This isn't based on economic theory or anything, it's just a political choice we have made as a country. We've chosen to reward those who move money around and trade capital more than we reward those who labor. And this at a time when, supposedly, the country is trying to increase its ability to build things.
We're on the same wavelength. To me, I find it hard not to think about our explosive growth as a country happening at the same time we refuse to expand representation of the public. These charts are very frustrating to me: https://www.congress.gov/crs-product/IN11547
The people in power do not want to lose control, but clearly have no idea how to manage the scale of what has been built. There's an American leadership crisis going on right now that is hard to ignore, both in public and private life.
We should go back to having the house filled with 1 representative per 10,000 people. Also, we should do something new and have all the representatives in the house be chosen by lottery.
Normal people are not represented in congress, because politicians are not normal people, but if we chose people by lottery we would have a branch of congress filled with normal people. They would have time enough to study the issues. Some of them would be stupid, but this is no worse than the current crop of politicians.
I don't normally reply twice to the same thread, but I just wanted to say that I wish that the US had been founded with a co-equal branch of government comprised of people drawn via lottery (probably voluntary) like in ancient Greece:
I believe that this was one of the great mistakes by our founders. I'm sure that many suggested it, but unfortunately their ideas were suppressed due to our roots in slavery, colonialism and aristocracy (meritocracy today).
A couple of American politicians were executed in their homes a few months ago and one of the two presidential candidates was nearly JFKd in front of hundreds of cameras last year. A few years ago, a mob stormed the capital and erected a gallows to hang the sitting vice president if they could lay hands on him.
That’s violent enough even if you don’t consider the fact that de facto martial law is about to descend on major cities all over the country in the next few weeks. I’m doubtful that Greeks were anywhere near as volatile or violent as Americans are today.
What you're describing are anomalies. Most Presidental candidates are not "nearly JFK'd" nor do mobs storm the Capitol with regularity. For all of its cultural pretensions of being a nation of armed patriots always ready to "water the tree of liberty with the blood of tyrants" the US political system is for the most part incredibly stable and nonviolent. In ancient Greece, meanwhile, violent mobs, assassinations and tyranny were the norm rather than the exception.
To make the tax incidence on wages and capital gains equivalent, you must first deduct losses due to inflation and risk. For wages, inflation and risk round to zero. For long-term capital gains inflation and risk are large and often the majority of the "gain". Short-term capital gains are already taxed like wages.
In the US, unlike some other developed countries, there is a very limited ability to deduct losses due to inflation and risk from long-term capital gains. Consequently, if they made the tax rate the same as wages then the tax incidence on capital gains would be much higher than wages.
As a policy matter in the US, they fix this large difference in tax incidence by reducing the tax rate instead of adjusting the cost basis for inflation and allowing full deductibility of losses.
If you pencil out the implications of these two policies, I suspect you'd find that you like the way the US does it better. Making risk and inflation deductible to equalize tax incidence enables a lot of financial structuring.
Your point is undercut by the vastly lower effective tax rates rich Americans pay vs middle class workers. It's the norm in this country for someone making millions of dollars/year to pay a significantly lower tax rate on that income than anyone working a decent paying job.
A horseshoe shaped tax graph by income is clearly against the intent and spirit of a progressive tax code so something is very much broken and has been so for decades.
Imagine the risk of not being able to diversify your portfolio and putting all dependency on one income source. How do layoffs, broken health/major sickness, automation, local downturns get compensated by reducing future taxes? If I'm laid off for a year, then find a new job, I still pay the full tax amount on my income from that point forward, no 'loss deduction' from a year being unemployed. If I get sick with cancer and miss years of work then return, I still pay the full tax amount on my income.
I agree with you that it is unfair that people with variable income pay more taxes than people with steady income even if average income is the same. I’m a poster child for people disadvantaged in this way.
That said, I do recognize that mitigating this is really hard without introducing even more complexity to the tax code, which has its own cost.
Wages have no risk when you receive them. It is cash on the barrel. The only risk is counter-party such as your employer going bankrupt before you receive your paycheck. Not zero but statistically very low. Any inflation that happens after receiving wages is on the individual to the extent no one requires them to eat that inflation. (This is an issue during hyperinflation but the is very far from that.)
It was to point out, that giving asset sales an insurance break, or risk break, would only makes sense if we gave working people gapped-income and risk breaks.
Which is to say, that neither makes sense.
The way I would put it is, money inflates if you simply hold it, but it has time value almost always greater than inflation. If you don't at least do that, you are choosing to waste value.
So giving a tax break for inflation would be giving people a break on losses, that capitalism already accounts for. Such as naturally higher interest rates when inflation is higher.
(Yes return on asset balancing mechanisms are not perfect in time, but as noted, neither is employment.)
Seems like it'd be relatively easy to allow one to 'smooth' their income over multiple years. Imagine paying 100 income at 40% tax year 1 and 0 income year 2. A scheme where you could retcon things to be 50, 50, each at say 30% for a 10k refund (or at least credit) seems very doable.
Balderdash! Inflation and risk do not round to zero for wage income - wage income for the most part is NOT indexed to inflation and is certainly NOT guaranteed.
You do not owe future taxes on wages based on inflation, capital does. This difference is separately meaningful in both economics and policy. If you do not understand the distinction then you will always be confused by capital tax policy globally, not just in the US.
Whether or not your wages increase with inflation is an unrelated discussion.
That capital gains is not adjusted for inflation, so if you buy something and it keeps its inflation adjusted value and then you sell it, you have to pay capital gains tax as if that inflation was your profits.
As for risk, if you buy something, then you go bankrupt so you lose it all, the state doesn't pay you the negative capital gains tax from your losses. That is the risk part that workers never have to deal with, there is no such thing as negative salary but negative capital gains happens all the time. You can't cancel out those losses if you didn't make profits elsewhere.
> The way we calculate risk is inherently extremely biased towards the wealthy.
We are talking money here, we tax money so we talk about how money is risked.
We don't tax your health or wellbeing, it is true that those are serious risks worse than monetary risk, but it isn't something the tax office should deal with so it isn't a part of this conversation.
> Inflation should be low and we should make it in the interests of the rich that it stays so.
The prevailing opinion of a lot of progressive economists is just the opposite: standard policy for 40 years post-Volcker was to run with low inflation, loose money and slack labor markets, and probably all this did was keep wage growth depressed.
The brief inflationary period in 2022-2023 was fantastic for low-income workers, it was the only serious growth in real wages they'd seen in a half-century. But voters revolted and probably guaranteed we'll go back to the low inflation, high unemployment policy for another generation at least.
Growth in wages is meaningless if inflation consumes it.
My opinion is that inflation is generally a bad idea but the thing that really matters is inflation volatility. The market will adjust for whatever the inflation rate is (unless its extreme) but volatility just results in loss.
That's why I specifically said real wage growth. In 2022-2023 wages for the bottom ~35% of workers increased at their fastest rate after accounting for inflation. Inflation-adjusted wages for the middle ~40% were basically flat and decreased for the upper quartile. And since that last cohort is the one which dictates policy, they'll make sure it won't happen again.
I don't understand how inflation and risk wouldn't/aren't priced in. You have $1000. You can: put it in your mattress, put it in 'safe' treasury bonds at inflation +a few percent, or yolo it in NVIDIA. Yes if bonds are returning less than inflation you don't buy them and that makes financing more expensive but it's not somehow unfair vs the other things you could do with capital.
Seems like return is roughly proportional to risk(1-tax)investment so changing tax should affect everything proportionally (barring cheating/avoiding the system in some way).
This reply is a complete non sequitur. Taxing capital gains as ordinary income does not mean the removal of a "reward for risking capital" because the potential upside is still unlimited compared to working a wage job.
This isn't based on economic theory or anything, it's just a political choice we have made as a country. We've chosen to reward those who move money around and trade capital more than we reward those who labor. And this at a time when, supposedly, the country is trying to increase its ability to build things.
I thought this specific fact worth mentioning.