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PaperclipPerfector  1mo ago (text post)   26864 thread views

Culture War Roundup for the week of April 15, 2024

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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.

I think you are vastly underselling the cost to the government. Right now their WACC is probably what around 4 or 5%. If 4% and lock in is 20 years you almost cut the tax in half in PV terms.

I don't know of any literature that says the lock-in effect is so extreme that someone who had been planning to invest for, say, 6 months, would now choose to do so for 20 years. Rather, we'd be looking at something closer to a 10-30% increase in the time a median security would be held depending on the rate increase. Furthermore, interest rates are anomalously high right now compared to the last decade or two and will likely ebb a bit over the coming years assuming further waves of inflation don't happen (inflation has been on a downward trajectory for several quarters now).

  1. Yes capital gains rate might not have a big impact if you are planning to sell in the short run. But if you are thinking about rebalancing investment profile could have a huge impact. There is much more of the latter than the former.

  2. Rates are higher today than since the Great Recession but still not that high by historical standards.

  3. Inflation has been hard to get to the desired rate and has been rebounding in the last quarter. Expect another ugly print this coming month. Odds of a rate decrease are decreasing.

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