Tax Policy

I thought the whole rationale for taxing capital gains in the first place was that we want to discourage inefficiently frequent trading.

If you buy that rationale, then the last thing you want to do is tax unrealized gains. If you don’t buy that rationale, then why tax any gains?

Unless, of course, you’re more into thuggery than rationales….

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8 Responses to “Tax Policy”


  1. 1 1 Nick J

    The more common rationale I see for taxing capital gains is to bring the tax rate on income from capital gains in line with the rate on income from wages.

    Yes, it’s technically taxed twice in that case but given the way progressive taxes work, the income tax effect on capital gains tends to realize at a lower tax bracket. For example there’s no meaningful way in which Jeff Bezos’s earnings from selling Amazon stock were ‘taxed twice’; if he started with twice the money Amazon would not be worth twice as much today. The other example I see is Peter Thiel using a Roth IRA to earn billions in untaxed income because he started with a small amount of money.

    This isn’t a reason to tax *unrealized* gains, of course. But I don’t think anyone advocating for taxing unrealized gains is doing it out of a sense that capital gains taxes are intended to discourage excessively frequent trading, it’s a perceived fairness issue.

  2. 2 2 Jeff S

    “Thuggery”? One reason to tax capital gains is to discourage taxpayers from seeking to recharacterize earned income as a capital gain. People do that to some extent already.

  3. 3 3 Richard

    The income from my human capital is taxed. Why shouldn’t the income from my non-human capital be taxed?

  4. 4 4 AMTbuff

    If assets are held until death or donated to charity, the gains are not taxed as income. Large bequests incur estate tax on top of income tax on any pretax money other than capital assets.

    Taxing unrealized gains is an attempt to take another bite out of assets which would otherwise only face the estate tax at death, or no tax at death if the assets are placed in a donor-advised charity, as billionaires do.

  5. 5 5 nobody.really

    …why tax any gains?

    To pay for government services? Or, to be a bit more precise, to offset some of the inflationary consequences of government borrowing/printing money?

    The Wall Street Journal had a blockbuster article titled “Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth,” reporting how common this tax-avoidance strategy had become.

    Is taxing unrealized gains the ideal way to conduct public finance? Perhaps not. Almost certainly it would make sense to eliminate the stepped-up basis upon death. It probably it would make sense to simply make the current tax cost more progressive. And Biden is working with other nations to establish a uniform floor for taxation, thereby eliminating (or at least reducing) the role of tax havens in promoting inequality.

    But we live in the real world, not in the idealized world, so must pursue a lot of second-best (and third- and fourth- …) solutions.

  6. 6 6 Scott H.

    I think that rationale — to discourage inefficiently frequent trading — is the reason for the differential between short term and long term capital gains taxes. I don’t believe it’s a justification for having a capital gains tax to begin with.

    Also, what’s the moral difference between financing my lifestyle by borrowing against my stock portfolio and financing my lifestyle by borrowing against my home? People are shocked! by borrowing against stocks when they must know plenty of people that take equity out of their homes. It’s easier to generate these double standards when certain members of society are routinely vilified.

  7. 7 7 iceman

    Capital gains seems like an overly blunt instrument for dealing with any income-shifting problem. Clearly it results in a lot of double taxation. Would that we could address the “perceived fairness” issue by educating rather than placating…and direct more of our ire at Congress for creating a byzantine tax code. (It might even be healthy to acknowledge that we’ve all benefited quite profoundly from the talents of the Bezoses et al, even before they pay a dime in tax (that is, on top of the corporate taxes incorporated into stock gains.))

    The fact that we’ve historically encouraged longer-term holding does seem dysfunctionally at odds with targeting unrealized gains. Which seems like a different label for a wealth tax, with all of the workability / fairness issues that entails – do you get a rebate in down markets? Is there a general principle of taxing when there is cashflow? Is all this really worth it for what in the end just amounts to a timing issue? Or in the case of “no tax at death if the assets are placed in a donor-advised charity” – sounds like a pretty healthy incentive to me, is the problem there a lack of government control over the charitable ends? That does start to sound a bit like thuggery / greed.

  8. 8 8 Frank

    Oh, hell, let’s have a consumption tax and end with the bad incentives and most of the paperwork. :-)

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