Taxation of carried interest as capital gains makes absolutely no sense - I can't think of a better example really to illustrate "one set of rules for the rich and another for everyone else.'
Here a pretty good breakdown of how it works and why it makes sense [0].
To be clear, I’m not saying you have to like it, but the rich have been getting richer since the beginning of time. I don’t expect that will ever change. It’s as true with humans as with animals like lions (albeit the measures are different, as lions have no care about dollars).
[0] https://www.cnbc.com/2014/03/04/cnbc-explains-carried-intere...
5 years go by.
We sell the company for $1,000,000. You get $500,000, I get $500,000.
Should I get to pay a lower tax rate than you?
Of course, that would make many hedge funds a lot less attractive for many investors. Hedge fund managers want to have their cake and eat it too.
In any case, thanks very much for your explanations, really helped me think about the issue in a different way.
In any case, as I stated elsewhere(1), I'm actually not sure what I believe on this topic. I can really see it both ways.
You want to make it more expensive to increase productivity? (Because that’s what capital does - it gets invested to increase profits).
The logical path you’re going down would replace road builders with people with spoons to move dirt around and file down rocks with spoons to put them in the ground to walk on.
Seriously, if you consider the logical conclusion of your argument, we end up in madness.
#1 You’ve just discouraged capital investment.
#2 you’ve just agreed with my initial statement that there is a reason carried interest is taxed the way it is. If you tax capital more than labor, then by definition, carried interest is fine, because the people who pay it ARE THE PEOPLE DOING THE LABOR!!
Seriously, I realize that this is an emotional topic for many people, but you have to think through the second order effects. The first effect is pretty simple, but in this case the second order impacts have all sorts of ramifications.
I’m fine with people having their opinion and feeling that something is right or wrong - that’s healthy. What’s not healthy is having an opinion that is either self-contradicting, or made out of frustration.
Think through the scond order effects. Harry’s gave a great exam-let that showed just one simple version. There are tons more.
Capital investment is discouraged, but it's not as if it's going to stop due to this discouragement. What are people going to do with their money, NOT invest it? Found their own companies instead? Acquire capital assets and lease them? It's not as if you can work _instead_ of capital gains, cap gains income is passive.
Capital gains taxes in the US have been higher in the past, and at several points, were higher than wage taxes are now. Things worked out fine.
I build a company. Work my fingers to the bone for years, and take a significantly reduced salary compared to my market value. Later I sell it for a billion dollars.
That is taxed as long term capital gains. Are you saying that’s passive? Sure, you buying a few shares of Ford is passive, but tons of capital gains like in my example are not.
Also, you comment “that came out fine” is rather flippant. When you dominate the world after a world war, pretty much everything is going to go your way, whether you tax income at insane rates or make black people drink from separate fountains. Both occurred in the same time period. If you use you’re argument that “things worked out fine”, why not also keep that around? I think the reason is we’ve managed to see that correlation doesn’t drive our decisions there. And they shouldn’t in taxation either.
Why is the risking of money deserving of special tax treatment but not the risking of time?
You and I earn $200k in wages, and each pay $100k in taxes. You spend your remaining $100k on a boat. I invest my $100k, and 5 years later it's worth $200k. Suppose that $100k gain is taxed like ordinary income at 50%. After taxes I have $150k, which I also spend on a boat.
Without taxes, you would have had $200k to consume in year 0, but you actually got $100k; your effective tax rate is 50%. Without taxes, I would have had $400k to consume in year 5, but I actually got $150k; my effective tax rate is 62.5%.
Who should pay the higher tax rate? The person who consumes their wage income immediately, or the one who defers consumption? For them to be equal, the capital gains tax rate has to be 0%.
You provided an argument for a 0% tax rate on capital gains.
I'm not sure how your comment is a rebuttal to mine? Perhaps you responded to the wrong comment by accident?
I'm sorry if that was unclear.
That's not true and we must be careful not to accept an aristocracy (or oligarchy) as inevitable. That the wealthy will inevitably hold and consolidate power is counter to the history of democracy, a specific rejection of aristocracy, and a system which has worked the other way in country after country to great success economically and politically - great news and great hope for humanity in these times. The foundation of the U.S. is that all are created equal, and after that it's a land of opportunity where merit wins out, not inherited wealth and corruption.
If by that you mean that rich have been getting richer relative to others, that's certainly not true. In the U.S. it's been true since the 1980s, but it fluctuates and in most other advanced economies the proportional difference (the disparity) is much less.
If you mean that there is not downward social mobility for the rich, that's also not true. I don't have the numbers, but I've read about research that overall social mobility (up and down) is significantly less than it was before Reagan. There's also the old American family story: Rags to rags in 3 generations. More concretely, the U.S. used to have higher taxes on the high income, and more importantly, a (much higher?) estate tax: Inherited wealth is not merit, but effective aristocracy. That said, I don't know the inter-generational overall trends of wealthy families.
(Or maybe the parent means something else.)
EDIT: Some clarification + the last sentence
The topic of discussion here is not “social” but economic mobility. Let’s not mix them up so carelessly. Economic mobility is a measure of ability, or potential, not concrete events. To discuss “downward” economic mobility is to imagine wealth being forced upon these folk.
So yes, the rich get richer, and high taxes do not stop that (but present the illusion that it stops ).
I’ll gladly admit I’m wrong if you can disprove my three simple examples. Last I hexked, they were R I C H.
Take money 100 years ago. The richest guy on the planet (ignoring royalty, as those figures aren’t reliable) was John D Rockefeller. He was worth a ton of money, possibly even a billion dollars. Today’s richest man in Jeff Bezos, worth about 100 times that (depending on the stock price, somewhere roughly between 100-125 billion).
So today, people say that the wealth gap is growing. Indeed, the rich are richer.
However, at his peak, Rockefeller was worth about 1.5% of GDP ( a truly crazy sum of money that equates to roughly $350 billion today).
So if we look at inflation-adjusted money, the rich are poorer than they were 100 years ago - indeed, Rockefeller was about 3 times richer than Bezos.
So depending on the metric, the rich are getting richer, and wealth disparities are growing. But when you normalize for inflation one other factors, the disparity is not growing.
Also, if you take the poorest person at the world with zero dollars, and the richest person in the world with one more dollar, than the wealth disparity is growing, and headlines shout out crazy stuff that sets everyone’s emotions.
But zero will always be the lower bound, and the number at the top will always grow (assuming inflation).
So is disparity growing or now? Well, I think the best way to answer that is ask this question: “would you rather be you today, or Rockefeller 100 years ago?”
I’d rather be me. Between the internet, healthcare, cars, planes, etc, I’m way richer than Rockefeller, because despite all that money, he couldn’t begin to buy those things. So society has gotten much richer, and the disparity between me and Bezos is smaller than between me and Rockefeller. Also, I don’t have to really be worried about dying from the flu. Rockefeller did - even a simple infection could kill him, but unlikely to kill you or me.
But I’m not going to debate that particular thing, and I’m fine if we disagree. *
That being said, the timespan question is very valid, but pinnning down the cause is really hard.
If you read the research, the highest correlation is with globalization, not taxes. Let’s pretend you fully buy into that statement. If so, would you argue against globalization? And I mean that as a serious question. This is a really hard problem, and the answers are more like foggy hints than anything else. But if we’re really honest with ourselves, and the answer was yes, what should we do about it? Taxation is hard because it immediately districts the natural market and causes many second order effects. Pulling those apart to understand the root cause is really hard and few people can do it at all, let alone well.
*My main issue is that economists tend to have a poor understand of statistics and cause and effect relative to what they need to really do their job. If you listen to Ed Yardeni, he basically throws out all macro-economics as being a sad state of affairs given how bad their models are compared to the reality they’re supposed to predict. Still worse, novel prize winners continue to spout their theories after they have been proven empirically wrong. Hence my general issue with the field. Some are clearly smart, but enough aren’t that gives me great pause.
The rich (LPs) aren't the ones getting carry, it's the GPs who get carry.