Entrepreneurs "have business to do" as Mark puts it because they stand to make some money from their efforts. The less money they stand to make, the less incentive. period.
Also, you state the following as if its fact:
"what capital gains taxes really do is favor the ultra-wealthy who live off of their investments, rather than those generating wealth directly"
No. In order for the ultra-rich person in your example to have accumulated $5M, he EARNED $6,750,000 and paid the government $1,750,000. So, by paying tax on his investment income, he's paying tax twice on the same money. That simple error aside, you're also missing the point that capital gains tax discourages investing in companies! Which has an impact on a company's cost of capital which has an impact on the price of goods and services which has an impact on you.
If I earn $6.75mm, then pay tax on it, I have $5mm.
Then I have $5mm in the bank and go get a job and earn another $100k, I'm only taxed (via income tax) on that $100k.
Similarly, if I have $5mm in the bank and it earns me $100k, I'm only taxed (via capital gains) on that $100k.
They are parallel taxes... not taxing the same money. The $100k is either earned income or investment income, and the $6.75mm was only ever earned income.
With dividends, it's easy to see that they are double taxed, but is that wrong? Your regular paycheck is double taxed too... first with income tax and then (in most states) with sales tax. There is nothing inherently amoral about double taxation, although it is kind of annoying how it hides your total tax rate.
To me, the annoyance of capital gains taxes is that it creates an entirely parallel tax rate structure, adding complexity (like everything Congress does with the tax code). If capital gains were treated like normal income, and capital losses (up to a certain amount) were treated like normal deductions, then taxes would be a lot easier for most people to file.
Same goes with sales tax. The fact that the government has turned every retail business in the country into a tax collector was an enormous coup. The system is impractical and a pain for businesses, placing the burden on them to raise funds for the states. It's also a massively regressive tax. Due to the impractical implementation, you can't even try to fix the regressive nature. States really need to find a better way to fund themselves.
I do not understand why people make such a big deal of the "double taxation" argument specifically in the context of capital gains.
If I hire an employee, I have to pay payroll taxes on the salary I pay him or her, and then I also have to pay business taxes on the value that the employee gives to the company in the form of increased revenue. Is this "double taxation" also a cause for moral outrage?
yes. name something good that comes from federal taxes.
all of the things that I associate with good government (schools, firefighting, disaster preparedness, zoning, etc.) are all handled by state and local governments.
the vast majority of federal taxes go towards socialist pyramid schemes or a wasteful military that got so bored it had to attack iraq.
That's one of the many reasons I moved. What's funny is how self-important many of the people I met were even though paper shuffling & long job titles are the main currencies.
Morally wrong? Like how? Please look up "utilitarianism" and do some reading on ethics, social contracts, etc.
A statement like the one you made really needs further reasoning to back it up. You might even be correct - but just claiming something to be true doesn't make it so.
socialism is ideally utilitarian. in reality the only people who benefit are those who hold the regulatory power to grant or withhold public funding. all you wind up doing is concentrating power in the hands of those who get to decide what is "the greatest good".
I have no problems with double taxation. Just don't compare capital gains vs. Income tax. Which is what the blogger is doing. When in reality the equation is: Actual Tax Paid = (Income Tax + Capital Gains tax).
If you don't tax capital, then only the wealthy will own capital. Eventually the capital starts owning itself and then the people don't even own capital anymore.
Our tax system has to try and fix one of the fundamental flaws of capitalism -- the tendency for the rich to get richer and the poor to get poorer. Without a capital gains tax, this very worst aspect of capitalism becomes even more emphasized, as capital will last forever.
I sort of see what you're saying. But the States' poor now are better off than the States' middle class was in the 1800s. The problem is, this isn't close to true in many other countries.
> fundamental flaws of capitalism -- the tendency for the rich to get richer and the poor to get poorer
BS. Riches to shirtsleeves abound. Wealth rarely lasts three generations. Now, there are certain subgroups that seem mired in poverty, but that's another matter. The extent to which the rich have been getting richer and the poor getting poorer for the last 30 years in America has everything to do with the explosive growth of government and regulation, NOT capitalism.
Capital gains should be zero. All wealth creation is driven by savings and capital. Maximized capital investment and the incentives to save, maximize growth.
Income taxes should also be zero, by the way. It is entirely feasible to fund a properly scoped government with excise, duties, and user fees.
I'm a big Cuban fan, but I was surprised and a bit disappointed when he made this statement (and I'm also surprised to see Matt defending it). I agree that many entrepreneurs don't consider tax rates when starting up (at least not consciously), but for any given rate there is a marginal entrepreneur who is just over the threshold for starting a company. Mark is so far over that threshold for current rates that he reaches the erroneous conclusion that taxes don't matter in general. I guarantee that there is a rate---whether 90% or 99%---at which even Cuban would throw in the towel, by quitting the game or (more likely) fleeing the country.
Taxes hurt entrepreneurship; higher taxes hurt it more. Denying this just increases the likelihood of more taxes.
What A lot of people see as entrepreneurship is a largely binary exercise: success/failure. Since tax rates do not really effect the venture in this way, they shouldn't effect the decisions of an entrepreneur.
A 'marginal entrepreneur' would need to be very marginal. Even if you consider complex effects (the effect of your uncle making $1m in the 80s vs $.75m on inspiring you). Cuban's talking about the 'within reason' limits based on practical choice a government is likely to make.
What might be affected by the tax situation is the flow of investment capital. Since Cuban is disregarding that as a factor, that has no effect.
I don't think so. I meant marginal as in: Very close to the point where she is going to make a negative vs a positive decision. Or put another way, the number of entrepreneurs starting a business because of this effect is incredibly small.
In addition to the supply of capital (which is quite significant!), tax rates also affect the likelihood that the startup is successful. The higher the tax rate, the higher the company's burn rate, and the less time the company has to gain traction / positive cashflow.
The idea that the economy can be saved by entrepreneurs that never need to raise money is sheer lunacy. I can believe that the funding climate might not be someone's primary consideration when deciding whether to start a company; I can also believe that it might not have much influence on the very early stage growth of the company. However, outside investment still plays a fundamental role in the growth and success of most companies of non-trivial size.
The point is that entrepreneurship (at any significant scale) is intimately related to the availability of capital. That applies to all sectors of business, but particularly to capital-intensive ones.
I think the term you used 'marginal entrepreneur' is appropriate if the tax rate is a significant factor in going forward with a business.
As you said, if the tax rate was in some ridiculous extreme, of course that would be a factor. But then I'd wonder what kind of country/economy would raise taxes to such a high altitude.
In my old line of work, we whipped up a spreadsheet model to show a new company's potential return on investment before we took the idea to investors. For any given company, there is a tax rate high enough that would have made it non-worthwhile.
Of course, we weren't in the web business, so numbers mattered to our investors.
When I started my first company I’d never even heard of capital gains taxes
Granted, but I guarantee that the limited partners in the VC firms you might consider for funding are very familiar with the tax structure in the US. If you raise the taxes on investment income, you effectively reduce the return on venture capital funds, which reduces the amount of money VCs will be able to raise, which reduces the amount of money available to entrepreneurs.
Precisely why you shouldn't have people who don't start businesses enacting policy for people who do... I make a general effort to vote for politicans who have eaten their own dog food on their policy platform, be it having spent time in the energy sector, run their own business, or whatever else...
I too believe that this is wrong, but for a different reason than does timae. It breaks a simple economic axiom:
You Are Not the Marginal Case.
It is simply not valid to extrapolate (especially if you're MC, jeez!) from yourself to all entrepeneurs. You Are Not the Marginal Case.
Just because you and Bill Gates persevered, Mark frikkin' Cuban, doesn't mean that the marginal tax rate on entrepeneurs is unimportant.
Let's restate the argument this way: "Two of the most successful entrepeneurs of all time were undeterred by high marginal taxes on their fledgling businesses, therefore high marginal tax rates do not kill fledgling businesses". Sounds a bit different, eh?
A lot of strawmanism going on. It's not that taxation prevents entry-level entrepreneurs from starting businesses. Rather, taxation represents a misallocation of capital. If a company or person loses an extra million dollars to the government, I promise you that the money will be converted into dust [1], or handed out to failed businesses [2], or spent directly on tyrannical activity [3], or redistributed to pressure groups, or any company or foreign nation with a good lobbying firm or PAC, instead of being allocated responsibly.
[1] Literally, via TNT.
[2] AIG, Goldman, Fannie, GM, Ford, etc
[3] The TSA, the FCC, the CIA.
That's interesting (and partly true), but it's nowhere close to the argument being made in the context of political debate about what capital gains taxes should be. After all, you've presented an argument against all taxes (or at least, all taxes beyond what's necessary to maintain a minimal government). That's quite frankly a much different (and more fundamental) debate than whether capital gains taxes should be fifteen or twenty five percent.
The debate in Washington and in the political media largely centers around whether or not a higher capital gains tax will discourage innovation, which is the argument that Matt is addressing.
I think you have a perfectly valid and consistent view, but the original article was most definitely not "strawmanism". It might have been strawmanism if he was writing the article as a reply to you, but he wasn't.
How about the Laffer curve? Historically, whenever the capital gains tax rate has been decreased, revenue has increased due to secondary effects. That sounds like a pretty good argument to me.
Umm, yeah, and unfettered capitalism does such a wonderful job of allocating resources. Government is terribly inefficient, but what other entity is going to maintain infrastructure, a social safety net, schools, and other basic services from which society benefits? I hate that so much money goes to DOD, TSA, farm subsidies, and the like, but reducing government revenues doesn't force the government to make tough choices, it simply causes it to run an even more unsustainable deficit.
By the way, if you lower taxes (and thus government revenue), it's not defense and corporate subsidies that suffer--they always get their piece--it's infrastructure and social programs. The "starve the beast" concept simply creates more suffering for those who can't afford things like private schools, expensive out-of-pocket health care, and jet time-shares.
federal government does not provide schools. propoerty taxes (state) provides schools.
federal government does not provide infrastructure. gas tax provides roads, state funds and tolls go towards bridges and the like.
as for a social safety net? i'd be fine with it if it wasn't so obviously rotten. it needs to be gutted before any good can come of it.
look at yourtaxes sometime and see what percentage goes towards state vs. federal. ponder how state government can accomplish so much more with so much less.
Sure governments make mistakes, but most first world countries do a pretty good job of converting taxes to public services and a generally good framework for supporting the citizens.
I don't know which country you live in, but most of my tax money goes towards killing brown people and paying for other people's healthcare. I pay most of my taxes to the Federal Government and receive the most services from my state and local governments.
Wow -- downvoted to troll status? Maybe I should clarify my argument. The parent PROMISED us that our money would turn to dust. I think it's safe to say that generally taxes get turned into 'good' things, even if some misappropriation does occur. I think to say that any extra taxed money goes to waste is a little extreme.
I think the very existence of organized governments with stable economies along with generally healthy and happy populations means not all taxes are going to 'dust'.
Don't change the argument. I never inferred, let alone stated "it is impossible to have a stable economy or happy populations without government". I am saying that empirically you can see that governments in first world countries generally aren't screwing things up so much you can say taxes are completely wasted.
You can also feel free to infer that I don't think the free market would do a better job, but that wasn't ever my argument.
I think the case against capital gains is less about the entrepreneur and more about the investors. If the capital gains tax is raised so high that investors can get a better after tax return by putting their money into lower risk investments, then they're not going to want to bother funding new businesses. This may not be an issue if you're making a web app and your only capital outlay is living expenses and hosting fees, but this could seriously hurt innovation in fields where money is required up front to even get started (hardware, pharmaceuticals, etc.)
Why not just have income be considered the sum of all the money you've made in a year? 100k salary with 25k stock gains would give you an income of 125k and that's just taxed normally. Why should capital gains be treated differently at all?
Also, just simplify the entire thing and have a simpler tax rate. It may also be interesting to see what happens if the party responsible for what tax dollars are spent on is not the same party that decides the allocation of the money. Group 1 creates a list of priorities A, B, C but voters then get to choose the tax dollar allocation.
If, by some miracle, you managed to simplify the tax code, then lobbyists would be there the next day trying to add loopholes to it for their clients. Without constraints on government (and ours has none de facto) there is plunder to be had in Washington, and people respond to incentives.
You'd penalize the investment gains with double taxation. The person already paid income taxes on the money that was used to generate the $25K. Why should government policy penalize savings and investment?
So if I buy a lottery ticket for $1 and then use it to win $50 million I shouldn't be paying taxes on the $50 million because I already paid income taxes on the $1?
A quote from Bill Gross, bond manager extraordinaire:
"That ol’ Laffer Curve has a certain logic to it, but it only makes sense at the upper margin. People did work less at confiscatory tax rates imposed pre-Thatcher/Reagan but once they got down to 50 percent or lower, it was all gravy – promoting conspicuous consumption as opposed to higher productivity and overtime at the office."
I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.
In the beginning, this is the whole point. It's not about the money. It's about doing the thing that you just have to do.
0% of nothing is a lot less than x% of something. I still prefer the latter, whatever that may be.
I think the most that can be said without much of anyone besides accountants disagreeing is that simplifying the tax code would actually do a lot of good.
Entrepreneurs "have business to do" as Mark puts it because they stand to make some money from their efforts. The less money they stand to make, the less incentive. period.
Also, you state the following as if its fact:
"what capital gains taxes really do is favor the ultra-wealthy who live off of their investments, rather than those generating wealth directly"
No. In order for the ultra-rich person in your example to have accumulated $5M, he EARNED $6,750,000 and paid the government $1,750,000. So, by paying tax on his investment income, he's paying tax twice on the same money. That simple error aside, you're also missing the point that capital gains tax discourages investing in companies! Which has an impact on a company's cost of capital which has an impact on the price of goods and services which has an impact on you.