I love this discussion, as it hits all the right notes for me.
All income is income, and should be taxed when realised. It should also be indexed to inflation. No exceptions for inheritances or investment partnerships (hedge funds, VCs, etc.). When you get cash income, you pay a tax on it, indexed for inflation. Yes, it’s not easy to value illiquid assets or determine their cost basis when that was in the distant past, but those are mostly one-time effects that will cease to be an issue once everyone realizes the need for properly assessing and recording the values of all assets.
I’d also completely eliminate the deductibility of interest on debt - corporate debt and mortgage. It will cause a re-alignment of the credit markets when it happens, but once that is done, it will reduce one more distortion from the economy while disincentivising some forms of risky behaviour. And yes, you’d need to grandfather some of this stuff in, but that’s doable over the course of 5-10 years (during which time CPAs and tax preparers will be busy as heck).
One year, the IRS sent me $4000 more than I was expecting in my tax refund. It turned out that someone at the IRS entered my capital gains incorrectly, so that it went from a couple hundred dollars to something like $20,000. When they thought I'd made a big chunk of my income from capital gains instead of my job, the taxes I owed decreased by $4000. I was so angry.
Here's the problem with closing that loophole: you now have to determine what your mother-in-law paid for those dolls, in order to fairly subtract the cost basis. Good luck with that! Did she keep the receipts? Do you have them??? Are you gonna go through them all?????
If you've ever actually been through the death of a parent, let me tell you, even the ones without a lot of money tend to have things like mutual funds that go way way back with stuff like reinvested dividends. Good luck figuring out the correct basis!
What will happen if the loophole is "closed" is that rich people will find shenanigans to get their basis as high as possible (and know to do that, and how to do it), whereas ordinary people will be stuck without being able to figure out the basis, and the IRS will undoubtedly force them in that case to use a basis of zero.
The thing that makes sense is MARK EVERYTHING TO MARKET annually, and pay capital gains taxes on that as part of annual income tax.
Oh, and captial gains should be taxed at the same rate as labor. Always, period. The economists who claim this is bad use bogus assumptions, like that labor gets paid at its marginal value. Which is just nonsense.
First: We agree that capital gains should be taxed like income, which is important.
We also agree that assessing the value of non-liquid assets is difficult. But that's why I think it should be done once -- at death, when we already go through exactly this process for assessing estates -- instead of every year. As you see in the footnote, I think mark to market could be workable for liquid assets, but the difficulty of assessing non-liquid assets like paintings, vehicles, and Anne Geddes dolls on a yearly basis is the main reason why most European countries ultimately decided that the squeeze wasn't worth the juice on wealth taxes.
I'd say because income is income. It doesn't matter how the money was made; it only matters that you made money. The question could be inverted: Why should capital gains be taxed at a different rate than income?
Arguments for capital gains rates that are lower than income tax rates usually center around prioritizing investment (e.g. "we want people to buy stock"). Personally, I think this just causes a market distortion (I want people to invest the amount they would without any tax prioritization). Other arguments have to do with the practicality of taxing these assets (which is kind of what we're getting into here -- what's the best way to tax things whose value has not yet been converted into cash?).
I was paraphrasing J.S. Mill, who was describing landlords. In the past they were called coupon clippers, but now se call them rentiers. People who don't actually work.
Damn it, I forgot indexing for inflation; I think indexing for inflation is legit. I'd be fine with a system that factored that in. As for the others...
I don't see how this is double taxation. I've always thought double taxation was a strange concept; if I earn a dollar, pay taxes on it, end up with 70 cents, use that 70 cents to buy some Tic Tacs and pay 5 cents in sales tax, I guess that's technically "double taxation". But this is nonsensical to me; it doesn't matter to me what happened to the other part of the dollar before I spent the 70 cents. It seems like basically any taxes could be called "double taxation"; after all, if I work for a company, and that company pays taxes, and they also pay me a wage, then wouldn't any taxes on that wage be "double taxation" by the same logic? And capital gains is money I MADE; why does it matter that I might have bought the asset with a dollar that had previously been taxed? What if I bought it with a dollar that HADN'T been taxed? What if I inherited it? What if I found it lying on the street? The whole concept is gibberish to me; I don't find the "double taxation" argument persuasive.
I think the "encourages present versus future consumption" miscategorizes investment as consumption. You don't get taxed on the money you invest; you only get taxed on the money you make. The argument being made (if I understand it correctly) is "if you have a million dollars, you might as well go out and blow it, because you won't pay taxes on whatever you buy but you'll pay taxes if you put it in stocks and accrue capital gains". That's not correct; you only pay taxes on the money the million dollars EARNS. If you buy stock, and the stock doesn't move before you sell, you get your million dollars back and pay no taxes. If it makes, say, $100,000, then you still don't pay taxes on the million; you pay taxes on the $100,000.
This is mostly right, but why is indexing for inflation legit? If you put the money in the bank instead, and the bank paid interest at the rate of inflation, you would owe taxes on the interest income. Capital gains should be treated the same.
I'm sure that's true. Though let's also remember that not EVERYTHING that gets shoved through this loophole is a difficult-to-assess asset; some things can be assessed fairly accurately. And in many cases, a somewhat-arbitrary assessment would be better than nothing.
You only pay taxes when you realise income from the sale of an asset. If the realised income on an asset after indexing the cost price for inflation is actually lower than the indexed price of acquisition, you should be allowed to take a loss, set it off against other income and/or offset it against future gains.
There is no mechanism to “claw back” previously paid taxes - but perhaps there ought to be one in the case of people who die with losses that they have not been able to offset with gains. Maybe their losses should also be inheritable and usable by their heirs to offset their future taxes?
At my mother-in-law's funeral, a distant cousin showed up with his family, which included a teen daughter. She was carrying a small baby, and I've heard enough about TLC programming to know what I was looking at was a teen mom. When I approached to greet them, I realized that in fact I was looking at a Lifetime after dark special, for it was not a baby but a highly realistic doll. Let me reiterate: at my mother-in-law's funeral.
I love this discussion, as it hits all the right notes for me.
All income is income, and should be taxed when realised. It should also be indexed to inflation. No exceptions for inheritances or investment partnerships (hedge funds, VCs, etc.). When you get cash income, you pay a tax on it, indexed for inflation. Yes, it’s not easy to value illiquid assets or determine their cost basis when that was in the distant past, but those are mostly one-time effects that will cease to be an issue once everyone realizes the need for properly assessing and recording the values of all assets.
I’d also completely eliminate the deductibility of interest on debt - corporate debt and mortgage. It will cause a re-alignment of the credit markets when it happens, but once that is done, it will reduce one more distortion from the economy while disincentivising some forms of risky behaviour. And yes, you’d need to grandfather some of this stuff in, but that’s doable over the course of 5-10 years (during which time CPAs and tax preparers will be busy as heck).
One year, the IRS sent me $4000 more than I was expecting in my tax refund. It turned out that someone at the IRS entered my capital gains incorrectly, so that it went from a couple hundred dollars to something like $20,000. When they thought I'd made a big chunk of my income from capital gains instead of my job, the taxes I owed decreased by $4000. I was so angry.
Here's the problem with closing that loophole: you now have to determine what your mother-in-law paid for those dolls, in order to fairly subtract the cost basis. Good luck with that! Did she keep the receipts? Do you have them??? Are you gonna go through them all?????
If you've ever actually been through the death of a parent, let me tell you, even the ones without a lot of money tend to have things like mutual funds that go way way back with stuff like reinvested dividends. Good luck figuring out the correct basis!
What will happen if the loophole is "closed" is that rich people will find shenanigans to get their basis as high as possible (and know to do that, and how to do it), whereas ordinary people will be stuck without being able to figure out the basis, and the IRS will undoubtedly force them in that case to use a basis of zero.
The thing that makes sense is MARK EVERYTHING TO MARKET annually, and pay capital gains taxes on that as part of annual income tax.
Oh, and captial gains should be taxed at the same rate as labor. Always, period. The economists who claim this is bad use bogus assumptions, like that labor gets paid at its marginal value. Which is just nonsense.
First: We agree that capital gains should be taxed like income, which is important.
We also agree that assessing the value of non-liquid assets is difficult. But that's why I think it should be done once -- at death, when we already go through exactly this process for assessing estates -- instead of every year. As you see in the footnote, I think mark to market could be workable for liquid assets, but the difficulty of assessing non-liquid assets like paintings, vehicles, and Anne Geddes dolls on a yearly basis is the main reason why most European countries ultimately decided that the squeeze wasn't worth the juice on wealth taxes.
I'd say because income is income. It doesn't matter how the money was made; it only matters that you made money. The question could be inverted: Why should capital gains be taxed at a different rate than income?
Arguments for capital gains rates that are lower than income tax rates usually center around prioritizing investment (e.g. "we want people to buy stock"). Personally, I think this just causes a market distortion (I want people to invest the amount they would without any tax prioritization). Other arguments have to do with the practicality of taxing these assets (which is kind of what we're getting into here -- what's the best way to tax things whose value has not yet been converted into cash?).
With capital gains, you "make money while you sleep" as well as when you sit on the potty and other non economically productive endeavors.
I wish I made money while I sat on the potty. If that were possible, you can bet your ass I’d be just fine getting taxed on it. Pun intended.
Not productive for the greater economy.
I was paraphrasing J.S. Mill, who was describing landlords. In the past they were called coupon clippers, but now se call them rentiers. People who don't actually work.
Damn it, I forgot indexing for inflation; I think indexing for inflation is legit. I'd be fine with a system that factored that in. As for the others...
I don't see how this is double taxation. I've always thought double taxation was a strange concept; if I earn a dollar, pay taxes on it, end up with 70 cents, use that 70 cents to buy some Tic Tacs and pay 5 cents in sales tax, I guess that's technically "double taxation". But this is nonsensical to me; it doesn't matter to me what happened to the other part of the dollar before I spent the 70 cents. It seems like basically any taxes could be called "double taxation"; after all, if I work for a company, and that company pays taxes, and they also pay me a wage, then wouldn't any taxes on that wage be "double taxation" by the same logic? And capital gains is money I MADE; why does it matter that I might have bought the asset with a dollar that had previously been taxed? What if I bought it with a dollar that HADN'T been taxed? What if I inherited it? What if I found it lying on the street? The whole concept is gibberish to me; I don't find the "double taxation" argument persuasive.
I think the "encourages present versus future consumption" miscategorizes investment as consumption. You don't get taxed on the money you invest; you only get taxed on the money you make. The argument being made (if I understand it correctly) is "if you have a million dollars, you might as well go out and blow it, because you won't pay taxes on whatever you buy but you'll pay taxes if you put it in stocks and accrue capital gains". That's not correct; you only pay taxes on the money the million dollars EARNS. If you buy stock, and the stock doesn't move before you sell, you get your million dollars back and pay no taxes. If it makes, say, $100,000, then you still don't pay taxes on the million; you pay taxes on the $100,000.
This is mostly right, but why is indexing for inflation legit? If you put the money in the bank instead, and the bank paid interest at the rate of inflation, you would owe taxes on the interest income. Capital gains should be treated the same.
In my experience, when you don't know the cost basis, the IRS doesn't know either so you can just make something up.
I'm sure that's true. Though let's also remember that not EVERYTHING that gets shoved through this loophole is a difficult-to-assess asset; some things can be assessed fairly accurately. And in many cases, a somewhat-arbitrary assessment would be better than nothing.
Which just encourages cheating, and punishes the honest. That's what I object to.
You only pay taxes when you realise income from the sale of an asset. If the realised income on an asset after indexing the cost price for inflation is actually lower than the indexed price of acquisition, you should be allowed to take a loss, set it off against other income and/or offset it against future gains.
There is no mechanism to “claw back” previously paid taxes - but perhaps there ought to be one in the case of people who die with losses that they have not been able to offset with gains. Maybe their losses should also be inheritable and usable by their heirs to offset their future taxes?
At my mother-in-law's funeral, a distant cousin showed up with his family, which included a teen daughter. She was carrying a small baby, and I've heard enough about TLC programming to know what I was looking at was a teen mom. When I approached to greet them, I realized that in fact I was looking at a Lifetime after dark special, for it was not a baby but a highly realistic doll. Let me reiterate: at my mother-in-law's funeral.
anyway what were we talking about?
Ok I couldn't finish after I got to this line:
Inflation happens when demand exceeds supply. Many buyers + few sellers = higher prices.
I might be very nitpicky but this isn't what economists mean by inflation. This is a change in relative prices.
Inflation is when the generalized price level increases. The purchasing power of a dollar falls. [High guy meme here] But what does it really mean??
https://www.themoneyillusion.com/what-were-talking-about-when-we-talk-about-inflation/
Yes, but what causes the change in purchasing power? Too much money chasing too few goods. Hence my attempt to capture that in plain language.