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the origins of profit, part 1

I guess the set of things I tend to go back to thinking about over the span of a given year or two tends to remain relatively narrow. I keep going back to thinking about value and profit, two things which I have posted about several times within the past 2 years.

Most recently this came up again as a friend commented on Facebook to say something about the preferred capital gains tax rate, and how it didn't bother him that certain rich people, such as Mitt Romney or Warren Buffet, pay lower tax rates (because they only pay capital gains) than the middle class. He then went on a rant about how the people who pay only capital gains tax and not regular income tax tend to be the most productive and are contributing a lot to the economy, creating jobs, etc.

I responded by saying that I viewed capital gains as a kind of unearned income, similar to someone who wins the lottery, and therefore if we really wanted the tax code to be perfectly fair, capital gains should be taxed at 100%, not 15%. It's not the kind of income that you have to do any work to get, instead it's just a way to get paid for already being rich and doing nothing. He countered by saying that I was implying thinking was not a type of work, and I assured him that I did indeed consider thinking to be work, but I didn't think most capital gains required thinking to achieve--rather, they just require capital.

This got me thinking again about the origins of profit, and whether what I said at the spur of the moment on FB is really true, or if it's more complicated, or if I'm just dead wrong there, and there is a good reason why capital gains could really be considered to be "earned" in the sense that wages are. (Mind you, I did add a comment that despite not considering capital gains or lottery winnings to be earned income, I do think it is fine for someone to legally keep their winnings, minus taxes. I also acknowledge that making everything perfectly "fair" may have large negative consequences on the growth of the economy, and that if given the choice between the two I may prefer economic growth to fairness.)

Let's start with a definition of "fairness". It's surely a loaded and contentious term, but for my purposes here I think "exchanging value for value" will suffice. In other words, if you can demonstrate that somehow, a person who reports a capital gain on their tax forms gave up something of equal value to the thing they received, then I'd agree that this was a "fair" transaction. If not, surely it was unfair (although perhaps still justifiably legal).

On the face of it, the whole idea of a capital gain seems to violate this principle trivially. By definition, a capital gain is when you buy something at a lower price and then sell it at a higher price. So if there is any real "value" associated with the thing that was traded, it's hard to see how both of these transactions could simultaneously be fair. Of course, this goes back to my related subject of frequent thought this year, the connection (or lack thereof) between fact and value. For someone who believes in objective value, two different exchange values for the same good seems like a direct and immediate proof that there was some unfairness somewhere. For someone like myself who believes in subjective foundational values, the connection is less direct, but it still seems like there is something unfair going on here. Of course, one of the main important shifts from classical economics to neoclassical economics was a shift from thinking about objective value to subjective value, and classical economists like Marx who believed in objective value tended to be a lot more sympathetic to the idea that corporate profits were unfair and unjust, whereas later neoclassical economists tended to hand wave them away because of subjectivity. If all value is subjective, then there really isn't any such thing as "fair" in the first place, which is purely a normative judgement unconnected to any economic facts. Does that mean my intuitions are naive and if I really followed through on the consequences of my subjectivist foundations for value that I'd come to agree with the neoclassical economists? The purpose of writing this post is to explore that.

Continued in part 2...

Comments

( 11 comments — Leave a comment )
roxymartini
Mar. 4th, 2012 11:26 pm (UTC)
one poor person's point of view
As both a wage-earner and an investor, the reason I object to capital gains being taxed at all is this:

The money that I put into my stock portfolio was, at some point, earned income. That is, it was already taxed at whatever my income bracket was at the time. Now, it's possible that Mitt Romney never worked to earn income, but I don't think that's true. He was probably a salaried worker at Bain Capital. Surely his stint as the governor of MA paid him some wages. He was taxed on that money, same as everyone else. Why should he be taxed again on his stock market earnings?
spoonless
Mar. 5th, 2012 12:00 am (UTC)
Re: one poor person's point of view

The money that I put into my stock portfolio was, at some point, earned income. That is, it was already taxed at whatever my income bracket was at the time.

Well, you seem to consistently have no clue when it comes to tax law, I remember you saying something similarly ridiculous a while back about taking home less money when you make more income.

You are never taxed on money you put into your stock portfolio, you are only taxed on the extra money you make on top of that. For example, if you make $50,000 in wages in a year, then you pay taxes on that (once and only once). Then if you put it all into the stock market, whether you pay any taxes depends on whether your portfolio goes up or down. If it goes down or stays the same, you still pay no taxes. If it goes up, say to $55,000, then you only pay taxes on the $5000 of additional income you got... never on the original $50,000 again.
roxymartini
Mar. 5th, 2012 12:23 am (UTC)
Re: one poor person's point of view
You are never taxed on money you put into your stock portfolio

This is patently untrue. But I think you know this because you later say "if you make $50,000 in wages in a year, then you pay taxes on that" -- that is money I put into my stock portfolio. It is not tax-exempt just because I invested it. Unless it's a traditional IRA, I guess.

I never said that after paying income tax, the invested money is taxed again. I asked why we should be taxed again on stock market earnings.

And... I just realized that my objection to being taxed on this is more or less just due to my general aversion to being taxed. I guess I wanted to think of taxation as a process that my money only goes through once. Like, if my income has been taxed, it gets stamped with "we already taxed her on this" and then everything that I do with it thereafter is not taxed. And yes, I understand that isn't how it works. Wishful thinking, etc.
spoonless
Mar. 5th, 2012 03:50 am (UTC)
Re: one poor person's point of view

You are never taxed on money you put into your stock portfolio

This is patently untrue. But I think you know this because you later say "if you make $50,000 in wages in a year, then you pay taxes on that" -- that is money I put into my stock portfolio. It is not tax-exempt just because I invested it. Unless it's a traditional IRA, I guess.

My statement there was perhaps a bit poorly worded, but what I meant is that it can never get taxed again, since it has already been taxed when you earned it as income. It gets taxed exactly once, not zero times, not twice, but once. It doesn't matter whether it goes into an IRA or a regular stock portfolio, it never gets taxed again after the initial taxes that are taken out of your paycheck. You're either completely mistaken about this point, or just playing dumb now.
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I guess I wanted to think of taxation as a process that my money only goes through once. Like, if my income has been taxed, it gets stamped with "we already taxed her on this" and then everything that I do with it thereafter is not taxed.

Right, and this is exactly how it works.

If the $50,000 you made from your wages has already been taxed, then there's nothing you can do that would result in another tax on that same income. If you have new income, such as income made from a stock portfolio you put the $50,000 into, then you can be taxed on that *new* income. Like if you made $10 from investing it in the market, then you'd pay a 15% tax on that $10 (in other words, $1.50), but no additional tax on the $50,000.

Your original statement about Mitt Romney being taxed twice on the same money if he earned wages demonstrates why what you're saying is wrong directly. If he made any wages (assuming they were anywhere near what his capital gains income was) then his tax rate would be a lot higher than 15%. It would be a 35% tax on his wage income and a 15% tax on his capital gains income. Two entirely different sources of income taxed at different rates, so his average tax rate would be somewhere in between. If it worked as you're suggesting and the same money could be taxed twice, then his tax rate would be closer to the sum of the two, or 50%.

Edited at 2012-03-05 03:50 am (UTC)
spoonless
Mar. 5th, 2012 03:54 am (UTC)
Re: one poor person&#39;s point of view
And incidentally, Romney's total tax rate was 13.9%. In other words, he couldn't have had any wage income unless it was very small compared to his capital gains income.
roxymartini
Mar. 5th, 2012 04:55 am (UTC)
Re: one poor person&amp;#39;s point of view
Ok, this is all some misunderstanding. I was not suggesting that the same money was taxed twice. I was objecting to taxes on the earnings because the money going into the investments were, at some point, already taxed. And then I admitted this was probably due to my distaste for being taxed in general. The fewer types of tax and the smaller the percent I personally have to pay, the happier I am.

No, it doesn't work exactly the way I want. In particular, "everything that I do with it thereafter is not taxed" is not true. If I invest it and that investment brings dividends those dividends are taxed. We just mean different things, I guess.
spoonless
Mar. 5th, 2012 03:17 pm (UTC)
Re: one poor person&amp;#39;s point of view
I was not suggesting that the same money was taxed twice.
Ok, well if you admit that then I guess we agree. It sure sounded like that's what you were saying to me.

I guess by this comment:

"I guess I wanted to think of taxation as a process that my money only goes through once."

The only way I can make sense of this, aside from thinking that you were implying the same money went through taxation more than once... is that you are lumping all of your money into the category of "your money" and saying that if some of it gets taxed, then more money that you make shouldn't get taxed, especially if it had anything to do with the original money (like being in the same portfolio). It's hard for me to see what the point of that objection is, but I guess we both understand now what we were saying.

By the way, I was thinking about my statement that no matter what you do with your money after you earn it, it never gets taxed a second time... and I realize that it's sort of wrong. If you invest it, it doesn't get taxed again, but if you spend it then it does (sales tax). Although I think this is not quite double taxation either, because technically, it is the store who is selling the merchandise who has to pay sales tax on any items they sell. Most stores are just savy in that they pass on the tax immediately to the customer by adding it on to the receipt... presumably so that their customers realize how much the prices get inflated by tax and don't vote to raise them.

In reality, every transaction is taxed and because of supply and demand, both parties are going to effectively end up paying for some of that. Of course, sales tax is state not federal... I guess you could argue that state income tax is "double taxation" since it has already been taxed at the federal level.
roxymartini
Mar. 5th, 2012 12:34 am (UTC)
Re: one poor person's point of view
Oh, and back to that other ridiculous thing I said -- you're right. It was something I repeated from my mother without actually looking into.

Somewhat relatedly, there IS a strange law in CA that probably effects you. Did you know that all CA workers are legally supposed to be paid overtime for any work they do over 40 hours a week? Yes, but there is a very specific exception to this law- software engineers who make more than $81K (or thereabouts) per year and do not work for the movie industry. So, in other words, if your salary is $80K, but you work an average of 10 hours per day, your pay with the CA overtime laws would be about $110K, but giving you a salary of a few thousand more actually means you get paid tens of thousands less for the same work. Pretty fucked up. (More details here: http://www.dir.ca.gov/dlse/Glossary.asp?Button1=E#employee%20in%20the%20computer%20software%20field).
spoonless
Mar. 5th, 2012 04:01 am (UTC)
Re: one poor person's point of view
That's pretty weird, I hadn't heard about that.

I actually haven't lived in California since 2009 though--I currently live in Illinois but will be moving to New Jersey in a few months. I think the usual convention is that if you're a salaried employee, you don't get paid over time, you just get a certain salary per year and that's it. But if you're a contractor, then you get paid per hour regardless of how many hours you work. That's how it works in the software industry, not sure about other industries.
roxymartini
Mar. 5th, 2012 04:59 am (UTC)
Ah, ok. I think I've heard of this convention too, about salaried workers and overtime. But I think it's bizarre that California has overtime laws for everyone except this very particular class of employees that, I think, are just the sort of people who would benefit most from mandatory overtime laws! And also, that is IS possible to have a smaller salary and end up getting paid more due to wonky laws.
spoonless
Mar. 5th, 2012 12:07 am (UTC)
Re: one poor person's point of view
(Incidentally, there is a type of "double taxation" that Republicans like to complain about that is related to capital gains, but it has to do with corporate tax followed by capital gains tax, nothing to do with taxes on wages. The reasons for this are complicated, but it basically has to do with the fact that a corporation is treated as its own legal entity, separate from the investors.)
( 11 comments — Leave a comment )

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