The U.S. Tax System

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<p><em>So what irks me is that I had to work my ass off in earn my W2 wages but only had to sit on the couch with the laptop (and sometimes a Scotch) and complete some trades to earn the capital gains. The tax is inversely proportional to the effort to earn the money and it just chaps my hide.</em> </p>

<p>HB Bear, think of capital gains as a form of mild double taxation or maybe the equivalent of a sales tax just at quintuple the rate. You invest it, which in turn creates the opportunites for others to work their butt off to get taxed at the W-2 rate.</p>

<p>If you spend the money, you create jobs and the State will take a cut up front as a sales tax and the State and Fed a backend cut from the jobs as income tax.</p>

<p>If you invest the money, you create jobs and the State & Fed will take a cut from the backend jobs as income tax as before, but from you, they'll both take a much larger cut from you of any money you get back. The primary argument on investment is that investment creates many jobs and opportunity than simple consumption.</p>

<p>If you stuff it in the mattress, the State and Fed get nothing and no jobs are created.</p>
 
No_Such_Reality,



But if I spend or invest my wages, won't they have the same net respective effects as if I did the same with my capital gains?
 
<p>No, that's the point. The capital gains already created additional jobs/employment/earnings that are generating additional tax revenue.</p>

<p>Both start with wages/earnings are some point, even the lucky inheritance people once had their pile start as earnings albeit on their more productive forebears.</p>

<p>A simple wage spending map looks like this:</p>

<p>Wage Spender: 2007 Wages in, taxes and spending out. -> 2008: 2007 spending created wages in, smaller taxes out, -> 2009 tricklle down. Graphically let's say a wage spender spending generated taxes are 2007 +++, 2008 ++, 2009 + ... </p>

<p>Then the wage spender taxes looks like</p>

<p>2007: +++</p>

<p>2008: +++,++ (+++ w/s (wage spender) plus ++ (2007 trickle down))</p>

<p>2009: +++,++,+ (+++ w/s plus + 2007 td) plus ++ 2008 td)</p>

<p>The investment look like this</p>

<p>Investor: 2006 Investments made: -> 2007 Capital gains/dividends earned, smaller taxes paid PLUS multiple wage spending earners ar created from it (the simple spending map above) adding to total taxes paid because of the capital gains.</p>

<p>Graphically, let's say the investor gets one + for the dividends/gains taxes. The investor/investment generated tax then looks like this:</p>

<p>2006 wages earned +++ (money not spent but invested)</p>

<p>2007: + (investor) plus +++ (one additional wage earner/spender) plus +++ for each additional. Plus any +++ for investor wages.</p>

<p>2008: + (investor still getting dividends), plus +++ ( for the above wage earner) plus ++ for the 2007 wage earners trickle down plus +++ for each additional wage earner still in existance plus ++ for each additional wage earner that was in 2007 and spent. Plus +++ for any investor wages.</p>

<p>2009: + (investor still getting dividends), plus +++ the above wage earner) plus ++ for the 2008 wage earners trickle down plus + for the 2007 earners last trickle down. Plus the same for each additional earner. Plus +++ for any investor wages.</p>

<p> Which group has more +++ (taxes)? In the case of only one additional wage spender being created by the investment, the 2007-2009 taxes look like this</p>

<p>2007: +,+++,+++ (+ dividends tax +++ (additional wage spender) plus +++ (investor wages)</p>

<p>2008 +, +++, +++, ++, ++ (with trickle down from additiona spending)</p>

<p>2009: +, +++, +++.,++,++,+,+ (compounded trickle down)</p>
 
Thanks for taking the time to try and help me understand your perspective. I get your point that a dollar from capital gains has a head start, if you will , in its benefit to the economy, but a new dollar of investment seems like it has the exact same econmic benefit whether I pull it from a stock account (capital gains) or from the checking account where my paycheck gets deposited (wages.)



Now, if taxes overall were lower, certainly there would be more to invest and would be a good thing for all reasons you point out above. Amen to that.



But I just don't think that capital gains deserve the 50% lower rate than ordinary income because they've got a bit of economic benefit headstart. Perhaps they deserve to be treated somewhat more favorably because of the "headstart" factor but 50% seems quite high. And, like I've said before, given that capital gains are passive and that labor is active, I'd argue that wages deserve more favorable treatment which on the balance may negate the "headstart" factor.
 
<p>I think we can agree that taxes overall would be nice if they were lower. How it is added up is always going to be open for debate. Frankly, I wish we taxed wealth, which is in reality assets. I've done the calculations, a 3 asset tax would balance the budget and start a 30 year pay-off of the national debt. </p>

<p>However, that'll never happen. A 3% tax on their cars (major asset) got Gray Davis kick out of office. The thing I like about it is you can't hide the assets. Whoever or whatever owns it, pays it. </p>

<p> </p>
 
<em>"Frankly, I wish we taxed wealth, which is in reality assets."</em>





This is basically what the inheritance tax does. It is the only wealth tax I can think of other than perhaps property taxes. The difference with property taxes is that it taxes all property whereas the inheritance tax has a minimum threshold that only taxes the wealthy.
 
<p>Except the inheritance tax is onerous ranging from 37% to 55% which is basically confiscatory.</p>

<p>People hate property taxes. And frankly, that is good. They should hate taxes as a necessary evil. </p>

<p>Combine the asset tax on anything with a Title and all financial instruments with a sales tax for income and it will be quite effective. Whomever or whatever holds title is responsible for that tax. Combine it with a 3% national sales tax and rebate poverty level to anyone and we're fine and everybody pays and hates it.</p>

<p>Bill Gates pay's on his $56 Billion. Buffet or his living trust his 3% on his $44billion, Oprah 3% on her $2.5 Billion and Irvine school teacher fresh out of school with no savings, 3% via sales tax on their roughly $40,000 a year earnings less poverty level rebate. Probably about $1000 in taxes.</p>

<p> </p>
 
Personally, I am a fan of consumption taxes. I would be in favor of a national sales tax, particularly if they did away with income taxes at the same time. People should be encouraged to make as much as they want and save whatever they can. If I were only taxed on my consumption, I would not pay much in taxes at all...
 
<p>Except a consumption only tax would ring in about 20%. The State would also come in at about 7% on top of the existing 7%+ sales tax.</p>

<p>Although I must admit, people would scream and that may be good. </p>

<p> </p>
 
<p>IR,</p>

<p>It's far more likely they we get a national sales tax ON TOP OF the current income tax. Take away the income tax and you remove the ability to reward/punish desired behavior.</p>
 
Though I favor a consumption tax instead of an income tax, the only way to implement it would be to repeal the 16th amendment and enact a corollary that enables the Federal government to institute a sales tax. Because of that high barrier to entry, I don't think a consumption tax is realistic. (And I don't trust the government to enact a consumption tax WITHOUT repealing the 16th amendment)
 
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