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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...
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...
Re: one poor person's point of view
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.
Re: one poor person's point of view
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.