It's Time to Tax Wealth Like Work

April 11, 2011
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Cross-link to SharedEconomicGrowth.org in support

I just wanted to let you know that I cross-linked your campaign to http://www.sharedeconomicgrowth.org/enforcingprogressivity/capitalgainsrates.html , which contains further background in support of the conclusion that capital gains rates are not an efficient or wise  tax subsidy. If nothing else, they subsidize investment in foreign stock or real estate to the same extent as desirable U.S. investments. We can do better with our dollars.

Thank you!

Thanks for letting us know - we appreciate your support and activism!

A question

How can we respond to the retort that money that was earned and invested should not be taxed a second time when it produces interest?

Response to "A Question..."

Good questions...

I think the argument is that people paid a tax on their income when they first earned it, and shouldn't have to pay again from the investments they bought with their earnings. However, what capital gains is is the DIFFERENCE between the purchase price and the price at which the investment was sold. So if someone bought $1 million worth of Apple stock a few years ago, and then resold it for $5 million, the capital gains portion of that is the $4 million difference. While they may have paid income taxes on the million they earned to buy the initial investment (assuming they didn't just inherit the investments), they have not paid any taxes on the $4 million in capital gains. That has essentially never been taxed.

The same basic distinction applies to dividends, which are payments to shareholders from their investments. Again, that income has yet to be taxed.

Does that make sense?

Thanks for the question - Brian

Fair?

You sense of fairness sound more like use tax to punish people for making money. I agreed that capital gains must be taxed as any other profit. But taxes on dividends already were paid by corporations. Banks will pay taxes on interest from mortgages payments. Why do like idea of paying taxes on the same money twice? 

Fairness in paying for

Fairness in paying for government provided goods and services doesn't have anything to do with percentages of income in the first place.

Fairness in paying for government services is no different than it is in the private sector - on a user fee basis.

No one's income or wealth level is a "service" that has been provided to them by the federal government.

 

The top 50% of income earners already pay 97% of the federal income taxes collected. They certainly are not getting 97% of total federal government services in exchange for their money.

Anyone paying more in taxes on an absolute dollar basis than the abolute dollar amount of their pro rata share of the particular government activities that have provided them personally a demonstrable specific direct benefit calculated on a user fee basis is already paying more than their "fair share"

 

 

Re: Fairness in paying for

There are many reasons why a fee for service government is a terrible idea. The most basic point is that government services should not be available only to those who can afford them. There are already too many fee for service aspects to government. In a functioning society, and individuals access to government should not be limited to by their ability to pay for it.

Additionally, what remains of the progressivity of the federal income tax is largely offset by the regressivity of other taxes including payroll taxes, state taxes, local taxes, and yes, fees.

"While they may have paid

"While they may have paid income taxes on the million they earned to buy the initial investment (assuming they didn't just inherit the investments), they have not paid any taxes on the $4 million in capital gains. That has essentially never been taxed."

"The same basic distinction applies to dividends, which are payments to shareholders from their investments. Again, that income has yet to be taxed."

 

Wrong on both counts.

Corporate income is taxed twice - once at the corporate level and again at the individual level. The stockholders are the owners of the corporation. That means they own all the assets - including the cash that the corporation uses to pay corporate taxes. That counts as the individual stockholder paying it just as much as if the corporation had paid out 100% of it's earnings in dividends and then it was all taxed at the individual level. As it is, dividends are distrubuted from the portion of corporate earnings left over AFTER taxes have been paid on them at the corporate level. Whatever amount of earnings that are not paid in corporate taxes or paid in dividends are retained and reinvested in the company to build up it's value. So those capital gains do indeed represent money that has already been taxed.

 

Furthermore, the cost basis of capital gains is not adjusted for inflation when the investment is sold. Therefore a significant chunk of the "gain" on  a long held investment represents a non-economic gain in terms of purchasing power. The tax brackets that apply to wage income on the other hand, ARE adjusted for inflation every year.

The deck is also stacked against investors when it comes to capital losses. Only $3,000 per year can be deducted against ordinary income. If someone had  a $30,000 loss. It would take them 10 years to apply all of that loss against their other income absent any other investment activity in the interim. If they had a $30,000 capital gain however, they would have to report and pay taxes on the entire amount in the year the investment was sold.

 

 

I would suggest that getting

I would suggest that getting lost in the "details" of tax policy before settling on the basic construct of what sort of social contract we would like to have with one another is a path doomed to failure.

So let's begin with what we want...   I want a safe  and clean environment for myself and my kids.   I want access to health care  for myself, and I want it for everyone I come in contact with so that they are healthy too and not carriers of disease which will sicken me or my kids or the people I know and love.  And I do not want to be surrounded by illness and suffering.  I want the people I share my world with to be able to read and write and speak with clarity.  I want to be able to engage in honest and meaningful dialogue with the people around me so that together we can sort out the problems of the day, or admire the spring blooms on the trees.  I want roads and parks and bridges and libraries and museums.  I want places to go to hear music, to watch dancers, to hear poetry, to pray, to sing. to grieve.  I want to be able to call upon the police when I am being wronged by another... I want to be able to have firemen come when lightning sttikes the tree above my house, or when my visiting friend falls and breaks his leg.  I want courts to help sort out the complexity of differing ideas and beliefs.  I want researchers to be exlporing what we do not know becuase of what they might find...

The list could go on, and on... and on.   My point is that there are things that I want, that you probably want, that many others want...  And when we come together to meet shared wants, we can do so more efficiently than each of us doing it on our own.  If we can agree on that, we are off to a good start.  If not, we are dead in the water.

I will operate on the assumption that we can agree that we all want SOME of the same things...  Perhaps we have some differences as to what we each want...  maybe I want something you don't care for, and vise versa...  OK, maybe we both agree that neither of us gets what we want... or maybe we both do...   Either way, there IS a list that we agree on. 

Now, how do we pay for it?  In my view, we use taxes.  In my view, the easiest and most efficient way to tax money is when it changes hands.  Harder to see when it is sitting still (though not impossible).  In my world, I would exempt ALL income from taxation for the first "X" amount... an amount that was a clear reflection of what it actually costs to live.   After "X" ALL income would be income. Period.  And a progressive federal tax rate would apply.  The ONLY possible exception  MIGHT be for the sale of a primary residence if the income from the sale were reinvested in another primary residence within a specified time frame...

The argument about how many times dividends have been taxed, or whether cap gains has already been taxed misses the entire point...  If we all want a list of similar things...  we need to come up with a way to pay for them.  And that way ought to be an expression of fairness.  If I don't have extra money beyond what I need to survive, I can't invest in stocks...  why should I pay a HIGHER tax on my income than someone who has MORE than they need to survive, and so CAN invest.  That is fundamentlally unfair.   If I have extra, I am free to take whatever risks I want to or not...  the tax code should not provide me with incentives...  And, as history has shown, there is no need for the tax code to provide incentives for investment.  Greed will suffice quite nicely as an inducement.

For the past two years I have had entirely unearned income aproximating $100k.  In both years my "taxable" income was only $30k... and in both years, my fed and state tax bill was ZERO.   There is NOTHING fair about that. I have wealth, and security and money coming in from legal, declared sources... but according to the tax code, written by those with wealth and the power to change the rules, my "income" isn't really income.  And even the income which doesn't get redefined, is not taxable because the rules were written for ME.  That is not fair... and it does not make my street safer, or my neighbors more cheerful or my fellows on the highway more patient, or the lines at the homeless shelter shorter, or the fear and lonliness of those who surround me any less dark.  

I want to see joy on the faces of the people I meet.  I want the spark of anticipation and excitement twinkling in their eyes,  I want to hear laughter.  Joy is NOT something to be earned.  Joy is our shared birth right.  I want to throw MY resources into the pot according to my means, along with everyone else according to theirs in sufficient quantity to make possible the dream that we ALL share.  To be safe, free from hunger or cold... to play... to love... to smile... to laugh.  THAT is what taxes are for. 

 

 

 

Re: "While they may have paid

I think the previous answer says the most important points.  I also want to say, our tax system is not designed to tax money once.  It is designed to tax money each time it goes from one owner to another.  

As an example, I work and pay income tax and taxes for Social Security and Medicare.  I spend some of my income and pay sales tax.  I put some of my income in a savings account and earn interest.  I pay taxes at the regular rate on that interest.  Eventually I retire, and if I have a lot of other retirement income, I pay taxes on my Social Security income.

Taxes are not the main reason investors decide to invest. Most investors look at the likely rate of return and the degree of risk, and then decide whether to invest.  Low tax rates on investment income just distort that decision. 

When our country had higher tax rates on capital gains and dividends, as under Presidents Reagan and Bush Sr., we still had good rates of investment and substantial corporate profits.  So it's clear from that experience that the tax rates UFE is proposing will benefit the economy by reducing the deficit, will reduce the need for budget cuts that hurt lots of regular Americans, will help reduce the extremely wide gap in incomes, all without harming investment levels or profits.

Henry George

In your material, you point out that the richest people tend to own the most real estate. Henry George proposed a tax on Land Rent way back in the late 1800s. This, in my opinion, would be a more effective way to tax the rich, as it would be a tax on their wealth, rather than their adjustable income due to the numerous tax breaks that they get through the current tax system. So, I propose the following:

Tax land, and all the natural resources that are extracted from it (oil, natural gas, timber, copper, ore, etc.). Eliminate ALL tax deductions, except for a standard deduction for a married couple of (perhaps) $100,000, and for a single individual $50,000 (a single mom or dad should also get the $100,000 deduction). Any income that exceeds that amount would be taxed at say 25% (remember, no other deductions for the rich to hide behind). Leave all other taxes as they currently stand. Then incorporate a 25% tax on Land Value (not the buildings and improvements, just on the land alone). 

Finally, take all of our current welfare programs and do away with them...replace them with a basic income grant (BIG). One proposal that I had read by a San Diego Congressman was $1,000 per month for every adult, and $500 a month for children. A family of four would get, rather than welfare or EITC, a BIG of $36,000 a year to supplement their existing income (or replace it). Imagine if people didn't HAVE TO work, but perhaps only had to take part-time work...or decided to do charitable work...whatever!

Jeffery J Smith of the Geonomic Institute estimates that somewhere around $34 Trillion could be produced through this method, which would be more than enough to fund a BIG. By having a BIG for everyone, there'd be no need for Social Security, as the BIG would be paid to every citizen (who files an income tax return) until they die. This BIG could supplement a private pension as well. It is given without means testing, simply as a guaranteed income for being a citizen. The wealthy would still be wealthy, just not as much...and the rest of us wouldn't have to lose sleep trying to figure out how we're going to make it another day.

Obama Is Wrong When He Says It's Fair to Tax the Wealthy

An article published in today's Washington Post by economist Arthur C. Brooks is a very interesting read and succinctly argues that people should not be penalized in a progressive tax system for working harder and smarter than other people.  If our political and economic systems were a true meritocracy, this argument would be hard to dispute, but in many ways we are a privileged society where who you know and what schools you attend play a dominant role in the making of presidents and industry barons.  The one statement in this article that jumped out at me was "We are not a perfect opportunity society in the United States.  But if we want to approach that ideal, we must define fairness as meritocracy, embrace a system that rewards merit, and work tirelessly for true equal opportunity."  That statement alone, coming near the end of the article is an argument for and not against the wealthy paying a fair share of taxes to level the playing field until we achieve true equal opportunity in this country.  

Another argument in favor of progressive taxation...

Interesting post... Justing from your final comment, "That statement alone, coming near the end of the article is an argument for and not against the wealthy paying a fair share of taxes to level the playing field until we achieve true equal opportunity in this country," I gather you support a progressive tax policy.

A couple of other thoughts to consider... Adam Smith was one of the first to make the case that those with the greatest stake in the economy our nation makes possible should contribute the greatest share toward its maintenance. This is not unlike the argument made by many Responsible Wealth members. That is, the public structured funded through our tax system - schools, highways, courts, police, etc. - sow the seeds of prosperity that make their fortunes possible. It's hard to imaging Bill Gates rising to the fortune he has today if it were not for public R&D that led to the creation of the internet or the courts that protect the copyright of Microsoft products. By that same token, Abigail Dinsey has argued convincingly that here family's wealth would not be possible if it were not for the highways that brought Americans to Disneyland or the education system that fills Disney studios with creative artists (educated at taxpayer expenses). 

Most wealthy people, if they thought long enough about it, would soon realize that the public investments funded through our tax dollars are essential to their own prosperity... and as Adam Smith said, those who have the greatest stake in the economy our nation makes possible, should contribute the greatest share toward its maintenance. That's progressive taxation.