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PaperclipPerfector  1yr ago (text post)   26364 thread views

Culture War Roundup for the week of December 4, 2023

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(Mods, let me know if I need to delete this and repost in Small Questions Sunday.)

The US Supreme Court (SCOTUS) hears Moore v United States today. According to SCOTUSBlog, at issue is "Whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states". Since that's not very helpful, I'll quote The Atlantic's summary instead:

The story of Moore starts in 2017, when President Donald Trump signed the Tax Cuts and Jobs Act. The law aimed to minimize the incentive for U.S. corporations to hoard money overseas by reducing certain taxes on foreign earnings. But, in exchange, U.S. investors would have to pay a onetime tax on accumulated foreign profits going back several decades—the so-called transition tax. Charles and Kathleen Moore are among the Americans affected by the change. In 2006, they invested $40,000 in KisanKraft, an Indian company owned by a friend. They allege that they never received any payments from the company because all of its profits were reinvested. The transition tax nevertheless stuck the Moores with a $15,000 tax bill based on the company’s retained earnings. The Moores countered that the transition tax is unconstitutional because it exceeds Congress’s power under the Sixteenth Amendment. That amendment, ratified in 1913, explicitly empowers Congress to tax incomes. But the Moores argue that unrealized gains aren’t income at all.

Mother Jones, NPR, CBS, and Foreign Policy (of all the friggin' places) are running articles breathlessly proclaiming DOOM! for the US tax code, or at least the ability of Democrats to pass wealth tax laws. This Forbes article seems to be a pretty good explanation of what's at issue but I'll admit that I'm not well-versed enough in tax law to understand the full ramifications of what a Moore victory would mean for the ability of the federal government to raise revenue. On the other hand, I can't say I'm sad about the idea of a wealth taxes getting a bullet to the head. What am I missing or not considering as I read about this from the various outlets?

All else equal, all wealth should be taxed equally (say, flat 1%/y) , not income from wealth. Current tax laws encourage bubbles and poor investing. Just buy a garbage bond or shitcoin and uncle sam will barely touch it, but god helps you if you invest in a company actually making money. And don’t give me the hard-luck grandma story.

It’s like a poll tax on wealth, and like a poll tax, it’s very tax efficient. The problem with income tax is that it discourages economically beneficial behaviour, like working or good investing. Every time you engage in it, the state wants a piece, and possibly, an even bigger piece, the better you are at it. So the state, counter-productively, eggs you on to be a bum and to stack your wealth under the mattress (ignoring inflation). Your lazy bum money should be taxed at least as much as superstar cancer-curing money.

Let e be your risk aversion and let p be the the proportion of your portfolio you are investing in stocks

Where is “p”? I’m gonna need a template for these equations, like an article who uses similar ones (the wikipedia markowitz model wasn’t helpful). Or more letter definitions.

As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance.

So a 99 % capital gains tax results in everyone investing in stocks?

The chief academic argument against capital gains taxes is that they impose a 100% tax on consumption in the far future, which is maximally distortionary.

I call bullshit on that. A 100% tax on everything right now is more distortionary.

I personally think that if society had no welfare, a flat income tax would be either not distortionary or push people to work more.

But we have welfare, and the income tax isn’t flat. You’re very theoretical today.

Note: historically people worked much more and (e.g.) wages being 4x lower because your country is poor is equivalent to a 75% flat tax today.

Ignoring the motivating effect of hunger, of course.

A wealth tax reduces returns by k:

x = ((A-k) - (i-k)) / (2ekkB) = (A - i) / (2ekB)

I think there’s an error here. The k subtracts itself in the numerator, so the two k’s stay in the denominator, unlike in the cap gains equation.

in case it wasn't clear, I'm saying a wealth tax is better than a capital gains tax in that it doesn't distort risk-taking while a capital gains tax does

Vast layers of misunderstandings keep peeling off, yet your position remains as inscrutable as ever. Didn't you (wrongly, see above) determine that the equation was the same : ' x = (A - i) / (2ekB)' for both? So why is risk tolerance increased for cap gains tax and not for the wealth tax?

I want to distort risk-taking, I think we would all tremendously benefit from a 90% reduction in financial risk aversion of the average citizen. By the lights of MPT, shouldn’t we collectively expect a higher return on all our investments if risk aversion went down?

Yeah. Note: people would probably save less, but what the people are saving would be invested in stocks rather than bonds in this model.

I think that discredits the model. They’re not going to take all the equity risk for 1% of the equity premium, they’re supposed to be loss averse.

Sure. I mean that according to ivory-tower theory, even a 1% capital gains tax now is equivalent to a 100% tax on far-future consumption.

This is a useless extrapolation theory.

I think a poll tax (and its opposite: welfare) is distortionary.

Welfare is not the opposite of a poll tax, it’s a progressive tax that goes into the negative. Regardless, how is a poll tax distortionary?

That's not what risk is. If the company he invests in goes bankrupt, that's not helped by the 99% capital gains tax. That is the risk he cares about, not the variance on his profits. But let's not get into that.

And it keeps going, more layers of misunderstandings.

x = ((A-k) - (i-k)) / (2eB) = (A - i) / (2eB)

So, my conclusion remains: the wealth tax doesn't affect the allocation into stocks, while the >capital gains tax does. This also explains your second point: the two conclusions are no longer the same.

So your math was incorrect, but luckily you interpreted it wrong, so by being doubly wrong you went all the way to being right again?

And what happened to the k’s now, why did you remove them from the denominator? You previously used them to justify “As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance. “

By that logic, and assuming the equations are worth a damn, the wealth tax also causes increased risk tolerance. More even, since you have two k’s in the denominator going to zero.

Do you believe venture capitalists and the startups they fund are net-bad for society? I think they're (a) net-positive and (b) the platonic ideal of high-risk-taking, so I don't think we want to discourage risk-taking in general.

Another misunderstanding. Man, I am in favour of risk, from the beginning. Between low-risk/low-return and high-risk/high-return, I choose high every time. Personally, and macroeconomically. I said people should be less risk averse, ie, take more risk. I could rail against insurance companies and the giant societal loss they represent all day. They prey on the irrational fears of people to the tune of trillions of dollars annually. But that’s besides the point.

To be 100% clear, no, I do not believe VC and startups are net-bad for society at all.

what matters isn't that risk is reduced - what matters is how it was reduced.

I am not talking about a reduction in risk, but a reduction in risk aversion. An investor with less risk aversion (ie, willing to take more risk) could expect higher returns, correct? I’m just applying this to all investors in the economy.

Just to make sure we're on the same page - you're saying welfare is a "progressive tax that goes into the negative". A poll tax is a fixed sum demanded regardless of income.

Yes, and yes.

Your progressive tax depends on your income. When your income is low enough, instead of paying the tax, you get welfare. So it’s the ‘negative side’ of the progressive tax. Your progressive tax becomes a payment to you.

The poll tax is not distortionary, because nothing you do matters. You can work or not work, you’re still on the hook for the same poll tax, 100 dollars or whatever. The progressive tax( including welfare), takes from you if you work and gives to you if you don’t. Whether that is good or bad is another issue, but it definitely distorts your behaviour more.

So, in this model, a poll tax would cause me to work more.

Any tax in this model is distortionary. We’re talking relative distortionaryness.

If you want a story: consider someone who barely makes enough to survive - a poll tax would force them to work more hours to continue surviving.

That’s what I referred to above : “ignoring the motivating effects of hunger”.

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