The tax system in the US is commonly used to encourage behaviors the state finds desirable and discourage others. Capital gains are taxed lower because of the perception that that money will get reinvested and that investments are good for the economy.

The other way to interpret this is that lobbying by wealthy interests have cut their own tax rates by half as compared to the working class, perpetually creating a class of wealth-holders and a class of renters through systematic distortions in the tax system.

Is it really fair that a wealthy investor pays 15% tax, while a doctor pays 35%?

> Is it really fair that a wealthy investor pays 15% tax, while a doctor pays 35%?

no. But then the wealthy's capital gains could come from gains in stock or a company, and those gains have already had company tax paid on them, e.g., if a company makes a profit of $100, they'd have to pay $21 in tax, and the company's equity gain is then $79. If you then charge a 35% tax on top of the $79, then that means you've taxed the $100 profit at 56%, which is a lot higher than the normal amount. So by reducing capital gains tax to 15%, you'd end up charging only 36% in total.

It makes sense.

However, why this doesn't apply to a bank's interest payment is beyond me. So may be it is rigged...

The counterargument here is that the officers of the company can make most of their income not from being paid oodles of cash, but from being given oodles of stock that they later sell back to the company, which is now capital gains and not ordinary income.

From a matter of tax form simplicity, it is much easier--and probably better for society--just to count everything as ordinary income and tax it as such. Fewer potential for loopholes that drive your effective tax rate down to 0; easier to actually do your taxes yourself; etc.

> The counterargument here is that the officers of the company can make most of their income not from being paid oodles of cash, but from being given oodles of stock that they later sell back to the company, which is now capital gains and not ordinary income.

Unless the stock option gains value (which is capital gains), no, the option itself is treated the same as if they had been paid cash.

> In general, the tax treatment for stock received as compensation for your services -- that is, stock in lieu of pay -- is the same as for regular pay. You must pay income taxes on the fair market value of the stock you received. Say an employer gave you 100 shares of stock in lieu of pay, and on the day you received the shares, the stock was trading at a price of $40. You've received the equivalent of $4,000 in income, so you'll be responsible for paying taxes on $4,000 in income. How much that tax will be depends on your tax bracket.

https://finance.zacks.com/tax-stock-lieu-pay-11287.html

How do they avoid paying tax on receiving the stock? If you're given shares, that counts as income at fair market value.

Many corporations pay 0 tax as well. So in many instances, double taxation is not occurring.

This is just another example of the rich getting richer, leading to the massive income inequality that is destabilizing America.

If your life is also becoming easier and more comfortable as well, how does income inequality affect it?

>If your life is also becoming easier and more comfortable as well, how does income inequality affect it?

Is his though? only seems to be getting easier for the top.

Then you admit income inequality isn't what is important here. but absolute quality of life.

A priori, that's a huge if.

Income inequality causes auction-priced goods and sevcices (much to most spending, including housing) to be bid up in price, it also creates power imbalance that can lead to more wealth extraction from the poor.

Is that what's going on, wealth extraction from the poor? Because it seems to me that poor people today are taking more out of the system than putting into it.

Life isn't getting easier for the majority of Americans. Life expectancy is literally going down.

Then you admit income inequality isn't what is important here. but absolute quality of life.

48.65% is not 56% fyi

where did you get 48.65 from?

> if a company makes a profit of $100, they'd have to pay $21 in tax, and the company's equity gain is then $79. If you then charge a 35% tax on top of the $79, then that means you've taxed the $100 profit at 56%, which is a lot higher than the normal amount. So by reducing capital gains tax to 15%, you'd end up charging only 36% in total.

35% of $79 is $27.65. Total tax according to your example would be $21 + $27.65 = $48.65.

They were being a bit pedantic, but their math is correct.

good spot, i miscalculated.

Long term gains are 23.8% for high earners. To get an effective federal tax rate of 35% in the US today, a single doctor would need to be earning about $2 million per year.

There are several arguments for a lower long term gains rate:

- It accounts the effect of inflation. Doctors don't receive their paychecks years after they perform the work, and they expect their salaries to keep up with inflation.

- Holding assets for long periods of time imposes risk that other forms of income don't have. Doctors don't typically risk having their paycheck cut in half suddenly.

- Progressive tax rates can be particularly harsh on investors, because sales typically come in big lump sums. Doctors get nice smooth paychecks that don't suddenly move them up and down income percentiles per year.

Investors also have plenty of opportunities for tax loss harvesting and spreading out gains using financial engineering techniques.

Yeah and doctors get free vacations from drug reps and that all gets expensed. Everyone finds ways to minimize their tax exposure.

Also, doctors often invest their earnings in the stock market and real estate, so let's not pretend "investor" and "doctor" are mutually exclusive entities.

People already have incentive to invest, inflation. I don't really buy the argument that capital gains taxes encourage investment, because without them, you'd still be stupid not to put your money to work.

Incentive isn't a yes or no thing, it's a scale. The more you tax saving relative to spending, the more you encourage people to spend. Mathematically, if we view save vs spend as a choice between consuming now vs consuming later, with some fixed time discounting function, then for any given save vs spend decision, taxing one increases the relative payoff of the other.

Seems strange then, that all politicians talk about is putting people to work, yet working is the most highly taxed activity.

This is pretty common world wide you want to encourage investment in companies and not just Guilts (T-bills in US speak)

And also it incentivises things like employee shares which everyone agrees is a good thing, even the SWP Socialist Workers Party Grudgingly accepts this

I wish there was a way to truly be neutral in phrasing. I did not mean to imply this was bad or a lie, but I also didn’t want someone to pop up and say “capitalist lies!” :-)

Because there is a reporting burden to keep track of income, and the more nit picky you get about reporting all income the more deadweight loss you impose upon society as they waste time on accounting for trivial transactions.

one reason other replies haven't mentioned is that long-term gains don't play well with a progressive income tax system.

imagine you make $35k salary and you make an investment that increases in value by $50k over ten years. we'll ignore inflation and tax bracket hikes for simplicity. assuming you live in the US, your salary places you in the 12% bracket, and the 22% bracket starts around $40k income. if you realize that gain in the last year and it counts as income, almost all of that $50k gets taxed at 22%, despite the fact that "on average" you only made $40k each year. this effect gets worse the longer you hold onto the asset.

A few replies.

First, I don't believe this is actually an issue for people with 35k salaries as a whole. The vast majority of Americans do not have savings in excess of $1k let alone the ability to make an investment in the ballpark you're talking about.

Secondly, if this is true - why is the "long term" tax capped at 1 year? And not 10? Or adjusted for the length of an investment? To me the answer is because it's not designed to fix this problem.

it's a contrived example to make the math easy. you can get the same outcome with more realistic values by putting the income closer to $40k and decreasing the gain, or you could do the analysis at a higher tax bracket boundary.

my point is that it doesn't make sense to naively tax gains as if they were income acquired in a single year. I'm not arguing for/against the specific implementation of cap gains we currently have.

Why not simply apply the gain over the time period. If you get $50k gain after 10 years, that's counted as $5k gain per year and we already know what tax bracket you were in for those years so you submit a revision and pay the tax that would've been due in each of those years.

that would be a reasonable solution. I wouldn't oppose it if it came with a slight cut to income tax rates.

The issue is double taxation. Income at the corporate level is already taxed at corporate tax rates (albeit these were significantly higher before a Trump). When a profit is realized by selling shares that same income is effectively taxed a second time so the lower rate compensates a bit for that. Personal income is only taxed once.

I never understood that argument: If I buy some Google stock for $8000 and then the value of it goes up and I then sell the shares for $10000, then the $2000 I made have not yet been taxed. Making the argument "but them there people at the Google company already paid this and that tax!" seems to just be some weird category error, in my estimation of the circumstances.

This line of argumentation, whenever it comes up, has the feeling of a "pre canned response" that people somewhere are taught to offer up any time someone argues for higher capital gains taxes (though I'll admit I haven't thought about the issue in great enough detail to be completely firm on my assessment, or maybe I'm misunderstanding some important detail)

It’s the difference between the value of the stock and dividend payout before and after corporate taxes are paid.

If you bought stock in January 1, 2019 and then sold the stock before the end of 2019 then you were double taxed. Your effective rate is still low in the history of the US but you were technically double taxed.

Where it gets tricky and fundamentally alters the equation is when you defer and don’t sell in the same year you bought. You’re still technically double taxed but the effective rate can become comically low.

I’m also just outright ignoring inflation but inflation is a huge aspect in this calculation.

Not a single comment in this thread, nor the OP document, contained the word "dividend", so I am completely lost as to why you are now referencing something that applies only to dividends, when the discussion clearly is about "investment income" in the general sense, not to mention that dividends don't exist with cryptocurrencies.

This isn't a pre-canned response. I'm not arguing for or against the current tax regime. Here is the theory: Assume a normal corporate tax rate of 20%. If a company makes $100 of profit it will have $80 of after tax profit. Let's just be very simple an say that $80 of retained profit makes the value of the company increase by $80 and no dividends are paid. When you go to to sell that stock assuming you hold it long-term then you pay another 20% capital gains tax on the $80 profit so now you are at $64 of after tax profit as an investor from the original $100.

Compare that to $100 of income taxed at 35%. You end up pretty much the same place of $65 retained earnings. Prior to the Trump corporate tax cuts (which no I don't agree with before I am downvoted again as a right-wing corporate shill) the difference of double taxation was more stark. At a 35% corporate tax rate and then a 20% short term gains tax the double taxation led to an effective tax rate around 50% on investment profits.

One can argue the tax code should disfavor capital income vs. labor income etc but that is a different matter.

My comment was a bit flippant, I admit.

But still, from an economic standpoint I think it's flawed to think of the $80 after tax profits as just "money owned by the company sitting in a bank account". The idea of "value investing" (in the original sense of the term as it was used in the 1920s-1940s, where people would value companies by just taking "cost of building"+"cost of desks"+"cost of chairs"+"money in bank") is no longer how the stock market works: Virtually all companies are now valued at more than the mere physical assets that they own, so clearly that $80 in the bank account of the company should be worth more than $80 in terms of stock market valuation. After all, the whole point of a corporation is to act as a machine that turns small amounts of money (i.e. capital) into larger sums of money- This is in large part what determines the price of a stock in the investment markets, i.e. how well this machine works... the $80 is merely (a small bit of) evidence that this machine is functioning properly.

In conclusion, stock valuation and raw revenue/assets/income are categorically different things and arguing that taxation of one category is equivalent to taxation of the other is a categorical mistake, in my opinion.

This is only true if you sell shares and realize a profit on an annual basis. As soon as you start deferring, as virtually every shareholder does, the math fundamentally changes.

In reality the “double tax” is still significantly lower than the top tax rates in the US. And the top tax rates in the US are less than half of what they used to be during the years Donald Trump thought America was great.