Comment · Wed, December 5, 2012
President Obama on why he's standing his ground on tax hikes for the wealthiest 2%: "It’s not me being stubborn; it’s not me being partisan. It’s just a matter of math."
What they were answering
OandO · 1 points
But how is this any diffferent than any form of taxation?
This guy's argument is the equivalent of someone bitching about their payroll taxes because the governement doesn't work hours for them.
Yeah the government is taking a cut, it sucks. In a perfect world we could all keep our own money, provide for ourselves, and all have equal access to resources. But why should investors have some privilege over others?
u/MisterYouAreSoDumb
Because he is looking at it in isolation. If this was your only transaction in a year, and it was a risky investment, then taking the same tax as regular income does not make sense. It would discourage the person from taking the risk of investing, since his return on investment would be significantly lower, while the risk of loss remained the same. Income tax is different, because there is no risk of loss. Investment income comes with the potential for losing money that you have already made (and been taxed on). The less potential return on the investment, the less likelihood the person will go through with it.
However, most people half other sources of income as well. This allows you to hedge your potential losses, since they are tax deductible. So let's say you make $100K per year in normal income. Now let's say you want to invest $25K in a company for a potential return. You could also potentially lose it all. If that were to happen, you could write off that loss on your $100K regular income, meaning you would only be taxed on $75K. You would take a loss on the investment, but so would the government. You would still be losing more than the government, though. That is why the capital gains tax is lower than the income tax, to incentivise investment.
If we were to make the rates the same, then the potential reward for the risk would be lower. Depending on the specifics, that could cause people to forgo that investment and hoard their cash. That's the argument for having lower capital gains tax rates. Trying to keep the cash in circulation. I am not sure what my stance on the whole thing is. It's complicated.