Allegory wrote:
gbaji wrote:
The wealthier a person is, the higher the percentage of their net worth is tied up into value generating assets versus assets they merely own, but don't generate value over time (or may even depreciate, like cars, furniture, electronics, etc).
Not true. Anecdotally, it's highly likely I've seen the personal financial statements and tax returns of more high net worth individuals than you.
That may be true (probably is), but that does not make you correct. Why do you suppose people like Mitt Romney pay such a low (seeming) tax rate? Because the bulk of their earnings is in capital gains. That means they own assets that generate value (that's what a capital gain is, right?). What you're claiming flies in the face of every fact I've ever seen, so simply saying it's true because you've seen more financial statements than I have isn't sufficient. As a general rule, the higher ones income, the larger the portion of that income comes in the form of capital gains. And, as I just pointed out, that means "assets that generate value".
I'm just not seeing how you could think otherwise.
Quote:
Wealthier individuals have a larger portion of the nation's wealth than they do the nation's income,
see page 9. They are proportionally a bigger drain on the economy than the lower 90%.
I'm not sure where you get the whole "bigger drain on the economy" bit, but did you bother to read the small print that clearly states that income on the charts on page 9 does not include capital gains? Go read it again. Kinda leaving out a huge factor there. You're trying to support your claim that the rich have a lower percentage of value generating assets because they own a higher percentage of the wealth than of income, but using a measurement of income that excludes income gained from value generating assets.
That's kind of a problem for your argument.
Quote:
Timelord offered a pretty clever solution I had not yet heard of, which I'd like to discuss with him more later. But I'm not underestimating. The math works out for me personally. I've also shown earlier that the wealthy are better at having than they are at earning. A net worth tax would shift taxation upwards, not downwards. If you have eveidence to the contrary, please present it.
I'm not sure exactly how it will shift the taxes overall, but it will hurt the lower income ranges much more than the "very rich" (or even "moderately rich"). As I stated earlier, those harmed the most are the middle class, who have sufficient earnings to obtain positive assets, but can't afford to basically buy 3% of all their stuff every year. For a person with a large amount of investments, a 3% tax rate really just equates to a higher inflation rate. Will that represent a higher tax burden than the current capital gains tax rates? Hard to say. Depends, I suppose, on how they manage their investments. But that's part of the point, those with the most assets will tend to shift them into investments with high rates of return (and high risk) rather than "low and safe" investments. Right, now capital gains tax rates being lower than income tax rates creates at least some pressure to invest in longer term growth. But once you put a tax on all assets, the only way to "win" is to go for high rate of return. Which is probably not what you want for a stable economy.
It hurts the lower income ranges in two ways:
1. Currently, those at the lowest ranges pay no taxes at all (and in many cases receive tax credits in excess of taxes paid, meaning they effectively receive money from the tax system). So unless you're going to monkey with the code (making it more complex than a simple 3% tax as proposed), you're automatically hurting this group of people. Quite a bit, in fact. Even as incomes increase through the working and middle classes, the act of taxing assets instead of earnings results in spending habits that probably aren't beneficial to the purchaser in the long run. It certainly acts as a barrier towards ever becoming "wealthy" by any meaningful definition. So if your objective is to inhibit upward mobility in favor of a "live from paycheck to paycheck" lifestyle, taxing assets is a great way to do this.
2. Harm is not just reflected in direct taxation effect. It also has to do with how that tax affects decisions. As I mentioned above, a tax on wealth will result in a trend away from long term growth related gains and towards short term high risk gains. The problem with the latter is that it's the kinda of gains that may work fine for paying taxes on assets, but don't tend to do things like create jobs. Also, to do well at that sort of investment scheme tends to require that one already be wealthy, have access to the best money managers, entry into high end funds, etc. This creates yet another barrier to entry for everyone who isn't already wealthy. And it also will tend to shrink the middle class.
Job creation is a huge killer. I'm sure you're aware how narrow the margins can be on a lot of businesses. Think about a restaurant. Right now, they pay taxes only on their net profit. It's not uncommon for a restaurant to have say 1 million dollars in assets, 5 million in yearly operating costs, but only net maybe $80-$100k for the owner. Paying $30 in taxes on the assessed value of the restaurant regardless of how profitable it was that year is insane. One bad year, and you're toast. And, of course, saving up money on the good years to pay for bad years is punished as well (cause you lose 3% of that too). I know a guy who owns a jewelry shop. There's simply no way for any sort of wealth tax to work. The profit to total dollar asset ratio in that industry is often less than 1%.
It's a really really really bad idea once you actually start looking at all the ways it would cause harm. If you really wanted to think about better alternatives, a national sales tax would be better. Tax people on things they buy/consume, but not on things they invest in, or money they earn. There are some issues with that, but far far less than a tax on wealth.
Quote:
gbaji wrote:
It does encourage acquiring assets that generate value, but that's only worth it if the value increases by 3% or more a year. For everything else, it has the incentive effect of simply not acquiring anything of value at all. So instead of buying something that would provide you utility for years, you'll spend money on temporary things that just benefit you today, but don't result in something that can be taxed. So instead of buying new furniture for your home, go to Disneyland. Eat out rather than buy cooking equipment. Rent instead of own.
This is incorrect. It doesn't discourage owning assets. If I gave a rational person $100 with the condition that she had to hold it in a 0% interest checking account, she wouldn't say "No I refuse that $100, because I'd have to pay $3 in taxes at the end of the year." Having more assets ALWAYS behooves you under this taxation system, but not all assets are equal.
Because you framed it as giving someone that money. But if you currently have $100, and I give you a choice between gaining $100 worth of stuff today, or holding that money for a year and only having $97 to buy stuff with then, which do you chose? Remember that ultimately money has no value. It's only value is in what you can buy with it. So there's no reason to not buy something
right now versus saving that money to have for later. Additionally, it will affect what you buy. Assuming the cost of things reflects their actual value to us, then spending $100 going out to the movies is of equal value to spending $100 on a set of blurays. Yet, if I do the former, I pay zero taxes on that $100 I have. If I buy the bluray disks, I have to pay an additional $3 every year I own them (well, then they devalue, but that's a different story).
When talking just about $100, this might seem trivial. But let's imagine the difference is between buying a $300k home versus renting. Now, to be fair, the rental cost will include whatever taxes the owner is paying, so maybe it's not the best example, but consider the owner actually paying off the mortgage. As long as he doesn't pay the mortgage, he doesn't have to pay taxes (lets assume that the tax would be on net equity in the home). In fact, this would encourage him to regularly take out home equity loans in order to keep himself from actually holding large dollar assets. But is that what we really want? A whole bunch of people who never actually own anything (of course, someone does, so this affects the lending rates, but at that point you're getting into yet more side effects that you are probably not considering).
Recall, that people borrowing on their homes based on the assumption that the value would keep going up, and thus it was a perfectly safe form of debt to carry was one of the major factors in the housing bubble. Again, I think you really aren't considering all the myriad ways this is a really really bad idea. It encourages the wost sorts of investment and spending habits. All the things we don't want people to do (immediate consumption, lack of savings, investing in short term high risk, and carrying as much debt as possible) it encourages, while discouraging the sorts of things we want people to do (maintain healthy savings balances, invest for the long term, buy rather than rent).
It's a terrible idea.
Quote:
gbaji wrote:
A tax on assets tends to punish those who don't yet have much assets or who are trying to accumulate them, while not hurting much those who already have them.
Almost literally the opposite of what happens. The system rewards people who start with nothing, but have high potential. It punishes people who start with everything, but are incompetent at managing it.
You're assuming that the people who currently have large assets are going to be less competent managing them than those just obtaining them for the first time. I think that's a pretty weak assumption. It's interesting that when most people think of "the rich" (complete with bashing people who inherited rather than "earning" their wealth), instead of looking at real examples of this, they instead tend to look at celebrities. Most of whom have very high earnings, and incredibly bad spending habits (cause they just assume the money will keep rolling on in). Most people who inherit wealth are not celebrities. You wouldn't recognize them on the street. They dress normally, do normal things, and don't spend extravagantly. The reason they are wealthy (and stay wealthy) is because they don't waste their money. They manage it well and live off it.
I'm not sure how it reward people who start with nothing. When your assets decrease by 3% every year (in addition to devaluation and inflation effects), it kinda creates an uphill battle to obtain wealth. A big uphill battle. One of the biggest obstacles to wealth is what I call the "wealth line", it's the point at which you have sufficient wealth to live off the gains of that wealth (assuming some sort of investment portfolio here, but could include direct ownership of businesses as well), while not having to consume the wealth itself. It's an interesting way to look at things, because you can think about different relative earnings level goals, and set various rate of return factors and then determine how much wealth one needs to accumulate in order to achieve that goal.
Anything that decreases assets over time, makes it take longer to get there. Obviously, taxes on earnings does as well, but again, that tax is only paid one time. Any earnings above what is required for sufficiency can be invested, and any such amount will accumulate over time. Lumping in a 3% drag on that growth kills the equation. It's not a problem for those who already have large amounts of wealth (are far past the wealth line), but it makes it very very hard to get to that line in the first place. And if you fail to do so, you must start consuming that wealth when you retire, meaning you will have little or nothing to pass on to your children, forcing them to start from the bottom as well.
And no, "starting from the bottom" is not a virtue here. Not at all.
Quote:
gbaji wrote:
If we want to encourage people to take $100 worth of stuff and turn it into something worth $150, shouldn't we reward them with a lower (or even zero) tax rate?
That's not what an exception for capital gains achieves though.
Says who? I think it's pretty well established that changing rates of taxes on different things is regularly used as a means to encourage/discourage certain types of economic activity, so again, what you're saying kinda flies in the face of the reality around us. By that logic, there was no reason to create tax credits for people who bought electric cars, because it would not affect their purchasing decision at all. Um... Of course it did. By the same token, if you create a tax reward (or in this case, removing a tax penalty) for one form of investment over another, you will affect the ratio of money put into one form of investment versus the other.
I'm honestly curious why you think otherwise.
Quote:
Wrong. Everyone takes risks. Workers also risk being fired, or cheated, or exploited.
The worker does not risk losing something he already has though. Only something he might have in the future. If you get fired, you no longer receive pay, but you also no longer perform work for the employer. He still has his labor and time though, and can sell them to someone else for pay. An investor may have invested every spare dollar he's earned for a decade or more into something. That's "risk". He actually loses something if it goes belly up. I just don't think you can equate those two things at all.
Quote:
Also the system is silly in that it rewards people based on how they receive income rather than how that income is generated. A business owner who draws a regular salary/distribution fromm his business is taxed at the normal rate and then sells his business after, while if that same business owner were to avoid compensating himself and then later sell for the exact same total income is taxed at a lower rate.
Same business, same risk, same owner, same income, different tax. The only difference is how the income was received. People are rewarded not for the decisions or risks they take, but for their ability to control how that income is received.
Yes. It's silly. But it goes the other way. That's what I meant by double taxation. He pays taxes on net profit no matter what he does with the profit. I'm not sure how you think "not compensating himself" works in this context. Regardless of the type of business, the net profit is taxed. In a sole proprietorship, the remaining money after taxes goes into his pocket. He can choose to spend that any way he wants (including investing it back into the business, of course). But if it were a corporation, the same taxes would be paid on net profit, but if he then pays himself (either via increased stock value, or via dividends) he has to pay taxes on that *again*.
You're kinda glossing over the whole net profit tax on the business itself. And yes, I'll admit that I'm simplifying things as well, but the simplifications I'm doing work regardless of how the profits are "taken" by the owner. The point is that if he takes it directly in the form of sole ownership of the business, he pays taxes once on the net profits and is done. If he pays himself a paycheck, that paycheck is deducted from the net profit calculation, so it washes out. But for some bizarre reason, once we call a business a corporation, the tax rules change, and not really for the better for the investors. Don't get me wrong, there are other reasons for incorporating, but the capital gains tax is basically a punitive tax on investment that shouldn't really be there IMO.
Quote:
Wrong. Distributions are not taxed as capital gains. Distributions are affected by the tax structure of the company (s corp versus c corp, etc.). More owners does not incur a tax penalty.
Uh... Dividends
used to be taxed as capital gains depending on how they were handed out. As of 2013, the law changed and dividends are now taxed as regular income. So we've actually moved in the wrong direction. And, again, based on most people having a gross misconception of what dividends are, leading it to be an easy tax hike to sell to the voting public.
I sure as heck have to include dividends on my tax return, so I'm not sure what you're talking about here. I could show you the line in the 1040 form where it requires you to report earnings via dividends, and then the directions that clearly require you to add it to your regular income in the tax calculations. Or you can just go look up the darn thing yourself.
The point being that people think dividends are "free money" handed out to people for not working. But that's no different than an business owner who's business is successful enough that he can hire people to run it. He gets money without working to, right? The difference is that if it's a sole proprietorship, he just pays taxes on the net profit and pockets the remainder. But if it's a corporation, the corporation pays taxes on the net profits and then divides up those profits among the investors, who then each pay taxes on their share of the profits.
It's taxing the same earnings twice. And there's absolutely no justification for it other than politicians looking for ways to increase tax revenues and finding ones that are patently unfair, but that most people don't realize are so. As you correctly pointed out, the taxes are different based solely on how the business is structured. Probably not what you meant though.
