Taxation and the middle class

[tomh009]

This relates to a valid concern about changes of this nature: if someone has planned based on the rules that have been in effect, new rules may have a significant negative effect on them, and characterizing everybody affected as wealthy and therefore not worthy of concern does not change the fact that a middle class person can easily have a small number of significant assets by the time they retire.

I don't think "not worthy" is the right term, but tax fairness definitely does come into play. A wage-earner earning $70K will pay about 30% marginal tax on income. A real estate investor selling a property and making a $210K gain (three times the amount) will have a marginal rate of just 25%. At $280K (four times the wage-earner's income) that marginal rate on capital gains will still be only 35%, not much more than someone earning $70K per year.

Is that unfair, do you think?

[bravado]

Even ignoring the fairness of it all - do we want to reward potentially-damaging investing and punish productive labour? Because so much of our productivity issues in the economy seem to come from the fact that only land hoarding and rent-seeking has a meaningful return on investment. That should be changed through taxation - which is essentially just government-mandated incentives against anti-social economic activity.

[ijmorlan]

I don't think that has been made clear yet, but the impression is that will apply to the whole gain ( reduced by all eligible deductions).

That would only work if you have in some way crystallized (and paid taxes on) the capital gain prior to the new rules coming into effect. When you sell an asset, you will always pay taxes on (the included part of) the capital gain, which is the selling price less the acquisition costs, regardless of when it was acquired.

Well, the point is that an existing owner of an asset accrued capital gains, and therefore tax, based on the existing rules. We are now changing the rules, and taxing the already-accrued capital gains based on the new rules is a confiscation of existing wealth.

That is not a conclusive argument, because we’re talking about “should”s here, but if instead of some hugely wealthy person we imagine a person with a good middle class job whose savings are mostly in the form of a rental property or two, the new rules might have severely affected their retirement plans. Even if we’re talking about enormously wealthy people it’s generally bad for people when the rules aren’t predictable, and it’s certainly bad for the investment climate in a country.

The real question is how to make us all wealthier, while measuring that in a way which doesn’t lead to massively unsustainable changes like burning as much fossil fuel as we do. Also make sure the “predictability” I’m talking about applies to everybody. For example, a farmer who is planning based on owning their land, should be allowed to sell when they want to for the price they can negotiate with a buyer, rather than being expropriated by the government acting on behalf of a huge corporation.

[ijmorlan]

Even ignoring the fairness of it all - do we want to reward potentially-damaging investing and punish productive labour? Because so much of our productivity issues in the economy seem to come from the fact that only land hoarding and rent-seeking has a meaningful return on investment. That should be changed through taxation - which is essentially just government-mandated incentives against anti-social economic activity.

What about productive investing?

For example, building a factory to make things that people want, subject to appropriate regulations that ensure the operation doesn’t defraud humanity by polluting its environment.

[bravado]

Even ignoring the fairness of it all - do we want to reward potentially-damaging investing and punish productive labour? Because so much of our productivity issues in the economy seem to come from the fact that only land hoarding and rent-seeking has a meaningful return on investment. That should be changed through taxation - which is essentially just government-mandated incentives against anti-social economic activity.

What about productive investing?

For example, building a factory to make things that people want, subject to appropriate regulations that ensure the operation doesn’t defraud humanity by polluting its environment.

That’s beneficial economic activity, and yet we don’t seem to see a lot of it even with existing “low” capital gains taxes?

What we do see a lot of: house flippers and slum lords.

[tomh009]

Well, the point is that an existing owner of an asset accrued capital gains, and therefore tax, based on the existing rules. We are now changing the rules, and taxing the already-accrued capital gains based on the new rules is a confiscation of existing wealth.

Tax rules and rates are, and always have been, at the discretion of the government. There are never any guarantees as to what the taxation will look like a year later. Assuming that nothing will change a dangerous assumption.  (Professional investors are certainly aware of this and invest accordingly.)

Also, banking a retirement on ever-increasing real estate prices is also a risky assumption.

And while you say "not enormously wealthy", a person making a good salary (say, $100K) plus $500K+  in capital gains will surely look that way to someone who is making $60K and struggling to pay rent.

[ijmorlan]

Report on Business is full of news about business investments, some probably questionable, others much more positive.

My point is just that capital gains arise in many situations, and pointing to bad situations to justify taxing them more leaves out a lot of the picture.

Another thing to remember: the values of a property used for capital gains calculation is based on the nominal prices, not the real prices adjusted for inflation. If I buy something, hold it for a time, and sell it for the same value, I pay capital gains based on how much inflation there has been since I purchased. In the case of a property held for a very long time, the original purchase price may be de minimis in the modern context so I may be taxed based on essentially the entire value of the property. Of course, in the usual case the property will have also gone up in real value, often by a lot, so it’s not as bad as that.

[tomh009]

Another thing to remember: the values of a property used for capital gains calculation is based on the nominal prices, not the real prices adjusted for inflation.

Same applies to dividend income or interest income, too: you may be getting 6% interest but if the inflation rate is 4%, your real income is really closer to 2%--but you will be taxed on the full 6%. It's how taxes work (in every coutnry that I am aware of), this is not specific to Canada or to capital gains taxation.

Canada is actually taxing capital gains less heavily than many other countries. 100% inclusion rate is quite common elsewhere.

[ijmorlan]

And while you say "not enormously wealthy", a person making a good salary (say, $100K) plus $500K+  in capital gains will surely look that way to someone who is making $60K and struggling to pay rent.

If you want to beat up on wealthy people, beat up on the super-wealthy.

We can build a society where everybody has the financial equivalent of a $100,000/year job. We cannot build a society where everybody has the power of a billionaire.

[danbrotherston]

And while you say "not enormously wealthy", a person making a good salary (say, $100K) plus $500K+  in capital gains will surely look that way to someone who is making $60K and struggling to pay rent.

If you want to beat up on wealthy people, beat up on the super-wealthy.

We can build a society where everybody has the financial equivalent of a $100,000/year job. We cannot build a society where everybody has the power of a billionaire.

Paying taxes != "beating up on".  Nobody is suggesting we literally eat the 500 thousandairs.

[ac3r]

Imagine thinking you're entitled to what I earned...

[bravado]

Imagine thinking you’re entitled to pay less than others do for public services because your income is acquired a different way

[ijmorlan]

If you want to beat up on wealthy people, beat up on the super-wealthy.

We can build a society where everybody has the financial equivalent of a $100,000/year job. We cannot build a society where everybody has the power of a billionaire.

Paying taxes != "beating up on".  Nobody is suggesting we literally eat the 500 thousandairs.

You’re focussing on my exact wording and ignoring the main point, which is that the income inequality problem isn’t primarily that there are lots of people who make 2-3 times the average. The main problem is that a tiny, almost invisible, fraction of people are thousands of times wealthier than typical people.

[ac3r]

Imagine thinking you’re entitled to pay less than others do for public services because your income is acquired a different way

I can't agree with that. Why should people who have earned more through their own volition be obligated to give a government a significantly larger sum of those earnings than others do? How is that fair? If I chose to guide my life in a way that has resulted in an abundance of wealth, that all belongs to me minus what at least should be fairly taxed. It is mine and mine only. If the government can't afford to do its job, then it should be making cuts where necessary and finding ways to earn more, rather than expecting those with more of it to give it to them. I also find it absurd that many of the general population has also somehow got the idea into their head the whole "eat the rich" rhetoric, where there is almost some sort of psychological envy that makes them resent and hate wealthier people than them, to the point they have deluded themselves into thinking they should be entitled to some of that (through however the state would use it, if it were more heavily taxed).

Any expectation that a government should be given the authority to heavily tax those who have more is authoritarian. To quote Ludwig von Mises:

The state is a human institution, not a superhuman being. He who says “state” means coercion and compulsion. He who says: There should be a law concerning this matter, means: The armed men of the government should force people to do what they do not want to do, or not to do what they like. He who says: This law should be better enforced, means: The police should force people to obey this law. He who says: The state is God, deifies arms and prisons. The worship of the state is the worship of force. There is no more dangerous menace to civilization than a government of incompetent, corrupt, or vile men. The worst evils which mankind ever had to endure were inflicted by bad governments. The state can be and has often been in the course of history the main source of mischief and disaster.

We should pay fair taxes as a population, but nobody should be forced to pay more because they have more. The wealthy and the less wealthy all use said public services on more or less equal terms, therefore we should be paying an equal share for it. And if the government needs more money to run the country they were entrusted to correctly run, then they should figure it out. If it can't do that, dissolve it because they are clearly a bad government.

[KevinL]

It seems you would say that taxation is a burden. If so, having everyone pay the same amount in tax is an unfair burden on those who make less, because a larger portion of their available income is taken for that purpose.

Society is not equal; one way to try to remedy that is progressive taxation. Many people, whether laymen like myself, or economists or sociologists or philosophers, would call that a good thing.