point. Yes, earned income and investment income are not identical. The question is, what in this difference makes you think cap gains shouldn't be taxed, or should be taxed at a lower rate?

Second, even tyro investors know the risk-return relationship. You've avoided discussing return, but it's important- investors seek out higher returns at higher risk, all else being equal. Investors can choose safe, nonvolatile investments and receive relatively safe but small returns.

I see three bastards who've already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together. Screw those guys

Excuse me, *who* has class envy?

Some take this observation as an insult which totally baffles me. Progressives typically are not market friendly and routinely rail against the privileged.

Likewise, conservatives hold their racism as a badge of honor. At least, some of them do.

[Phil]

Marty:Great argument against a sales tax, not even remotely related to the discussion.

It's extremely relevant to the discussion, as it bears on why different types of income are taxed differently.

How about "So if I have after tax dollars of $100, I should get taxed again when I deposit it in the bank?" Thats closer at least.

Which, in fact, I will. There's a little form on my 1040 for interest income. Maybe there's one on yours, too.

McKinneyTexas:This is an entirely subjective and, IMHO, class-envy, statement, in addition to being wrong in its fundamental premise.

Are you actually reading what russell writes, or are you so eager to battle the progressive strawmen in your head that you don't realize that, near a I can tell, russell is probably richer than you are?

Second, this same class of workers bears no risk of losing anything other than their jobs if the owner's business fails.

Spoken as someone who doesn't know any poor people. I can assure you, if the business at which my mother works tanks tomorrow, she will lose a lot more than her job.

I see three bastards who've already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together. Screw those guys . . . What I see is sanctimonious a-holes pulling up the ladder.

And yet you accuse others of class envy! Hahahahahahaha! Oh, man, this is rich.

More to the point, suppose they said taxes were too high, would you give them the same consideration? Not likely. You hold them out because they validate your view and their extraordinary, over the top success gives the appearance of credence to your position.

Brett Bellmore can explain this one to you.

Third, did I say that Buffet et al were progressives with antipathy for people who succeed in business? I don't think so. I referred to a number of progressive posters here who seem to feel that way.

Actually, what you said was, "No objective reader at this site can avoid the antipathy progressives have for people who make a lot of money in business." "Progressives," full stop, not "a number of progressive posters here." And then you got nailed on your bullshit, and are now backpedaling.

Except you're so un-self-aware and eager to battle strawmen that you did it again by the end of the paragraph I just quoted!!!! To wit: Progressives typically are not market friendly and routinely rail against the privileged.

So, are we back to talking about progressives, full stop, or "a number of progressive posters here," or "russell and everyone else" or just russell, or what? Pick a target and stick with it. Name names. If "a number of progressive poster here" are "not market friendly," surely you can name them. russell clearly doesn't count, nor do I, so who are you talking about?

[Phil]

What's especially hilarious is that, in this thread, exactly one (1) person has railed against the privileged: McKinneyTexas.

[Brett Bellmore]

"“Why don’t they charge a quarter or something?’” said Connie Lucas, who lives in Pine, Ariz., about a two-and-a-half-hour drive from here. “There was one rest stop between here and Phoenix, and we really needed it.”"

Standard principle of government spending cuts in response to revenue shortfalls: Cut first where it hurts. If you try to manage the cuts to cause the lease pain, the damn public just decides that you can get by without the money...

Popping a quarter to use the toilet wouldn't hurt enough.

[Phil]

Sorry for three comments in a row, but it just strikes me as hilarious that McKinneyTexas, when presented with three EXTREMELY wealthy men who are using the fact that people pay attention to them to argue in favor of a tax structure and a direction for American society that makes things a tiny, little bit better for lower- and middle-class people, can only view it not as making things better for more Americans, but as trying to "pull the ladder up after them."

Like, heaven forbid these rich titans of industry do something for the proles. They're supposed to look after their own: The innovators, the entrepreneurs, the McKinneyTexases!!

And he then accuses other people of class envy.

Man, I needed some cheering up, and this really did the job.

[Eric Martin]

First, low-to-moderate income workers (which I assume means family income of less than 60K) pay roughly the same tax rate as capital gains.

Effective rate? Are you sure?

for the rest, first, your post mixes and matches and comes to the conclusion that higher federal tax rates for everyone making over 250K, justified by the fact that the wealthiest 400 pay mostly cap gains, would have prevented the rest stop in Arizona from closing. That is your post. It is not well thought out and saying so is not ad hominem.

Actually, no. It made no such conclusions, and I already addressed the Arizona issue in my first response. See upthread.

I also specifically suggested that there should be more brackets above the 250K threshold. Also, the post linked to effective tax rates of more than just the 400 - it listed people netting a million or more a year. That's what the post says. Misconstruing it is...well, not good form.

Second, when three of the wealthiest men in the world opine that my taxes aren't high enough, I don't see the Oracle at Delphi having a particularly insightful day, I see three bastards who've already got so much there is really no point in having more taking cheap fake-moral shots at the rest of us who are trying to hold our little operations together.

Statements against interest are given more credence than self-serving statements. That's basic. And, again, why not more tax brackets say, on those netting in the millions? If your operation is NETTING in the millions, you wouldn't be struggling...

[russell]

near a I can tell, russell is probably richer than you are?

I'm guessing this is unlikely. And living in the real estate market I live in (north of Boston), my effective standard of living is basically middle class.

I'm fine with that.

If I didn't have to work, I could play music all day, and that would be fun. Other than that, no complaints, and if you ever hear any from me, give me a dope slap.

Also, a comment about risk. McKinney (and others) talk as if capital investors assume all the risk, people who work for a living do not. Or, at worst, "all that they will lose are their jobs".

Which comment sort of speaks volumes, but I digress.

When someone decides to go to work somewhere, they are not just selling their services. If they were, they would likely get paid better. They are investing their time, the opportunity cost of not working elsewhere, the training and experience they bring to the table, and their good will and professional reputation, into the enterprise.

If employment involves a move, they are committing to an entire community, and involving their family in the deal as well.

In comparison, just bringing money to the table seems, to me, to be kind of small change. There is nothing in the world more fungible than money. Money, in fact, exists expressly for the purpose of being fungible.

That's what money is.

When I say "just bring money to the table", I'm not talking about a small business owner, I'm talking about people who buy stuff with their excess cash and hope its value happens to go up, so they can sell it later for more money.

If what we want to do is use public tax policy to favor activity that builds productive businesses, grows the economy, and increases the general wealth of the nation and its people, then it makes no sense to me that the working person I describe above has their income taxed at a higher rate than the guy who buys stock in publicly traded companies as a speculative investment.

Yes, it's useful to have a big pool of nice fungible money on tap, so that the guy who, like my brother in law, spends decades building a business from his own money and sweat can cash out if he wants to.

But in the overall scheme of things, from any point of view you want to take, including the risk aspect, I don't see that as the highest value contribution in the mix.

But it's rewarded as if it were.

The people who *actually do the thing that businesses get paid for* create a sh*tload of value.

Don't you think?

Otherwise *nobody gets paid, at all*.

Right?

So they should be treated as if that is so.

That's my point.

[Jacob Davies]

In a nutshell, it's like this:

Labor and Capital fight it out in a steel cage death match to determine how they will split the rewards from Enterprise. After they emerge from the ring, proudly clutching their share of the winnings, Government comes along and, turning to Labor, demands it pay a percentage of its income ranging from 0% at the very bottom to about 20% at the levels most people pay to a max of about 43%, and then back down to about 35%. Government then turns to Capital and demands only 15% across the board whether you made one dollar or one billion dollars.

Labor saying "WTF!" seems pretty well-justified. Does Capital not drive on roads? Does Capital not send its kids to school? Does Capital not benefit from fire protection? Does Capital create its own untouchable old-age and disability insurance? Does Capital have its own private army to defend the country? What was wrong with the share of income that Capital negotiated with Labor? What business is it of Government how anyone makes their money? Why should Government privilege those who make their money by virtue of having lots of money and putting some of it at risk over those who make their money by working their ass off?

If Capital thinks Government should be smaller, that's fine. Suggest programs that should be cut, and get politicians elected who will cut them. Let's get rid of roads and national defense and public schooling. But it's not fine to just say, I don't wanna pay for this stuff, and I'm not gonna. Well, hell, you can say that, and you can even do it for a while if you get politicians elected who agree with you, but that stance does not seem fair or equitable to me, and I do not see that everyone benefits from it, and I do not want it to continue. That's not punishing Capital. That's just leveling the playing field, as you guys like to say.

[Sebastian]

The government isn't losing out anywhere. Almost all 'capital' is taxed as 'labor' before it gets invested. It almost always gets taxed as 'sales tax' when people buy non-investments with it. The government is getting its cut plenty.

[Brett Bellmore]

"Labor saying "WTF!" seems pretty well-justified. Does Capital not drive on roads? Does Capital not send its kids to school? Does Capital not benefit from fire protection? Does Capital create its own untouchable old-age and disability insurance? Does Capital have its own private army to defend the country?"

Capital responds,

"When I drive to the grocery store, I don't ride a hundred cars. My children don't each occupy a hundred seats in school. I don't collect 100 SS checks, or die 100 times if Canada invades. In short, the services I get from the government don't cost a hundred times as much as the services each of you get. So why the hell should I pay 100 times as much taxes as any of you?"

[Bernard Yomtov]

Let me add something to the many excellent points made by Jacob, Russell, and others.

Investment is deferred consumption. The investor gives up consumption today in the hope of more consumption tomorrow. The increase is return on investment - the income the investor earns from the investment.

The same logic applies exactly to most labor income. It's not for nothing that we refer to "human capital." It's not some touchy-feely term. It means that people defer consumption, spend money, etc., to build skills that will earn them a return in the future.

This is not just true of brain surgeons, or even lawyers. It's true of everyone who takes time to acquire a marketable skill - electricians, nurses, teachers, what have you. All these people earn income by virture of an investment they made in their own skills. They gave up some consumption now for more later.

Certainly we want to encourage this, as much as we want to encourage what we ordinarily think of as investment. So why should we tax the return on these investments at a higher rate than the return on other investments?

[ugh]

Taxes! Hooray.

[Mike Schilling]

Frist!

You can diagnose this problem after watching the videotape?

[Mike Schilling]

The tax regime we currently have treats income derived from capital investment more generously than it derives income from labor.

Where "capital investment" includes buying an existing share of stock for B and selling it for B + P, even though not a cent of the B was ever used as capital.

[Marty]

Phil, I am pretty sure you don't fill in the principal you deposited on your 1040. At least keep the story straight.

[Marty]

"Where "capital investment" includes buying an existing share of stock for B and selling it for B + P, even though not a cent of the B was ever used as capital"

Technically the market trades the ownership of capital that is still inuse by the corporation. The rise in price of the current amount invested raises the value of that currency to acquire additional investment. I can actually discuss the positives of the market dynamics but suffice it to say that the statement here is simplistic and false.

[russell]

So why the hell should I pay 100 times as much taxes as any of you?

Hey, it's shouting at the moon, but what the hell.

You shouldn't pay 100 times more than any of us relative to the income you make.

And you f**king well don't. You don't, nobody you know does, and nobody you don't know does. Cos nobody does.

Never have, never will.

Here's my homework. Where's yours?

Here's the takeaway:

Bottom quintile: 4.1% of the income, 0.9 percent of the total federal tax burden.

Top quintile: 53.5% of the total income, 67.2% of total federal tax burden.

We have a mildly progressive federal tax regime.

So enough already with this line of argument. Capital E enough. OK?

At least bring some documentation. I'm tired of digging up that CBO PDF every time this comes up.

Everybody pays taxes.
Rich people pay them at a somewhat higher rate than poor people.

Yeah, that gets up your nose. Oh well. We all got something that bugs us.

[Mike Schilling]

Technically the market trades the ownership of capital that is still in use by the corporation. The rise in price of the current amount invested raises the value of that currency to acquire additional investment.

The same is true if you bet on football. The market raises the value of the bet when it moves from potentially correct to actually correct. The only difference is that one is illegal in most states and the other is not only legal but subsidized by the tax system.

[russell]

Sorry, I misread Brett's point.

Brett is saying that we should all be taxed based on the value of the government services we personally consume, rather than relative to our income.

That's fine.

When your house catches fire, you can pay the fire department to put the fire out on a fee-for-service basis. The rest of us whose houses are not burning down will feel badly for you, but we will not contribute a dime.

Why should we? Our houses are not on fire.

When somebody robs your house, you can pay the police the full and complete cost of investigating the robbery, finding the criminals, recovering the property, and prosecuting and imprisoning the criminals on a fee-for-service basis.

When you eat a steak, you can cut uncle a check for inspecting the particular cow whose chop you're eating. Or, you could save a few bucks and take your chances.

Etc etc etc.

It's not a workable idea, Brett, which is why nobody does it that way. You can propose it 1,000,000 more times, and make all the claims you like for its eminent fairness, and it will still be an unworkable idea, and nobody in their right mind will adopt it.

It's a cute theoretical point, and it's utterly useless as a practical recommendation.

I'm not trying to bust on you, I'm just pointing out that it *doesn't make any freaking sense in practical terms*.

[Marty]

Mike, Really, that's the best you can come up with?

[russell]

Technically the market trades the ownership of capital that is still inuse by the corporation. The rise in price of the current amount invested raises the value of that currency to acquire additional investment.

Here's a scenario:

I buy a share of Company A at IPO. This results in Company A having some new dollars to invest in people, materials, whatever. So, now they can grow and take advantage of some opportunity.

Splendid.

Company A does well, and some time later I find someone who is willing to pay me 10% more than I paid for my slice of ownership in Company A. Mostly because that guy thinks he'll be able to sell it someone else later for even more.

So, I sell. Profit! Again, splendid.

Is your argument that the difference between what I paid for that share, and what the next guy pays, results in any meaningful way in net new capital flowing to Company A?

If so, can you explain how?

[Marty]

"Is your argument that the difference between what I paid for that share, and what the next guy pays, results in any meaningful way in net new capital flowing to Company A?"

Not directly. However, it is the return on that investors(you) original investment. It is the reward for your risk. He is paying your reward because he thinks that invested capital, wh ichis still in the company being used, will actually provide a higher reward and he is willing to wait longer for the higher reward than you are, for whatever reason.

In the meantime, if the company wants to expand etc. Then they can offer more shares to the public market and that is priced by using the value of the current shares (discounted) so the price does impact the ability to acquire etc to build a company.

[Mike Schilling]

Mike, Really, that's the best you can come up with?

Really, Marty, you think something more elaborate is required?

[bobbyp]

Marty,

As they say in the literature, there are many reasons to sell. The buyer may have made an educated guess as to the company's outlook, future growth, dividend yield, etc. Or he may be guessing. The decision may turn out to be a success or a disaster.

Higher share prices give those capitalized shares still held by the company more value. However, this is not a licence to print additional shares...known in the olden days as watered stock.

[bobbyp]

As a wage slave,
I wish I could be incorporated.
I wish I could write off all my expenses against my income.
I wish I could pay taxes against whatever is left over at capital gains rates.
I wish I could go to school and write off the expense over 5 years as a "tax loss carry forward".
I wish I could write off depreciation of my body as an expense as I got older.
I wish I could incorporate in the Caymans.
I wish I could live forever.
I wish I could walk away from my debts without penalty due to "limited liability".

But I am a blood and sweat human being. When I labor, I donate my time, a unique and limited resource. When I get old, nobody is going to take a run at me as an "asset play". But those who simply "invest" money get a better deal than I do in this world simply because they have a claim on my contribution to the real economy, and they basically donate nothing....because the truth remains, you cant' take it with you.

[Carleton Wu]

Is your argument that the difference between what I paid for that share, and what the next guy pays, results in any meaningful way in net new capital flowing to Company A?
If so, can you explain how?

There are two answers:
1)the fact that this share is partial ownership of the company means that it's value at the IPO is dependent on the ability to transfer that share easily. That is, the initial transaction is dependent on the second one, so the ability to have the second transaction leads to the first one in which capital reached the corporation.
2)The higher the current share price, the more money the company can raise via additional stock offerings.

[Carleton Wu]

Standard principle of government spending cuts in response to revenue shortfalls: Cut first where it hurts. If you try to manage the cuts to cause the lease pain, the damn public just decides that you can get by without the money...

Ive heard that theory a lot from conservatives, but Ive not seen evidence to back it up. It assumes that elected officials will put their positions at risk in order to preserve funding to favored programs, but I suspect that those officials are much more focused on keeping themselves in place.

[Carleton Wu]

I don't ride a hundred cars. My children don't each occupy a hundred seats in school. I don't collect 100 SS checks, or die 100 times if Canada invades. In short, the services I get from the government don't cost a hundred times as much as the services each of you get. So why the hell should I pay 100 times as much taxes as any of you?

But 1)big businesses do get more utility than individuals do from other things eg transportation networks, security, etc. And 2)businesses benefit from those services provided to individuals as well, eg by having access to an educated, healthy labor force.

[Jacob Davies]

Brett, where did the 100x multiplier come from?

A highly-paid specialist doctor works for an investor. The doctor is paid $350k a year. The investor has a capital gain of $350k the same year. The investor pays 15% in taxes, the doctor pays about 35-40%.

There's no difference in income at all there. Why does the doctor pay 2-3x as much tax on the same income as the investor?

Now as for 100x the tax when there's 100x the income, well, welcome to life in a democracy. Feel free to try to get the Flat-Tax Party elected.

Fact is, money is just another social & technical construct. No moral obligation requires me to deliver the product of my work to other people just because they happen to have a large stack of funny-colored pieces of paper with numbers on them. I do it, we all do it, right now, because we think that it's a useful system for allocating resources and the inequities it generates are tolerable. Moving to a system where 5% of the population consumes 50% of the work product is likely to result in the cessation of popular respect for the holders of funny-colored pieces of paper. Money & property are a game, a system, whose continued existence as tangible realities relies on the consent of the members of the society around us.

Luckily, the US is a democratic society, and so the response will probably be heavy taxation. You might look to the French & Russian revolutions for what happens when the possessors of large amounts of money decide that they owe nothing to their fellow citizens and the citizens have no way of redressing matters peacefully. They tend to gloss over this in school civics lessons, but the actual purpose of democracy is to give an alternative to gushers of blood running in the street as a means of pursuing social justice. I think it's a pretty good idea, personally, since the blood-in-the-streets method never turns out very well.

[allmaya]

Here's a great Arizona shake down that I ran into this week. On the edge of a small town (Show Low, to be precise), as you are leaving, the speed limit signs increasing the limit to 55, then 65 are REMOVED!

So then you are seven miles out in the country, clear day, no road construction, nice wide and straight US highway, and virtually zero buildings in the vicinity when you see one of their ubiquitous speed cameras.

BAM! It nails you for going over 45 mph, even though there has been no posted sign in the last seven miles of open country that this is still the speed limit.

BTW, my GPS said the limit was 65 in that stretch, but how much does it cost them to remove two signs and nail everyone from out of town?

[Sebastian]

"A highly-paid specialist doctor works for an investor. The doctor is paid $350k a year. The investor has a capital gain of $350k the same year. The investor pays 15% in taxes, the doctor pays about 35-40%.

There's no difference in income at all there. Why does the doctor pay 2-3x as much tax on the same income as the investor?"

Usually it is thought that the investor invests in the company which employs people, which is a good thing.

Generally employees get paid wages as they go along and can't lose money on the proposition. Generally investors don't get paid as they go along, and they can lose it all (and often do).

So there are at least some obvious differences.

[Jacob Davies]

Of course there are differences. The question is why those differences are any concern of the government.

The government doesn't distinguish between income earned giving cataract surgery to blind orphans and income earned working in porno movies. It doesn't distinguish between software engineering and psychic reading. It doesn't distinguish between pro-footballers and janitors.

Why does it distinguish between investors and salaried workers? In all those other cases, it does not try to discern the social value of the work and tax accordingly. In fact I think conservatives would have a fit if the government started using the tax code to punish occupations it disliked.

I don't think the argument that "investors create jobs" holds water, especially given the history of the last 30 years, the quite apparent lack of jobs despite floods of cash in the investment system, and the at-least-equal role that workers have in creating jobs.

This is either a pragmatic matter - the government should discriminate because it is socially useful to do so - or it is a principled matter. If it is pragmatic, you are going to have a tough time explaining the last decade of incredible economic suckiness. If it is principled, you are going to have a tough time explaining why the principle that people should pay X rate of tax on their income applies to workers but there is some other principle that applies to investors that means they only pay X/2 rate of tax.

[Jesurgislac]

If it is principled, you are going to have a tough time explaining why the principle that people should pay X rate of tax on their income applies to workers but there is some other principle that applies to investors that means they only pay X/2 rate of tax.

I assume it's the familiar class war principle that rich people should pay proportionally less tax than poor people, because (a) that way the government gets less money, and (b) that way poor people are likely to stay poor, which is how the US triumphs as an aristocratic society with very little social mobility.

Obviously that's better than the kind of classless mobility you might find in the distressingly egalitarian socialist countries, where people born in poverty just don't seem to know their place.

[Phil]

Phil, I am pretty sure you don't fill in the principal you deposited on your 1040. At least keep the story straight.

Sure I do. It's on my W-2 form under the box "Wages, tips, other compensation." Where did you imagine it comes from?

[russell]

Not directly. However, it is the return on that investors(you) original investment. It is the reward for your risk.

Yes, that's how I think of it as well.

What I don't see is why, as a matter of public policy, the return folks get for risk is uniformly treated more favorably than the return folks get for labor.

In the meantime, if the company wants to expand etc. Then they can offer more shares to the public market and that is priced by using the value of the current shares (discounted) so the price does impact the ability to acquire etc to build a company.

See, this is where I think you have it backwards.

You're arguing that the fact that the first investor can sell his piece of ownership at a profit enables the company expand further, because if they wish to issue further stock they can get more money for it.

The reason the first guy can sell his piece at a profit is because the company has done well, and has some prospect of further success. That's due to a number of factors, not least of which is *the efforts of the people who work there*.

Investor #1 has arguably made a contribution by making useful capital available to the enterprise.

Investor #2 has contributed nothing to the success of the enterprise, although he hopes to benefit from it.

[Marty]

Russell, I can point to hundreds of companies with competent hard working people that NEED the ability to access the capital markets to be successful. Those very hard working competent people want the capital so their efforts and dedication can create even more value. You keep setting up some either/or on the value of the capital markets and people that simply doesn't exist. Investor. Number 2 is the only reason investor number 1 would ever invest his money. BTW, investor number 2 is now an owner with voting rights on the make up of the board etc. So depending on the size of his stake he could have a pretty significant contribution to the companyn or not.

[Jesurgislac]

You keep setting up some either/or on the value of the capital markets and people that simply doesn't exist.

Aside from their being taxed differently, you mean?

Isn't that what started the conversation - the presumption that because what Investor #1 and Investor #2 do by investing their money in a company is of more value than what the people who work for the company do, they deserve lower tax rates?

[russell]

I think capital markets are great. I participate in them.

I agree completely that the market in publicly traded equities makes it that much more possible for investor #1 to realize the gains from his investment.

All good. Splendid, even.

What I do not see is why folks whose contribution to the economy is making their cash available for other folks to use should, uniformly and in all cases, have their gains treated more favorably than the folks who *do the thing that the enterprise gets paid for*.

I'm still waiting to hear a good argument.

What I've heard is that capital investors make a valuable contribution. I agree.

I've heard they take risk. That's true, and the reward they receive is generally commensurate with the risk they take. They *get paid* for taking risk.

And, as I note upthread, folks who contribute their own labor assume all kinds of risk as well. Including, as McKinney so astutely notes, losing their jobs, because most folks work at the pleasure of their employer.

If you derive your income from gains on capital, your income is taxed at 15%. 5% if you're poor, but there aren't many folks who are that poor who have income from capital gains.

If you derive your income by doing something productive with your days, your income is taxed somewhere between 10% and 35%.

Why should someone who earns money by doing the actual valuable thing, the thing that someone will pay good money to have done, have their income taxed at a higher rate than the person whose sole contribution is capital?

[Marty]

Jes, They are not taxed differently except in the instance that investor #1 or #2 holds their investement for more than a year. Long term capital gains taxes are designed to create incentives for building businesses (that create jobs) rather than day trading or short term trend trading. It is an incentive that makes sense in the very concepts Russel is circling.

My point is that it is a false comparison and a false conflict. People who want to start equity funded businesses count on the smooth operation of those markets, they also count on, and pay as they go, the employees necessary. The difference is that long term gains get taxed at a lower level to maximize the stability and attractiveness of the market, short term gains and labor get taxed because they are an immediate gain.

[russell]

You keep setting up some either/or on the value of the capital markets and people that simply doesn't exist.

And actually, I don't do this. I think they both make valuable contributions.

Who does this? The US tax code does this. The tax code distinguishes between income derived from capital investment and income derived from labor, and treats the first type more favorably than the second.

I am arguing *against* making that distinction.

[russell]

The difference is that long term gains get taxed at a lower level to maximize the stability and attractiveness of the market, short term gains and labor get taxed because they are an immediate gain.

If I sign an employment contract with my employer, agreeing to work for them at an agreed wage for at least one year, can I get a break on my taxes?

I'd sign up for that. Make it three years, or five years for that matter.

There's value in having a stable work force. People learn the business, get to know the customers and their needs, become more effective at their jobs with time.

I think it should be encouraged.

Agree to work for your employer for N years at some mutually agreed upon wage, and your income is taxed at 15%.

Splendid. Let's do that.

[Marty]

No Russell, if you sign an agreement to provide your labor for three years without getting paid, get a lump sum at the end I belive you could structure that as an investment and pay long term gains on it, probably. But if you take your money out of the company every two weeks it is a short term investment.

[Jesurgislac]

They are not taxed differently except in the instance that investor #1 or #2 holds their investement for more than a year.

In which case, they're taxed at a lower rate.

But someone who holds down a job for more than a year isn't taxed at a lower rate.

You feel that's a fair distinction to make - that investors deserve to be treated more favorably than people who work for a living - okay, try to defend that.

But don't try to pretend the distinction isn't being made.

[CharlesWT]

One reason for taxing capital at a lower rate than labor is that it is a lot easier for capital to pack up and leave the country than it is for labor.

[bobbyp]

Marty,

The three year balloon payment is simply deferred income and would be taxed at ordinary rates.

The state enforced (yes, that pesky government) concept of limited liability is a huge benefit to the investing class. Lower tax rates on their unearned income allows the power of compound interest to increase their financial wealth geometrically. Again, an action of the state.

But conservatives will whine and chew the carpet about being "self made" and get red in the face asserting "anybody can do this".

This is patently untrue.

State power initiates your road to wealth, keeps the traffic flowing in an orderly fashion, and favors those who already possess wealth and the power that flows from it.

That the rich do not desire to pay the state the true value of what it provides them is simply astonishing.