Capital and Taxes
At 10:18 PM 8/13/96, Brad Dolan wrote:
... and while I'm ranting...
Can somebody explain why:
1. Good jobs of the future are knowledge jobs which require little capital investment.
and
2. We need a capital gains tax cut to encourage capital investment to stimulate the growth of good jobs of the future.
?
Sure, as an investor in some small companies and a high-risk startup, I'll give some thoughts on what motivates _me_, and why a capital gains tax cut would help the economy. First of all, let's dispense with any confusion between "capital investment" and anything related to "capital goods" or "capital equipment." The two things are not at all the same. Consider a business that needs (or claims/hopes/plans) $1M in initial seed money to get rolling. Sure, some businesses get started with less, or with nothing, and finance growth out of sales. But a million bucks is not at all uncommon for a startup company that needs some work to be done before sales get started. Note that this million dollars has nothing to do with buying "capital investment," in the sense I think you mean (and in the sense I think Bart Croughs meant). It may all go to salaries for, say, 5 people for a year or two, plus office expenses, some other expenses, etc. Maybe even $50K worth of computers. This a "knowledge-intensive" company with very little needed in capital equipment. How is this money raised, and what calculations does a potential investor make about the risks, rewards, returns on investment, etc.? For one thing, the gains on such an investment over some time period (typically 3-6 years) are _capital gains_. These are now taxed at a marginal rate of 28% Federal plus whatever state and local taxes may apply, Here in California, the effective total marginal tax rate is 38-40%, depending on some factors. (In several industrialized countries the capital gains tax rate is zero, or nearly zero.) But this 38% rate doesn't even tell the whole story. Suppose that I want to make a $100K investment in this company my friends are trying to start. Money has a cost, both in the "rent" that is charged on it, or the "rent" that _could have_ been charged to another for an alternate use, and on something else that's terribly important: taxes must be paid on other assets sold to raise the $100K. For example, if I own shares in Intel, bought many years ago, I have to sell $160,000 worth of Intel stock, send a $60,000 check to Uncle Sam and Uncle Pete, and then send the remaining $100,000 to my friends. If the new investment *doubles*, my $100,000 gain is taxed at 38% and I'm left with a gain of about $62,000. It doesn't take a number theorist to see that I may as well have not even bothered. So long as I just sit on the Intel stock, no taxes are owed. Sounds like a no brainer to me. Yes, taxes will _someday_ have to be paid...but many of us are hoping, praying, and pleading for a cut in the capital gains tax rate...at least a rollback to the 22% rate of yesteryear (and 4% or less in states). This huge "backlog" of unrealized capital gains (aka gains on paper, but not yet taxable) is what is being spoken of when people like Jack Kemp and Steve Forbes speak of "unleashing" the capital gains now tied up due to the high tax rates. (Letting capital flow more easily will also make for a more efficient market. It may be that I would've liquidated much of my Intel holdings had the tax penalty not been so high.) There are many more things I could say, but this is already too long. Just don't think in terms of "capital" as just being "capital equipment." It is really "investment" in all its many forms. "Free the capital--and I don't mean D.C." --Tim May, author of "DOS Capital" Boycott "Big Brother Inside" software! We got computers, we're tapping phone lines, we know that that ain't allowed. ---------:---------:---------:---------:---------:---------:---------:---- Timothy C. May | Crypto Anarchy: encryption, digital money, tcmay@got.net 408-728-0152 | anonymous networks, digital pseudonyms, zero W.A.S.T.E.: Corralitos, CA | knowledge, reputations, information markets, Licensed Ontologist | black markets, collapse of governments. "National borders aren't even speed bumps on the information superhighway."
Brad Dolan writes:
BD> Now imagine that I want to make that $100K investment or, more BD> realistically, that I want to invest $100K in my kid's college BD> education. I'm going to have to earn wages of $160K and pay $60K BD> in tax. It would make me cranky if the guy next door could just BD> clip $100K of coupons, tax free, to pay for his kid's education. BD> While I'm sure Steve Forbes could, I can't think of a moral BD> argument why income from selling stock should be taxed at a rate BD> lower (or higher) than than income from wages. Because, when you work harder (or more), you are (presumably) producing more and adding to the economy. When you leave money in an inefficient investment, you aren't. Of course, this is all based on the premise that income taxes are moral in the first place. (; -- #include <disclaimer.h> /* Sten Drescher */ ObCDABait: For she doted upon their paramours, whose flesh is as the flesh of asses, and whose issue is like the issue of horses. [Eze 23:20] Unsolicited solicitations will be proofread for a US$500/KB fee.
On Tue, 13 Aug 1996, Timothy C. May wrote:
But this 38% rate doesn't even tell the whole story. Suppose that I want to make a $100K investment in this company my friends are trying to start. Money has a cost, both in the "rent" that is charged on it, or the "rent" that _could have_ been charged to another for an alternate use, and on something else that's terribly important: taxes must be paid on other assets sold to raise the $100K. For example, if I own shares in Intel, bought many years ago, I have to sell $160,000 worth of Intel stock, send a $60,000 check to Uncle Sam and Uncle Pete, and then send the remaining $100,000 to my friends. If the new investment *doubles*, my $100,000 gain is taxed at 38% and I'm left with a gain of about $62,000.
It doesn't take a number theorist to see that I may as well have not even bothered. So long as I just sit on the Intel stock, no taxes are owed. Sounds like a no brainer to me.
Yes, taxes will _someday_ have to be paid...but many of us are hoping, praying, and pleading for a cut in the capital gains tax rate...at least a rollback to the 22% rate of yesteryear (and 4% or less in states). This huge "backlog" of unrealized capital gains (aka gains on paper, but not yet taxable) is what is being spoken of when people like Jack Kemp and Steve Forbes speak of "unleashing" the capital gains now tied up due to the high tax rates.
Now imagine that I want to make that $100K investment or, more realistically, that I want to invest $100K in my kid's college education. I'm going to have to earn wages of $160K and pay $60K in tax. It would make me cranky if the guy next door could just clip $100K of coupons, tax free, to pay for his kid's education. While I'm sure Steve Forbes could, I can't think of a moral argument why income from selling stock should be taxed at a rate lower (or higher) than than income from wages. Jamie Whitten, late chairman of the House Appropriations Committee once said, "All anyone wants is a special advantage over the next fellow. Understand that, and you've understood the intent of every law ever passed." I think that applies to tax law. bd
participants (3)
-
Brad Dolan -
Firebeard -
tcmay＠got.net