Capital vs. labor: who risks more?
yosefk.com
yosefk.com
Huh? Whose justification?
It is naive to think that our tax code is based on how much people risk (ignoring how ridiculous quantifying that is). Is this what schools teach or something? Where does the author even get such a notion?
If I have a lot of capital, I may be able to convert to cash and just go retire to a beach somewhere. If I lose everything and can't convert (even to scrap metal), then I'm about as well off as low skill labor when low skill labor loses work / can't find more (surely I've made a wealthy friend or two while having lots of capital that can help out though).
High skill labor might have some savings and capital if they lose work / can't find more, and the benefits might include severance. That can buy you time to pivot and then replenish your savings.
Low skill labor just has very few options if they lose work / can't find more.
So IMO, capital has the best options depending how nicely you can exit the market.
What if we taxed what we wanted to discourage? We already have high taxes on alcohol, which is good because there are many side-effects that society has to support: Car accidents, busy hospitals on Saturday evening, violence at home, and just the loss of people who would be valuable to society. In that sense, high taxes on alcohol are a mere compensation for the cost of alcohol to society.
Let's have no tax on labour and high tax on pollution. You may say it would be unfair because the poor would pay higher total taxes. I don't think that's proven. If you could however demonstrate that poor people pollute more (eg. "Poor people commute a lot, using cheap cars, therefore consume more petrol"), we should re-adjust our minimum wage, our whole society, maybe our whole real estate assignment, because we'd be doing it real wrong.
Actually, that's the point: With tax on labour, we create a lot of incentives that are contrary to organizing a world which pollute less.
So the whole debate about "which one of tax on capital gains or tax on labour should be higher" is flawed. None of those should be high. Tax on pollution (and more generally things which create a cost for society) should be higher.
It's called "externalities".
If the main point is to ask if capital or labor risks more the answer is trivial: capital. There is a -100% downside for investment and minimum positive earnings for labor. On the other hand capital has an unlimited upside, while labor does not.
A more interesting question would be how to you optimize the opportunity between capital and labor?
As for optimizing opportunity between labor and capital, I tend to suspect that this metric would favor more equitable wealth distribution so as to maximize the feasibility of bootstrapping (low overhead, perverse incentives avoided, nothing remotely exploitative about it on either end of the deal) and to maximize the "surface contact" between capital and labor. But nobody is looking to maximize opportunity in general, only their individual opportunity, and the Nash equilibrium for that process lies in exactly the same place as the Nash equilibrium for wealth.
You also bring up personal utility which is important. How do you balance the risk of a destroyed livelihood against a much greater capital loss? We also have to be careful not to presume that Joe Schmo can't find another job (better or equivalent).
In your example, it sounds like we take the job and location as a constant. If they guy can't choose a profession that has good chances of surviving throughout the years, he'd be really bad as an investor.
However, there is a point to be made about how the loss of livelihood, or a reduced standard of living can be devastating. It's just not the same economically.
In Spain we have 21% VAT taxes,and progressive over 53% maximum income taxes. If you have a house they add property taxes, and this year capital gains have been considered as income taxes.
It is not enough, politicians want at least 23% VAT, and the left party wants to raise the income taxes as it is "fair". They want to remove inflation coefficients so they could confiscate 50% of the value of everything you have when you sell it.
In the new year, people that sell old houses will have to pay more than 30% in taxes(30% of the principal, not the benefit).
Meanwhile we discover that they took the public money of the public banks(cajas) to basically pay themselves luxury life, each one expending half a million dollars in credit card expenses OVER their multimillionaire salaries.
Parties like the socialist party(PSOE),PSOE accepted checks of 50 million euros dollars from the cajas that never paid back.
They took loans from the European Union to help nonworking population, over 1000 million euros and gave it to their friends and family.
They destroyed all the wealth they could touch and you tell me that higher taxes are necessary?
I can think of only a few out of ~195 countries in the last decade that have seen good economic growth with high taxation. Most of which have some other prop, such as oil in Norway.
The corrolation between high tax rates and economic growth is an incredibly partisan issue. There are lots of people saying that they are connected, but there are just as many saying that stagnation is much better corrolated to inequality (e.g.):
http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
I will say that if you look at the "quality of life for the average person" indicators (health and longevity, infant mortality, leisure time), the high-tax countries smoke the rest. So my argument is: even if your country's GDP is growing a little faster, why would you care if it doesn't make your life any better?
France has seen horrific economic 'growth' for the last decade, less than 1% avg nominal growth per year over that time, and negative in real terms. They're famous for their high regulation, high taxation approach. Doesn't appear to be working out, as they're sliding into another recession right now, with unemployment spiking 1%, to a new all-time record high, in just the last few months.
The only people that champion these types of systems, are either people ignorant of them in actual experience, or people that can benefit from the State graft. Much like fans of real Socialism or Communism.
We're told the modern system of high taxes works better, and yet Europe is in a depression economically, and its GDP is still at or below 2006/07 levels, and in inflation adjusted terms is much lower. Meanwhile the debt keeps piling ever higher, and the economies keep requiring ever more stimulus to just stay at 0% growth. It's the end of the run for the failed Keynesian experiment.
This of course implicitly assumes that the economy is an unplanned one. Yet the investor class is who fights tooth and nail with political donations and so forth to keep the economy unplanned. They fight tooth and nail to keep an unplanned economy, and then say they are deserving because they have to suffer the vicissitudes of an unplanned economy.
This entire discussion is about that class of people that fill out their tax form in the income tax box, not the capital gains one. You seem oblivious to that particular discrete distinction which is the whole point of this article.
All employees were paid on exit, including generous severance pay, etc. All of them found employment relatively quickly. A number of them were able to parlay the experience gained during the couple of years they worked for me to gain higher level jobs. One particular individual came in with very little experience in the field. I spent over a year tutoring him. He was able to get a VP position at a competing company within a week after we closed the shop.
My? I nearly lost everything. Probably took a million dollar hit (don't know exactly how much yet) and have components and supplies in storage that I paid half a million dollars for that you might be able to sell for less than five cents on the dollar.
Be careful making assumptions about who risks more based on silly examples like some guy flipping burgers at a fast food joint. Things often aren't that simple. I know one entrepreneur who died due to the stress of his business tanking during the economic collapse of 2008. His employees moved on just fine.
Yes, these are extremes. And, yes, these cases might not compare well when we are talking about billionaires. Don't know. From my perspective few people are willing to do the kinds of things I do: Put it all on the line. All. Take a huge risk. And if it pays off you reap the rewards and live to have someone call you a greedy bastard. If you fail miserably nobody gives a crap. They might even call you an idiot and malign you for firing a bunch of people without much notice.
Walk in someone else's shoes before being opinionated. Reading about something on the net is very different from living it. Don't think so? Go SCUBA diving with sharks. I've done it. Pissed myself. Multiple times. Easy to read and sound really smart about on the 'net. Not so when you are 100 feet under water with five of them surrounding you.
Labor & Capital tends to create physical goods and/or novelty. Thus labor, when applied toward sustainable pursuits, makes our lives, as a civilization, better.
Capital gains, providing "incentive" to invest, may or may not improve sustainability & global health. Global warming, resource depletion, poverty, hunger despite enough food being produced, & innefficient allocation of resources due to profit motive, corruption, rampant war, etc. indicate that the "incentive" is detrimental to sustainability & global health.
Is it necessary for Capital and Labor to be so opposed? It doesn't seem like the optimal arrangement. Wouldn't increased cooperation between these 2 sides reduce risk for both?
but lately there's been a chorus such as this one in attempt to change social opinion to tax capital gains more. to do so, you must start drawing lines, using this vs that.
Why should labor cooperate with these parasite heirs who suck off of their wealth-creating ability? Labor hasn't historically, and doubtless will in the future. Capitalism is the fourth major economic system the world has seen, and a rather unstable one. Marx said crises like 2008's $700 billion TARP bailout were harbingers of an eventual total economic collapse, and I for one believe that - one day the economy will go into the ditch and no bailout, New Deal or libertarian type solution will get it going again.
Labor should not get compensated for that which they are not owed and did not agree to.
It's that simple.
If they don't like the terms, they can go create their own wealth elsewhere, like so many millions of people before them have had to.
Your theory is that labor deserves to be paid something they didn't bargain for, and that does not in fact belong to them. You're arguing in favor of violent theft, because that's the only way such a system can ever be implemented, through extreme violence; there is no other way to give labor money that isn't owed to them, and does not belong to them, you have to steal it with guns.
Here's your scenario: so I have $1,000 to my name. You have $50,000. I don't like that you have what I consider to be capital, and I don't think you deserve it. I think that capital should be taken from you, because you're a rich person compared to me. I think you should have to give me most of your money.
It's a spiral to oblivion, because there's always someone richer and better off, and someone claiming that someone else doesn't deserve what they have. It's a system of envy and violence.
income appears to be taxed "more progressively"...One justification for this is that investors risk losing much or all of their capital. Workers, on the other hand, are guaranteed their wages
This is not the primary justification at all, and I'd be rather surprised to see many economists arguing it.
The actual reason capital should be taxed less than income (specifically, at 0%) is because there is no reason to tax savings. If you tax income only, you tax a person who earns $100 and spends it today the same as you tax a person who earns $100, saves it and spends it tomorrow. When you tax capital, you charge the second person a higher tax rate.
This is doubly true in the presence of inflation - if a person earns a 1% nominal return in a 1% inflationary economy, then they break even. If you impose a capital gains tax, suddenly their rate of return needs to exceed (inflation + cap gains) just to break even.
Furthermore, I don't see how we can justify having a very low interest rate set by the federal reserve in the interest of encouraging investment, but then decide to tax capital gains more which would discourage investment. However, trying to make any sense of our tax system is probably not a fruitful endeavor :)
We all have a general sense of what each category refers to, but there are a lot of edge cases where it's difficult to say whether it's one or the other.
If I'm a day-trader, buying and selling stocks, and making a living on this, is the profit income or capital gains? If we go by the logic that one shouldn't pay the same tax twice, then it's capital gains, because income tax has already been paid on the money used to invest.
I'm not saying this is the wrong conclusion -- that the income of day-traders selling and buying stocks should be taxed as capital gains -- but it seems to me that this constitutes favoring one profession over another.
Surely, if I earn my living buying apples cheaply and selling them for more money, my income would be taxed as income, and not capital gains. So why should income from selling and buying apples be taxed differently than income from selling and buying stocks?
Again, I don't claim to have the answer. It just seems like a hard problem to me.
This is not an edge case; it's a well-settled point of law.
Capital gains are related to the disposition of assets intended to be held for investment. Stocks are generally such assets and the disposition of stocks results in capital gain income (or capital losses). Apples are not intended for investment; they are intended for consumption. Ergo, the sales of apples results in normal income. (Note that for stockbrokers, stocks are also treated as inventory because by definition they are not in the business of holding stocks for investment.)
Buying and selling stocks as a day trader is not the type of capital trading that governments want to incentivize, so they treat income arising from this type of activity as "short term capital gains." In most countries, including the US, short term capital gains are taxed at the same rates as normal income, which is the scenario that would apply to your day traders. Consequently, the day traders and apple sellers are taxed in essentially the same manner.
It is only if capital assets are held for a sufficiently long period of time (in most countries 1 year, though in some countries as little as 6 months) that the true capital gains rates apply. This is where the day traders may come out ahead--if they hold on to some of the stocks traded for at least 1 year.
Wheat is also intended for consumption, but it -- as with many other goods, consumable or not -- is also a commodity that is traded.
I realize I may have pointed out some edge cases that weren't actually edge cases. I am not a tax attorney, so I don't know what the law says.
I am only trying to point out that determining what is income and what is a capital gain is a hard problem, even though laws exist that try to put various activities into one of the two categories. The US uses an arbitrary 1-year limit, while the tax code of my country of residence (Denmark) says the tax rate is determined, not by how long the assets are held, but by trying to determine whether the profit constitutes ones primary source of income. If the answer is "yes", it's taxed as income.
So different countries use different methods to solve this problem of discerning income and capital gains, but I still maintain that it's a hard problem, that has not been solved adequately anywhere. And that there are many edge cases, resulting from current law, that are counter-intuitive.
I'm not certain, but I think that the long-term rates could apply if you held your apples for more than a year.
If you make $500, then pay $100 in income tax, you're left with $400.
If you invest the $400 in a stock and sell later for $500, you're not taxed on the $400 you've already made (and were taxed on), you're taxed on the $100 capital gain, which you haven't paid taxes on.
Or am I misunderstanding things?
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Further ... Is your argument is that once a pool of money has been taxed, that pool of money should never be taxed again? If so, does that mean you don't believe anyone should pay sales tax on anything they've purchased (since they're purchasing it with post-income tax dollars)?
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Lastly, you mention that if "someone has a large pool of wealth, then they have already been taxed when they earned it". This is not necessarily so thanks to dynastic wealth, an issue others have brought up in other comments.
The issue is exacerbated when someone inherits wealth (and pays little to no taxes on it), then invests it and has a capital gain of say $40k -- enough to cover basic living expenses in many parts of the country for a year. That person's tax rate is lower than a person who worked for an employer and made $40k. The question is, why is the government incentivizing this through tax code?
In the case of VC/PE etc. it can be argued that much of the capital gains are actually income and should have been taxed as such to start with - lets face it most partners in those businesses are risking other people's money rather than their own anyway.
Problem I have with tax is we tax people on their income rather than their wealth so people with low incomes regardless of their wealth pay lower taxes.
There is a good case for taxing capital (savings). See Picketty.
Piketty's argument, near as I can tell, is merely that we might live in a world where the best way to create wealth is to allow super smart uber rich people to direct nearly all investment [1]. Further, if we allow wealthy people to do this, they won't actually consume the fruits of their labor - they'll allow the rest of us to. Why that's an argument for taxing capital I have no idea.
[1] His book doesn't justify this at all, it merely assumes it. http://www.chrisstucchio.com/blog/2014/piketty_and_inequalit... But he has a couple of academic papers with models that I haven't fully read yet.
If you tax consumption, you might also tax wealth, if a large portion of the income of the economy is concentrated in the hands of those who consume very little. Indeed, that is the entire point of having a wealth tax--to force consumption which can then be taxed.
You have misstated Piketty's argument, as has Chris Stucchio. Piketty's argument is that allowing wealth to concentrate in the hands of a few is the biggest threat to the stability of modern economic systems because it ultimately means that less money is available to everyone else, which restricts growth. He is very much in favor of wealth taxes to force the distribution of this wealth to a wider range of the economy precisely to keep the cash flowing. He's not arguing for capital gains taxes--indeed, he opposes them, and has argued that capital gains should be taxed no differently from ordinary income.
Piketty's argument is that allowing wealth to concentrate in the hands of a few is the biggest threat to the stability of modern economic systems because it ultimately means that less money is available to everyone else, which restricts growth.
This is incorrect. Piketty doesn't make any claims at all about less money (or less wealth) being available to anyone. He claims merely that the ratio of worker income to capital stock will be lower than it otherwise might be. Please, go read even just the introduction to the book.
Further, he hints that that the richest people will have the highest rates of growth of their investments (the book is pretty weak on justifying this, again, academic papers might be better). That means the best way to actually create wealth is to put money into their hands. Note that if the richest people do not have the highest rates of return, then there is no reason to expect wealth concentration. See my blog post which works out the math on this in detail.
Note that I'm actually citing the math in Piketty's book, not his mood affiliation.
Please clarify. Up to the comma I thought you were saying that he thinks the capital gains tax rate should be zero, but the rest of the sentence says something quite different.
Really? Have we really dropped to that point? The Picketty Card?
The inflation problem could be mitigated with a structure that takes this into account.
I can think of other reasons that low capital gains taxes are good, like encouraging investment, but the "taxing savings" argument doesn't seem like it works.
IMHO what we really need is a way to distinguish rentier income from investment income derived from investing in growth. The former should be taxed as income or maybe even higher, while the latter should be taxed at a lower rate or not at all.
Even this reason, however, is probably exaggerated. Suppose for example that the CEO owns 10% of a company's stock. While they have a greater incentive to work hard, there is also no reason to think the stock price will rise faster than any other stock (by the efficient market hypothesis). This apparent contradiction is resolved by that fact that the market already knows that the CEO is incentivized to work hard. So as long as the CEO isn't awarded shares before it is announced publicly, the capital income from these shares should be no different to any other share.
The same applies to startups, however in the case of the startup there is no market signal so it is easier to cheat accounting rules and claim that the value of the awarded shares are lower than they really are.
Only a few countries impose savings taxes (also known as "wealth taxes"): France, Spain, the Netherlands, Norway, and Switzerland. There might be two or three more that I'm missing. Wealth taxes are intended to prevent the concentration of wealth by essentially forcing a minimum level of capital investment by the extremely wealthy.
In your example, the person who earns and saves $100 is not taxed any differently than the person who earns $100. The saver has not invested any capital (yet), he is simply sitting on the money. Both were taxed at the appropriate tax rates (0% or their applicable marginal rate), so both have the same amount of money. If the saver then invests the money in a capital producing asset, when he later disposes of the asset, he may be taxed on the gain, if any, he recognizes on the income (i.e., the increase in the price of the capital asset over the price he paid for it). If the saver sold the capital asset for the same price, or for less, he is not taxed on the sale--in those situations, he is not treated any differently than the spender. It is only if the saver realizes a capital gain that he is subject to a capital gains tax, and when he is, he pays a far lower rate on that income than he would if he had earned the income (max 20% rate vs 25% rate or higher assuming saver is above the poverty line).
Why, then, is it inherently true that a government (or other entity) should provide citizens a mechanism to store the means to buy those things indefinitely for free?
Inflation is already the cost to save money.
In a low-inflation environment this wouldn't make much difference, but in a high-inflation environment (like the 1970s) it would make quite a large difference.
I fully expect someone to come along and tell me government shouldn't give tax preference to obsolete jobs, but if you don't like that, you probably like the idea of paying displaced workers basic income assistance for no labor output even less.
i wont go into capital gains being double taxed, thats covered bellow. what i will go into is how completely wrong the writer is on risk of labor vs capital.
its VERY easy to loose money in the market. unless you want to pay the same taxes on capital gains as your tax bracket (labor presumably), you have to dump money into a company and hope a year from then that after fees, taxes, and inflation that you broke even. even at the worst of our resession, the unemployment rate was around 8.1%, lets call it 10%. that means 90% of people were still working - in pretty much the 2nd worst time in US history for them. meanwhile investors lost about 50% of their capital.
This whole blog post seems to neglect the point that Labor generates Capital. Whether that money is invested or spent it has already been taxed once. Now if the capital generates more money as an investment it will get taxed again on the profits. Likewise if Labor continues to work the income will get taxed as well. The Capital investment has the risk of going to absolute zero. The potential Labor investment cannot go to zero unless the person dies.
[1] http://economix.blogs.nytimes.com/2013/11/26/effective-corpo...