No double undoing, from the excellent Matthew Lilley:
“Hello Tyler,
I completely agree with you both on taxing unrealized capital gains.
I was surprised, however, by Furman’s repetition of “why do you men oppose broad and deceptive taxes?” Aside from loopholes like step-up basis (just work those out exactly), how “broad” is the unrealized capital gains tax? It is not like two different categories of consumption goods or income, and some are exempted, like taxing apples but leaving bananas free of tax. Every dollar of unrealized capital gains eventually disappears or becomes a dollar of unrealized capital gains (and every dollar of unrealized capital gains probably starts out unrealized). Either it’s not really wide at all, or the widening range comes from short-term gains. And why should the latter be taxed? (Besides being deeply unfair, on balance, this penalizes very different investments. Why should we want to do that?) Additionally, taxing unrealized capital gains is often a way for governments to get their hands on tax money now rather than later (and thankfully governments are good fiscal managers ), and probably created a vibe to stick with the billionaires.
Furman’s answer is like saying “broad and flattering” as a self-evident argument, without it being remotely clear what this means. Why not pay taxes on unrealized earnings – sounds broad to me? (If not, why not?) And when do you have to pay? At birth? When they give you your SAT results? When you get Harvard acceptance letter or employment letter?
Of course this is sarcastic, but there is a grain of truth here. At the beginning of the first phase, a large part of the implicit value is the value of future work that cannot be compensated. (Actually, one argument given for the benefit of taxing capital like wages is that the biggest capital gain is the income of late founders etc). A raw idea has value, sure, but most of the startup value disappears if everyone in the organization quits for some reason and tries to just “sell the idea”, and that number of individual employees is enough to ensure that people don’t. t stop randomly – that’s why the value of future work is valued.
So why should we tax some types of workers’ wages in the future but not others? The argument ends broad and soft, doesn’t it?
As for Dylan Matthews’ claims of tax-free unrealized gains such as interest-free loans from the government, this appears to be confused and based on conflicting assumptions about rates of return. Here is Matthews:
It effectively offers interest-free loan income: if I get $1 billion in windfall profits from the 2010 IPO and owe $250 million in taxes, I can wait ten years and still only pay $250 million, interest-free, if I donate. you will not sell yet.
This is only true if the asset is not growing or earning interest at the moment. Suppose an asset grows at a rate R for n years. Then the government will get tax money of 250m * (1+R)^n when the property is sold in previous years. The government is not fooled with money – if expected these should have the same current value. (Presumably, such assets grow faster than the risk-free rate, so the government comes out ahead in dollar terms by waiting because the tax money captures this risk premia as well, but if it is a real risk premium the taxpayer should not care).
By comparison, Matthews assumes that the property owner has an expected return of zero over a decade, but this also disincentivizes them from selling. Why would they delay selling if they don’t make money anymore? Maybe you mean that the market interest rate is zero, but how is the government being cheated of revenue?
Hello,
Matt”
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