Earlier this week, Bill Gates told an interviewer on CNBC that he supports raising capital gains taxes so that they are at the same level as taxes on earned income. Gates said that would tax "capital" at the same rate as "labor". It surprises me just how little Gates understands our tax code and the effect of the change he is proposing.
Let's start with taxing capital and labor at the same rate. That's already done for the most part. People who buy and sell investments that they have owned for a year or less already get taxed at the same rate as the those paid by labor. In addition, people who lose money on investments don't get to deduct much of those losses except against other gains made the same way. The only place where capital is taxed at a lower rate is on long term investments where the rate is capped at about 23%. So is that taxing capital at a lower rate than labor? Not really. Let's use this example: In 1996, someone bought a building for $500,000. Today, they sold the building for $1,000,000. Under the tax code, that's a profit of half a million dollars and the tax paid on that would be roughly $115,000. Now let's compare that to someone who earned $500,000 over the last twenty years. That comes to $25,000 per year. The tax on that income would only be for Social Security and would total roughly $1900 per year. After 20 years, the total tax paid by the worker would be $38,000 or less than 40% as much as was paid on the capital gain. But the comparison gets worse. Since 1996, there has been inflation. Let's say that inflation has run 2% per year. That's actually not high enough, but let's use it for illustrative purposes. At 2%, the building bought for half a million would be worth roughly three quarters of a million dollars twenty years later. That's half the gain that the owner achieved. That's right. Half of his or her gain is just a decline in the value of the dollar; it's not a real gain. But guess what! The government taxes that phony gain anyway. There's no comparable tax burden on labor. So the truth is that it's wrong to say that labor is taxed at a higher rate than capital. Sometimes it is and sometimes it isn't. Gates is just wrong.
The there's the question of the effect of investment of capital. If an investor buys a building and then buys equipment to open a factory, he will be able some day to sell that and be taxed at long term capital gains rates. In the meantime, however, that factory will employ many workers. All those jobs will be created by the investment. That's the point of investment. It creates jobs. It creates many, many jobs. Investment is the fuel that causes economic growth. If the government were to follow Gates' idiotic view, there would be less investment, less economic growth and many fewer jobs.
For a guy who created a business worth many tens of billions of dollars, Gates certainly is an economic illiterate.
Let's start with taxing capital and labor at the same rate. That's already done for the most part. People who buy and sell investments that they have owned for a year or less already get taxed at the same rate as the those paid by labor. In addition, people who lose money on investments don't get to deduct much of those losses except against other gains made the same way. The only place where capital is taxed at a lower rate is on long term investments where the rate is capped at about 23%. So is that taxing capital at a lower rate than labor? Not really. Let's use this example: In 1996, someone bought a building for $500,000. Today, they sold the building for $1,000,000. Under the tax code, that's a profit of half a million dollars and the tax paid on that would be roughly $115,000. Now let's compare that to someone who earned $500,000 over the last twenty years. That comes to $25,000 per year. The tax on that income would only be for Social Security and would total roughly $1900 per year. After 20 years, the total tax paid by the worker would be $38,000 or less than 40% as much as was paid on the capital gain. But the comparison gets worse. Since 1996, there has been inflation. Let's say that inflation has run 2% per year. That's actually not high enough, but let's use it for illustrative purposes. At 2%, the building bought for half a million would be worth roughly three quarters of a million dollars twenty years later. That's half the gain that the owner achieved. That's right. Half of his or her gain is just a decline in the value of the dollar; it's not a real gain. But guess what! The government taxes that phony gain anyway. There's no comparable tax burden on labor. So the truth is that it's wrong to say that labor is taxed at a higher rate than capital. Sometimes it is and sometimes it isn't. Gates is just wrong.
The there's the question of the effect of investment of capital. If an investor buys a building and then buys equipment to open a factory, he will be able some day to sell that and be taxed at long term capital gains rates. In the meantime, however, that factory will employ many workers. All those jobs will be created by the investment. That's the point of investment. It creates jobs. It creates many, many jobs. Investment is the fuel that causes economic growth. If the government were to follow Gates' idiotic view, there would be less investment, less economic growth and many fewer jobs.
For a guy who created a business worth many tens of billions of dollars, Gates certainly is an economic illiterate.
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