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"I guess you're referring to the favorable tax rates for capital gains.

Those rates are favorable for two reasons: (1) The money invested to produce those capital gains has already been taxed once, so you're really talking about taxing it twice; (2) Over longer terms, most of the returns from capital gains are due to inflation."

1) Why does it matter how many times the money is taxed? Money is taxed many many times as you follow its flow from raw resource to waste matter. Lets suppose you take the interest from an investment and buy a car with it. Now the money was taxed first as regular income (assuming we are not tax-avoiders), second as capital gains, third as goods & services or VAT or your local equivalent. The end result of reduced rates of captial gains tax is that those who are rich already (have the most money to invest) enjoy a reduced tax rate on total income than those who are not, thus increasing the rich-poor divide.

2) While that may be true (I'm not in finance) average salary over the long term also tends to track inflation thus again the lower tax rate give the rich who can invest an advantage over those who are not.

Finally why should set up tax incentives for companies not to invest in growing and generating more jobs? Currently many countries are giving tax-payer dollars to corporations to try and get them to invest in growing and generating more jobs. Even if for some reason we decide it would be good to discourage companies from investing in themselves and growing, why should accept a set-up were that penalty is paid out to the richest members of society?

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Those rates are favorable for two reasons: (1) The money invested to produce those capital gains has already been taxed once, so you're really talking about taxing it twice;

In what way is the hedge fund manager being taxed twice? Let's assume that the top 25 in my previous post each made exactly the same profit. That amounts to approximately one billion dollars in that year for each manager. In what bizarro universe do you classify that as capital gains (15%) and not income (35%)? For the hedge fund managers, that money IS their income. When they are regularly pulling in that much money, the extra cash is not due to inflation. It's not the same as me selling that cottage I have owned for 20 years.

Edited by Reverend Jim

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(1) The money invested to produce those capital gains has already been taxed once, so you're really talking about taxing it twice;

Taxes are essentially applied to any money transfer, that's how it works. It's not about how many times a given chunk of money has been taxed. Taxes are like a toll paid to the government at every transfer of money, from employer to employee (as payroll tax), from company to investors (capital gain), from buyer to seller (sales tax), etc. If you don't like this system, that's one thing to argue about, but you cannot say "this money was taxed twice" because that makes no sense from the perspective of what taxes are, by definition.

The problem with arguments about why this or that particular kind of tax should be lowered or abolished is that it leaves a route for money to travel untaxed or at a reduced tax rate. And those who have the means to choose different paths to route their money into their pockets or their tax-haven account will choose the path for least taxation.

(2) Over longer terms, most of the returns from capital gains are due to inflation.

Then adjust the capital gain tax to be valued against present value. I agree that the inflation part of the capital gains should not be taxed as it is more a part of the principal than a part of the revenue. But the problem with the capital gain tax is not about John Doe and his retirement fund that is more or less just following inflation, I agree he should only be taxed for his gains above inflation (and many countries allow that, if you have a good accountant). The problem is that capital gain has become (among many other tricks) a vessel for all sorts of money transfers. CEOs and board members can take most of what is essentially their salary in the form of capital gains. Personally, I would just make capital gains (above inflation) the same as any other form of income, like many countries do already.

If you buy stock in a company, that company pays corporate income taxes on its profits. Then it distributes (part of) what's left to its shareholders, including you. Then that money, which has already been taxed, is taxed again. This double taxation is part of the reason that corporations are often reluctant to return money to their shareholders as dividends, preferring instead to reinvest that money to make the company bigger.

Companies being reluctant to (1) register profits and (2) distribute them to their investors / shareholders is a good thing, and that is one of the main reasons why high tax rates on companies and investors is a stimulant for the economy, which has been shown empirically. First, a company can reduce its registered profits (to be taxed) by increasing its assets (investing in "material" growth, like more trucks, plants or R&D). This causes companies to have a solid asset base and a strong cash-flow to profit ratio, exactly the two things that any wise investor looks for when making stable long-term investments (and Warren Buffett has said time and again how these things are the most important factors to look for). Second, when money is invested by the company (i.e., registered as profit and invested elsewhere instead of returned to shareholders) then that money serves to (1) solidify the company and (2) make wise investments since they are basically collective investments by the shareholders and stakeholders. Finally, rich investors have, on average, about 5-10% of their portfolios invested in stable companies and a small fraction of that in ventures. The vast majority of their money is in secure holdings like treasury bonds or gold, which for the most part do not play any beneficial role in the economy, i.e., it is just money sitting in a savings account. So, any incentive that pushes companies to reinvest in themselves rather than transferring money back to investors is greatly beneficial to the economy in terms of more stable, stronger companies and better employment in general. And, empirically, this is exactly what has been observed.

I don't care too much if companies are really big, if that means they employ a lot of people, can provide solid benefits, and have enough of an asset base to push through recessions. What I don't want is for companies to be allowed to give the appearance of growth through artificially induced profits and assets (e.g., derivative tradings), which are generally precipitated by having very low tax conduits for money transfers, at which point all those companies are just big houses of cards. Higher taxes on companies and capital gains work against that trend, and that's what I like about it.

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