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This doesn't seem right to me at all. Obviously there are distortionary effects, but you're effectively saying the laffer curve reaches its apex at 0%, which doesn't jive with traditional economics.
Yes, a higher capgains rate will theoretically lead to somewhat higher interest rates, but I find it exceedingly unlikely that it would perfectly cancel out especially when marginal investors decide to spend their money instead, leading to an increase in revenues through consumption taxes.
Capital gains (at least as currently taxed) are extremely sensitive to tax rate because the taxpayer can choose to sell or not sell (ie it isn’t like income). So if you have a higher capital gains tax you likely will have less gains because taxpayers obtain a better ROI leaving their pre tax investment in asset X instead of their post tax investment in asset Y.
As a practical matter, a lower CGT is one where lower taxes might actually be revenue raising.
That just kicks the can down the road a bit. They eventually sell if they want to get access to the money to do other stuff with it.
What rich people do is take out a loan using the asset as collateral. So long as the asset appreciates faster than inflation, you come out ahead and get to access the money without selling (I believe this is also not considered income in most jurisdictions).
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The lock in effect is studied and is real. Again, the higher the capital gains rate the higher ROI to stay invested in the same asset.
Think of it this way. You invest 100 dollars in Apple stock. It appreciates to 150. You could sell and pay 10 of tax on the gain leaving you with 140 to invest. Or you could keep 150 exposed to Apple. Provided the return on that 10 outstrips the ROI on the 140 invested in non Apple stock, I keep my money in the Apple stock.
Also there are strategies to monetize without triggering gain (eg leverage, death).
I don't deny the lock in effect is real and present to some degree, but it's not a way to avoid taxes, only to delay them a bit. Owning stocks is not an end unto itself for most people, they're a vehicle to get returns, either through dividends or appreciation. So yes, they can own the Apple stock for longer, but eventually they'll sell which triggers the full effect of the tax.
The death loophole is bad and should definitely be closed. I'm not sure how leverage could be used to avoid taxes, but it should probably be closed as well.
The less frequently you sell your assets, the lower the effective tax rate due to capital gains tax. Also, if it's something that generates a return other than through appreciation (e.g. a dividend paying stock or real estate), by holding to it longer, you realize more of the value in a form that doesn't count as a capital gain and so you pay less tax.
Those dividends are capital gains though (or worse, interest income if holding treasuries), and you can't choose when to realize them.
Optimal tax efficiency is selling stock yearly to realize ~$50000 cap gains per year, paying 0% if it's your only income, then immediately rebuying the stock because the wash sale rule only applies to losses.
If you sell all at once you end up in the highest bracket. If you were already in the highest bracket you'll pay the same whether you sell yearly or all at once, but the latter lets you defer the tax.
If you owe any capital gains tax, you're almost certainly already I'm the top tax bracket and you pay less tax the longer you go without selling.
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No, that's not how it works. Capgains are taxed based on a percentage of the appreciation. It's not like a financial transactions tax that is a flat fee every time a trade is made. A 20% gain will be subject to the same tax as 2 equivalent 10% gains would be.
Dividends are taxed at either the personal income tax rate, or the capgains rate if they're qualified dividends.
Yes, but if you have to pay tax on the first 10%, you won't get another 10% gain. Let's say you have a $1,000 investment that grows at 10% per year and the capital gains tax is 25%. If you sell after two years, you'll have gained $210 and pay $52.50 in tax, leaving you with $1,157.50.
If instead you sold and rebought after one year, then you'd have a gain of $100 that year, leaving you with $1,075 after tax. That would give you another gain of $107.50 after the next year, in which you'd pay $26.88 after tax, leaving you with $1,155.62.
It could be in a tax sheltered account though.
Yes, the key part of your two examples being that the guy who stayed in the market the entire time payed slightly more tax at $52.50 vs $51.88 that the guy who rebought after a year, due to the slightly higher principle. In other words, they delayed the tax, but they did not dodge the tax.
So maybe my point up above about being "subject to the same tax" was a bit misleading, and I should have clarified that they pay at the same rate, adjusted for principle. The guy who stays in for two years pays 25% of his gains on his two years, vs the guy who rebalances after one year pays 25% for one year, then 25% for the second year. The important point here is they're not avoiding the tax forever, they're delaying it.
Not sure what you're referencing here other than qualified dividends.
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Leverage just enables you to get the cash today and pay tax much later (or maybe never with death). Delaying taxes over a long enough time period is effectively avoiding taxes from an NPV perspective.
That's just more can-kicking then, not an actual way to avoid taxes.
At this point, I don’t know what you are even arguing. The point was that CGT are highly sensitive to the tax rate because you can easily avoid paying tax today. Also the higher the CGT rate the more the lock in effect. So a lower CGT rate easily can lead to more capital gains!
Are you arguing no?
Your argument to me seems like the following:
Motte: Higher capgains means people could elect to stay in the market longer, thereby delaying when they pay their taxes
Bailey: Higher capgains means people could elect to stay in the market longer, thereby avoiding taxes forever
I'm arguing against the bailey. You keep restating the motte, but then it sort of seems like you want to edge towards that bailey. The main way to avoid paying taxes is through death via the step-up loophole, which should absolutely be closed. Beyond that, there's a small cost to the government getting the money later from the concept of the time-value of money, which certainly does exist but which is still a fairly small piece.
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It’s not a laffer curve element. That’s for raising tax revenue alone. It includes other indirect costs like government interest costs.
https://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/
This thought experiment was popular on econ blogosphere back then. It seems roughly right to me.
Now someone above mentioned they consume capital gains and quit working. The story gets a bit different then since higher cap gains taxes or full consumption would lead to him entering the labor market producing more goods and services for others to consume.
But in general without causing a change in behavior (rich consuming less, getting people to work more) there would be no net gain in government fiscal position.
Elon Musks for example can’t be taxed. If you took $100 billion from him it’s not changing his lifestyle. Just numbers on a bank account. He would still work and he consumes so little compared to his net worth consumption changes would be meaningless.
That link you shared is an exceedingly strange scenario, where a man with $84 million never spent it. I can't check the link to the article it was responding to because it was dead, but people with $84 million usually don't tend to live a life of subsistence. When people make money through labor or capital, they usually do so with the desire to use it on something, be it material possessions for themselves, bequeathments for their heirs, or chasing things that are a little less tangible like power and influence.
I generally like Elon for what he did to Twitter, but the dude owns several houses, an entire fleet of private jets, and a lot of other luxury items. The bigger issue would be if he would pass down his wealth to his kids to create a Musk Dynasty with the wealth continuing to expand further and further. To some degree you could say Musk deserves his money since he made a large chunk of it through his own labor, but his kids wouldn't have the same claim.
It’s an idealized thought experiment. But I would say it’s largely true for Buffett, Musks, and a few others. You wouldn’t be taxing them directly. Carnegie is an interesting example. You wouldn’t for the most part be taxing him, but what you would have taxed is what he did with the money. The government would get more money and it would be real but what your taxing is what he did with his money which is buy a lot of libraries, science, and cultural centers in the US. Maybe that is a net gain. But you are not taxing the rich guy.
I do not believe Musks owns a home anymore. He probably does own a private jet or two. But his consumption would be way below his means. Any taxes on him isn’t going to change his jet ownership so no consumption change. You would be taxing something else besides Elon Musks. Not sure what it is.
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