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Comment by sfblah | Hacker News Reader

My view is capital gains rates should be capped at some reasonable gain per year. So, for example, you'd pay the capital gains rate on the first 10% per year you earn on an investment. If you hold it 10 years, that would be scaled up appropriately (1.1 ^ 10). Then, once you make more than that, you'd pay regular income taxes.

That would avoid the issue of incentivizing gambling while not disincentivizing investment in the economy. Notably, it would also require founders of big tech companies to pay mostly income taxes, since their cost bases are so low (which I believe is appropriate).

Taxes should also probably be due on assets once they've been held for some period of time (say 5-10 years), whether they sell the assets or not. This would avoid the phenomenon where fantastically wealthy people borrow money against their stock holdings to avoid ever paying taxes, then use estate planning tricks to pass the money on to heirs.

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Congrats! You just created a massive incentive to churn your investment holdings!

Make an investment in a new technology? Best to sell before your returns are 10% (or 20% in 2 years, etc), then immediately buy back in and repeat.

No doubt this would seriously disincentivize long term investment.

That's not what it would do. Think about it.

Edit to add color:

If you hold 6 months, the hurdle rate would be ~5%. If you hold 18 months, it's ~15%. You can't avoid the tax by churning, unless you're phenomenally lucky at market timing. The hurdle rate isn't 10%. It's 10% per year. That makes a huge difference. There is no incentive to churn your holdings. Quite the contrary, as the percentage taxed at a lower rate goes up each year.

People churn today because of tax incentives like tax-loss harvesting.

If you think your return >10% in a year, sell, pay lower tax, rebuy and reset your tax basis. Repeat.

People do tax-loss harvest, but they're taking a risk because they have to stay out of the stock for 30 days, and during that time who knows what will happen. I'd be interested in a more concrete example of exactly how someone could do what you're saying to come out ahead. So far you just keep saying vague things. What exactly would someone do under my system to sidestep it?

You just purchase another stock right away that correlates or matches the one you sold. Sell Vanguard total market and buy Fidelity total market. No need to stay out of the market for 30 days.

I don't buy that the reversion to income tax should happen on high percentage gains if the absolute gains are low. I think the tax could be made even more progressive. Something like:

The first $500k of capital gains get current cap gains treatment. After that, all gains are taxed as regular additional income.

This is gross double taxation: they already paid taxes when they earned the money you are investing, and you are suggested taxing them again at high rate.

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