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Comment by sidko | Hacker News Reader

Taxing capital gains less than ordinary income is a crude method to ensure that you're not being taxed on your losses (in terms of real purchasing power). Unless that's fixed first, there is no way you should be paying for losses.

Based on today's taxation laws, if you bought a stock for $100 10 years ago, and sold it for $110 today, you'll be taxed for the $10 "gain" even though in real terms you lost a fair amount of money. Calculating the real loss (not the nominal gain) is complicated because you need to consider inflation each year into the calculation and the IRS doesn't allow for that.

Not disagreeing that capital and labor need to be taxed at the same rate, but the situation is trickier than just saying "lets tax all gains and wages at the same rate".

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The benefit of inflation is punishing unproductive investments and keep capital in play. Which is why economists want 2-3% not 0. As such low long term capital gains taxes are a bad idea economically. Ideally the tax rate should increase for every year an asset is held. Such that there is no bias for liquidating new assets instead of old ones.

Which is effectivly the same as paying capital gains each year. On the flip side the annual rate could be set as low as 5% or capital gains = 1 - (0.95^(number of years)). Which is actually rather close to inflation targets.

The downside of inflation is that is screws the poor and redistributes wealth to the already rich. The former is evidenced by our need to continually increase the minimum wage and the latter occurs because the middle class is pushed into investments to beat inflation, socializing business risk while leaving the gains to the already wealthy.

Inflation punishes people who assets. Poor people only suffer when their nominal wages don't grow to match inflation -- but that's exactly the same as their employers lowering wages in an inflation-free environment. Inflation is only superficially related to the problem of real wage reductions.

> Poor people only suffer when their nominal wages don't grow to match inflation.

That is exactly the policy intent of inflation.

http://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hig...

"..in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."

In other words there is this aggregate value called "employment" that it's politically expedient to optimize, and the way to do that is to tweak the markets to screw the poor and transfer that wealth to the rich.

Well, yes, if you create a moving wage treadmill that forces people to work harder or fall off, you will get higher employment rates.

I would argue that as a design it has nothing to do with inflation (I'd be happy to consider any evidence that this is its purpose but I am not aware of any). Rather it is more to do with the "bunching" of income when assets are sold. If I earn a return of 10%/yr for 10 years and sell and asset I have to consider all of those gains as income occurring all in the year I sell it rather than 10 years of income.

It is complicated to account for inflation, and there would certainly be a lot of debates about the details, but I think we should do it anyway. It's ridiculous that in a low-inflation environment such as the one we've been in for several years, capital gains are still taxed at a much lower rate than income. In a normal- or high-inflation environment, we should do our best to estimate the real gain, and tax that at the income rate.

But personally, instead of increasing the capital gains tax to match the income tax rate, I'd rather see us lower the income tax to be closer to the capital gains rate, and make up the difference with a federal VAT. Taxing consumption just makes more sense than taxing income.

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