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Thursday, November 8, 2012

Capital Gains Vs. Net Wealth

Yesterday stocks plummeted by the biggest % all year.   No one knows exactly why, but most think it's from a combination of things including the fact that Wall Street doesn't like our status quo politics, and they particularly don't like the looming fiscal cliff: the series of tax hikes and government spending cuts scheduled to kick in in a couple months.

It may be that investors are worried about what Obama might make them pay as he continually hammered during the election that people like Mitt Romney and Warren Buffet actually pay less in taxes relative to their income compared to a typical worker because their incomes are largely earned by capital gains.   Are capital gains tax increases destined to be part of any cliff negotiations ?

Classical economists (conservatives) generally don't like taxes on capital gains because it essentially acts as a negative incentive to save money.  Keynesians don't fret as much about that since in their view investment often leads the savings and wealth creation and investment decisions by firms are partially benefited by furthering demand (consumption).  Say's Law is rather outdated!

I'm against capital gains hikes personally much as I also dislike income tax hikes (or income taxes in general).  For one thing they are taxes on flows not stocks.  That is, you are taxed based on an annual increase or decrease in wealth via capital gains (or income).   Well I could be a billionaire but have one bad year in terms of my income and thus owe nothing to the government despite my wealth.  In fact, that was the case for many firms during the recession.   They had net operating losses and owed $0 to Uncle Sam.   Or, you could be a recent college grad making mad bank and therefore paying big taxes even though you are still young, have no wealth to speak of, have $0 in your 401K and have $100K in student loans.  Income taxes are stupid.

Similarly regarding capital gains, if the stock market takes a dive and they make no capital gains, then they don't pay the taxes.  If we care about distribution of wealth (and most conservatives don't, but I do) then we should care about this inherent loophole.  Another reason I don't like capital gains tax is that it creates a perverse incentive: it makes people want to save less for their futures.  If we want a populace that cares about its future and how it's going to pay for their golden years, then we should care about not promoting the next car purchase over the next Roth IRA purchase.   Notice this is not the same argument classical economists make.  Classical economists are pathological, and don't give a shit about you personally.

Some European countries use a net wealth tax, which to me is much more preferable (though perhaps not at the exorbitant rates as some of those countries) - it compares your assets minus your liabilities (stock variables) and the more you have, the more you are taxed.  Simple, efficient, dynamic.   So if I'm an average Joe, I won't feel queasy about saving for my future.  I might feel a little queasy if I'm a billionaire in terms of net wealth: if I have a McMansion on the hill, 10 porches, and private jet... but frankly, if you are a billionaire and you are queasy about giving back to society that has helped you so much to get where you are, then you are an asshole and I don't particularly care.

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