Sunday, January 13, 2013

Progressive Capital Gains Taxes Make Sense

I have developed a tax code which I published previously:

I already know the least popular part of this plan will be taxing capital gains as regular income is going to be the claim that I am hurting investors. There is some merit to this, but it only looks at the individualistic side of the picture. People will claim I need to tax capital gains at a lower rate than regular income, that capital gains keep the economy running, that taxing capital gains as regular income introduces double taxation,  but there are some problems with this. Most arguments come from this far-right think tank’s article on why they claim to oppose a progressive capital gains tax:

  1. The biggest problem with this article is that the way we currently tax capital gains (which I would never change) does not introduce double taxation. The Capital Gains tax is only on the amount the investment made, which means that despite what many will claim, all income is only getting taxed once.
  2. Another thing, is that you are only taxed once you pull the money out, if you leave the money in a stock for over a year you will only pay taxes the year you pull your money out.
  3. Taxing capital gains as regular income will give the government enough revenue to fix the debt without touching spending. 10% of our government spending in Fiscal Year 2012 went to the debt, and that money should be going to the American people in the form of health care and education, or a lower tax burden.

These types of groups write sensationalist loaded language that is designed to make people who already agree with them to be outraged (and frankly, I have occasionally been the victim of some left-wing groups doing the same tactic) and should be ashamed of themselves.

Taxing capital gains as a progressive tax is just fair and actually makes good economic sense.

  • If someone invests their money early and keeps it in for decades they could have billions of dollars if they select right, like pretty much everyone on the Forbes 400 list. A progressive capital gains tax will encourage people to keep money in for the long term and withdraw gradually.
  • If Capital Gains are taxed at a fixed rate and you have a billion dollars in the stock market and the market collapses and you pull everything out along with your billionaire peers the market will collapse further and companies will have less capital to invest with, which will put them at odds between the continued growth of the company through assets and employees, or giving their investors their annual/quarterly dividend and increase to their stock, and we all know which usually takes priority.
  • To stabilize the stock market we need to give an incentive for these mega-investors to keep their money in for the long term so that companies can use their money efficiently, downturns can be short, and unemployment can be lower than otherwise which will preserve our economy’s demand curve. By preventing large market collapses it will help people who have their money in the market from losing all of their gains, and companies will continue to have capital to invest and grow, and hire more people which will raise the demand curve, decrease unemployment, and make a stronger economy.
This is why a progressive income tax that treats capital gains as regular income is just healthy economics for America and the world.

Another closely related issue with the corporate world is how much people should be paid. is a collection of stocks that beats the S&P 500 every single year in growth, and are selected not for their stock returns (which are considerable) but for their morality. By paying their workers more every year than their counterparts they have lower turnover, lower training costs, lower hiring costs, and their employees make fewer errors which cost any company money, giving these companies money to either grow, and/or pay their investors more money than their minimum-wage and/or Chinese slave driving competitors. ( By paying people more money this helps the corporation immediately by getting and keeping the best workers in the market and making them valued which makes a difference. In the long term at the societal level it raises the demand curve for goods and services which means that more people can afford the goods the corporation makes which increases their demand and means that a stable relationship between company owners, employee, investor, and consumer can develop. This is just good economics from every perspective for the reasons I outline above. As Henry Ford said, “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.
Read more Ford quotes at

I also hope I don't have to defend taxing gambling winnings at a progressive rate.

To finish I want to make clear that even if we tax capital gains when they are sold at progressive rates, the best investors will still have more money. Using the tax code I designed I link to at the top, the amount kept for the following withdrawals per year are as follows, assuming cost of living is $20,000. These numbers are gross income from all sources, as I made my plan above to do.

  • Someone making $20,000 or less in Capital gains where that is their entire income will pay nothing.
  • Someone making $100,000 per year will keep $92,500 after taxes, 4.6 times the cost of living, and pay only 7.5% of their income.
  • Someone making $500,000 per year will keep $402,500 after taxes, 20 times the cost of living, paying 19.5% of their income.
  • Someone making $1,000,000 per year will keep $722,500 after taxes, 36.1 times the cost of living, paying 27.8% of their income.
Some people would say paying 27.8% is a horrible tax, but when you are keeping 36.1 times the cost of living after your taxes, you are doing well enough in my opinion.

Looking at countries in the world here: we see a trend that most developed nations (by every measure) have the highest tax burdens, with exceptions of Taiwan, Singapore, and Hong Kong. What is the difference between these three countries and the countries next to them? I have identified a few:
  1. Ease of doing business ratings are at the top of the list. The governments make it easy and people can easily trade while there are high barriers to entry and doing business in the less developed nations with similar tax burdens and much worse Human Development Index ratings. They are heavily involved in health care and education. They also tend to be small.
  2. Chile is also developed as measured by HDI and have a low tax burden, along with large markets for exports.
  3. They have low barriers to trade with other countries, which allow goods to be exported and goods to be imported at low cost.
  4. All countries that are highly developed, except the United States, have universal health care which has no change in tax burden.
  5. The connection between tax burden and quality of living is a correlation with a heavy concentration with developed countries (with a few exceptions) at the highest percentage, and a heavy concentration of undeveloped countries (with a few exceptions) at the lowest percentages.
  6. The countries with a low tax burden and high growth tend to be trade and banking centers where goods pass through while the countries at the top of the list are highly developed and aren't transit points for international commerce like Taiwan, Singapore, and Hong Kong in their special situation.
  7. Countries at the top of the Ease of Doing Business Index have low unemployment, their GDP growth beats their Population growth, with an exception of Japan which is hard to explain and I think it is something besides a large elderly population which is for another post when I will look at what it could be which at this point I am not certain, while the countries at the bottom of the list tend to be third world, with an exception of Venezuela leading me to detect other factors.
  8. Of the top twenty countries in tax burden, only two that look to me like a truly third world country are Zimbabwe and Kiribati, and of the bottom twenty countries are mostly Sharia law countries with high oil exports, followed by third world countries to make the rest of the bottom 40. The top 40 countries by tax burden consists of many of the world's most highly developed or quickly developing nations. The trend is more or less clear with few exceptions to these rules.
  9. Most countries at the top of the list have GDP growth that beats population growth and high levels of income equality, meaning high consumer demand and growing wages.
The statistics show me a correlation that is pretty strong with taxation around 40%, a strong health care system, a strong education system, an easy free market for new businesses (which I see as a key part of economic development), and low health care costs. The statistics show me another clear correlation between depressed economies, low taxation, poor health care, poor education systems, low GDP growth, and I feel the most important difference is high barriers of entry for new businesses. The popular correlation between high taxes and poor economic growth does not match the statistics.

To sum everything up, a progressive capital gains tax will help businesses and consumers, it will free up capital for businesses to use to grow, it will reduce the government debt which in the future will free up tax dollars to improve our schools and access to health care or send surpluses back to tax payers, and most importantly will encourage investors to keep their money in companies for a long time so that they can grow better creating more jobs, which will decrease the severity of economic downturns, and provide an incentive to increase wages for workers to reduce turnover and decrease training costs for businesses. This is why I think we should tax capital gains as regular income.

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