Signs of the Times - and a question

[finnbow]

Originally Posted by whell

Taxing capital does nothing but devalue it, reducing its value versus labor.

We don't tax capital. We tax gains made upon capital. As an aside, why is it OK to tax interest income (or bond yields) as ordinary income, but not the income derived from capital? Aren't interest and bond payments also derived from capital? Worse yet is the tax treatment of "carried interest," the means by which fund managers have their incomes treated as capital gains rather than income (and a reason for Romney's 13% tax rate, BTW).

Economics is not a science. It has as little to do with science than social contracts have to do with contracts. It's called the dismal science for a reason. Just because supply/demand relationship is well understood, it does not follow that the other aspects of economics are equally well understood. There's good reason it is called the dismal science.

[merrylander]

As I recall Harry Truman always wanted to find a one armed economist

[d-ray657]

Originally Posted by whell

Woah! We're way of course now! However, since you injected the social contract arguement, here goes:

- the social contract concept is not an absolute. It's a theory at best, and is philosophy rather than science. I'd point to Locke as a basis for my responses about a social contract, and I imagine you'd point to someone like Rousseau. Under the law, two sides need to agree to be bound by a contract, and since you and I can't agree on the content of a social contract, I suggest we move on.

- there is an agreement that you and I are party to: the US Constitution. It does give the government the power to levy taxes. The constitution gives the gov't the authority to tax revenue and income. It leaves the determination of rates and wage bases of that tax to congress. So regardless of any social contract, corps and individuals are subject to tax, and regardless of the social contract individuals and groups can petition gov't to modify that tax.

Now to you question, capital and labor are of equal import in an economic discussion. Labor is required to convert capital, but without capital labor can have no product. Taxing capital does nothing but devalue it, reducing its value versus labor.

OK, thanks for answering my question. My follow up it this: do taxes not also devalue labor? If that is the case, what absolute value is there that should place capital in an advantage over labor with respect to taxation? A different consideration is this: what value do labor and capital receive in return for their taxes? There, we can talk about the infrastructure, the ordered society, the education for the individual and the educated workforce for capital, security, safe shipping, and so on.

And frankly, I did not think I was getting off topic. One of your premises was that we could discuss tax policy without any political discussion as well. I have challenged that premise, and pointed out that the underlying economic analysis here makes certain assumptions with respect to the relative value of capital and labor. I have tried to not frame my responses in partisan political terms, but I am unwilling to concede that the approach to the question can be free of any ideological bent, or that the question was framed without ideological assumptions.

Regards,

D-Ray

[piece-itpete]

One could argue that lowering taxes on capitol gains vs earned income is social engineering

Pete

[finnbow]

Originally Posted by piece-itpete

One could argue that lowering taxes on capitol gains vs earned income is social engineering

Pete

Indeed. Redistributing wealth to the wealthy.

[d-ray657]

Originally Posted by piece-itpete

One could argue that lowering taxes on capital gains vs earned income is social engineering

Pete

Lefty.

Regards,

D-Ray

[piece-itpete]

LOL!

As a non-wealthy person I get a tax break on any capitol gains made if I sell my house.

Though it really is a wealth question. They will move

Pete

[whell]

Originally Posted by finnbow

We don't tax capital. We tax gains made upon capital. As an aside, why is it OK to tax interest income (or bond yields) as ordinary income, but not the income derived from capital? Aren't interest and bond payments also derived from capital? Worse yet is the tax treatment of "carried interest," the means by which fund managers have their incomes treated as capital gains rather than income (and a reason for Romney's 13% tax rate, BTW).

Start with $100 in capital. Now, take that capital and let it gain value, either though investment or conversion into a salable product. Since its easier to discuss as an investment, I'll use that to illustrate. Invested with a 3% return, the capital would be worth $103.

Now we tax the gain. At 10%, capital is now worth $102.70. Just sitting there, it loses value due to inflation. With an average inflation rate of 3% per year, that means that the actual value of the capital would be $97 before the gain on interest. With the gain, the capital is worth $99.70. It makes taking the risk financially unrewarding.

If the gain with interest is 4%, the capital value rises to $104. With taxes applied we fall to $103.60. With inflation factored in our capital is now worth $100.60. We needed to take a greater risk (the higher interest) to make the capital gain less taxes outpace inflation. At some point someone needs to decide if the increasing risk to eek out any significant gain is worth taking.

If taxes were not a factor, then the gain would be retained in full. The value of the capital would then be $101.00 after inflation. Even with inflation, there is a gain which is more significant, and may provide significant enough incentive for more individuals to take the risk and invest their capital. This also increases the availability of capital and makes more capital available for individuals to choose to take a risk.

Move this discussion out of the investment realm, and into a manufacturing environment where the risks are more significant, and the prospect of actually losing capital becomes very real.

This also hopefully illustrates how capital gains tax is also a tax on capital. Unless capital is "risked" (invested, converted or utilized) it will be reduced in value. If it is a commodity like gold, it will rise and fall with market value. But even gold gains value with it is utilized as capital and converted to a product. Without creating an environment that incents the conversion of capital, we suppress economic activity and economic growth.

Must a 2% (plus or minus) annual growth rate in GDP be accepted as "the new normal", or can we do better? Can we jump start growth by reducing the cost of taking a financial risk?

I think the answer to both is yes.

[whell]

Originally Posted by d-ray657

And frankly, I did not think I was getting off topic. One of your premises was that we could discuss tax policy without any political discussion as well. I have challenged that premise, and pointed out that the underlying economic analysis here makes certain assumptions with respect to the relative value of capital and labor.

D-Ray

The inclusion of a question about the "social contract" is what threw me off, not the discussion of tax policy. The social contract is a philosophical construct. Tax policy is not.

[piece-itpete]

Thanks whell, post 148 was great.

Pete