You pay income tax every year because you consume about that amount of resources every year and the things you want to buy aren't tax deductible. If you didn't, and you have enough money to be worth doing it, there are already a zillion tax shelters that cause taxes to be deferred until you actually want to spend the money on something.
It would reduce inequality to make that available to ordinary people rather than only the super rich, as well as encourage people to have more savings so they have more stability and aren't as impacted by a large sudden expense.
> Taxes are designed to fund the government and also address inequality. You need to be taxed more frequently to address the inequality issue.
Except that you aren't, you just keep the holdings you have already instead, and then everything is worse for everybody. The government ends up with less in the long run, so does the taxpayer, so does the new business looking for investment capital to challenge the incumbents. About the only beneficiaries are the incumbents who retain capital that wouldn't continue to be allocated to them in a more efficient market.
In theory it shouldn't have mattered if you invested in Blockbuster or Netflix because if Blockbuster was doomed then their share price should reflect that already. But in the early 2000s Blockbuster still had a higher market cap, in part because someone who invested in Blockbuster in 1989 but now thinks Netflix has more promise would have to be extra sure before making the exchange since it would cause a lot of taxes to immediately come due. So then they don't, and it becomes harder for the challenger to raise capital and easier for the zombie incumbent to waste resources in its death throes, which is inefficient.
Having the zombie company isn’t inefficient. That company is still deploying its capital to its employees and vendors, paying rent, etc. They are still contributing to the economy.
Also remember companies aren’t making money from stock trades. They already got all the money at the IPO.
It isn't intentional and it doesn't do that. Speculation can already be done with no tax consequences or profitable tax consequences when the thing you're selling to buy something else has had zero or negative value appreciation, and can also be done by borrowing money to speculate with and using the shares you can't sell as collateral for the loan. But that too is less efficient because, although the speculation is happening, now there are a bunch of wasteful transaction costs.
Also, long-term investors shouldn't care about short-term value swings, and short-term investors get what they paid for.
> Having the zombie company isn’t inefficient. That company is still deploying its capital to its employees and vendors, paying rent, etc. They are still contributing to the economy.
When one company is paying people to build technology to reduce carbon emissions and the other is paying people to dig holes and fill them back in for no reason or rearrange the deck chairs on a sinking ship, diverting capital to the second company is most certainly inefficient.
> Also remember companies aren’t making money from stock trades. They already got all the money at the IPO.
The IPO for some companies hasn't happened yet. Moreover, existing companies can sell new shares, and the company's market value is used to assuage creditors and allow existing companies to borrow at lower rates because the creditors know the company could pay the debt by issuing new shares if necessary.
Yes, it is. If the price drops, it becomes that much more feasible for an outsider to rescue it with a takeover bid - either way, the company will surely be viable as a going concern. You don't seem to be making a consistent argument here.
Obvious counterexamples to your logic: ETFs using heartbeats and foreign buyers can buy and sell without tax consequences in the US.
Making it possible to trade stocks without tax consequences may make it easier to better deploy capital, but it would also have a destabilizing effect, because it could make the markets more exposed to emotional reactions and poor information.
In most states, when you sell your car and buy another in a single transaction, you do avoid sales tax on that amount. (This is common in a dealer "trade-in" scenario.)
Did the person you sold your old car to have to pay an equal amount of sales tax? Because in that case yes.
> Making it possible to trade stocks without tax consequences may make it easier to better deploy capital, but it would also have a destabilizing effect, because it could make the markets more exposed to emotional reactions and poor information.
This sounds like the argument a monopolist makes for why competition is bad.
If you like, but that is not how sales tax works. My point is that taxing economic activity that is not in cash form (such as trading shares) is not generally considered unreasonable. Arguably, by selling my car, I am better deploying economic resources, as the other guy evidently had more use for it than I do.
If we taxed only translation into cash, the largest fortunes would grow the most rapidly of all, as wealthy people have less use for cash, proportionally. That's arguably against the public interest.
Anyway - I am not taking a position - I am observing that it is not illogical to prefer the current system.
It frequently is. In many cases it goes the other way, e.g. if you buy a PC for $1000 and pay sales tax on it, and then you sell it some years later for $200, the buyer often doesn't owe sales tax because you already paid it when the PC was new. And when a business buys a product as inventory they don't pay sales tax on it, because the customer will.
It's generally not a good policy to charge the same tax twice on the same product. But that's not even what we're talking about here:
> My point is that taxing economic activity that is not in cash form (such as trading shares) is not generally considered unreasonable.
My point is that it isn't doing that.
You can't avoid income tax by having your employer buy you a car. The value of the car just becomes taxable income.
Deferring taxes when securities are exchanged isn't doing that, because your tax basis in the new securities would be the same as it was in the original ones. You still owe the tax whenever you want to sell the securities and spend the money.
Doing it this way would also allow you to get rid of a lot of the rules that really do reset the tax basis, like the one that happens to inherited property. The concern there is that property inherited through generations would have a tax basis of nearly zero, so the entire value would be taxable income and that amount of tax would make it uneconomical to ever sell the property, even if continuing to own it was highly inefficient. But if you could exchange it for another investment vehicle of equal value and just transfer the tax basis then that wouldn't be necessary and the government could continue to defer the tax obligation rather than waiving it entirely as they do now.
Perhaps the money should be held in escrow until a sale or death happens, much like tax withholding for wages.
The problem with this is that the "capital" in many of these cases is a family business. You have some auto shop and the company owns the shop with its land and equipment, but it's all needed to continue operating the business, so you can't sell it without shutting down. Meanwhile the business only makes enough to pay the salaries of the owner-employees, who would likewise shut down the business if they weren't getting paid. So the business is worth more than the taxes it owes, but the only way to pay them would be to liquidate the assets and cease operations. The government sensibly prefers to allow the business to continue operating and collect the taxes later.
But then that creates another perverse incentive. You've just graduated medical school when you inherit an auto shop. If you sell the shop and use the money to found a medical practice (or just invest it in a major ETF and go work for a hospital), you immediately lose $250K to taxes. If you continue operating the auto shop, you don't, which gives it an advantage it shouldn't have and you end up with a doctor running an auto shop. It creates too much of a preference for not selling the shop. So to solve that we reset the basis. But how is that better than leaving its basis where it is but allowing it to be sold and the low tax basis transferred to the medical practice or the stock purchase?
(edit: basis isn't set to zero, taxable gain is zeroed out by setting basis to FMV)
> how is that better than leaving its basis where it is but allowing it to be sold and the low tax basis transferred [to another investment]?
IMO, that is better from a record-keeping and audit perspective. It is often not possible to determine when or at what basis an asset was acquired, particularly when the original purchaser can no longer be interviewed. It is not a particularly exploitable loophole as you have to die to "take advantage" of it.
If you own Stock A and it has appreciated significantly over the years, but now you think Stock B is a better choice, the fact that trading one for the other is a tax realization event may cause you to not do it. This doesn't get the government any revenue this year, and it costs the government revenue in the future if you were right that Stock B is now the better choice, because you'll have less taxable appreciation when you finally do cash out during your retirement. It also makes the economy less efficient in general by locking up capital in whatever people invested in years ago.