From: dong@oakhill.sps.mot.com (Don M. Gibson)
Subject: Re: why progressive tax rates (was Re: Clinton's Economic plan attacked)
Organization: Motorola Inc., Austin, Texas
Date: Wed, 19 Aug 1992 21:32:24 GMT

MEDELMA@cms.cc.wayne.edu (Michael Edelman) writes:

>In article <36956@sdcc12.ucsd.edu>
>jlodman@cs.ucsd.edu (Michael Lodman) writes:
> 
>>
>>In article <1992Aug17.174255.16003@ncrcae.ColumbiaSC.NCR.COM> ernie@ncrcol.ColumbiaSC.NCR.COM (Ernie Corley) writes:
>>>Actually, the poor would benefit quite a bit from a capital gains tax
>>>cut.....  much more so than the rich.  Investment fuels the
>>>economic engine that creates jobs, creates prosperity, and creates
>>>opportunity for ALL to advance!
>>
>>I've always had trouble with this. What else are investors going to do with
>>their money?
>>
>>I suspect this is nothing but Reaganomic brainwashing.
>>
>>--
>It's always surprising to me that people who are otherwise well educated
>in some narrow field fail to realize that economics is a bit more complicated
>than their simple intuition would suggest!
you provide an excellent example.

> 
>High capital gains taxes combined with ordinary levels of return on investment
>and low inflation can result in effective marginal tax rates exceeding 100%.
>The math is trivially simple. Try it yourself. Assume an inflation rate of
>4%, a bank account yielding 6% and a marginal income tax rate of 30%. That's
>an average middle-income scenario. Now compute the actual inflation-adjusted
>marginal tax rate on a $100 investment:
> 
>Initial deposit:               $100
>Nominal return after one year: $106
>Nominal Profit:                $  6
>Tax:  (roughly)                $  2
>Actual inflation adjusted
>       return: (approx)        $  4
>Real marginal tax rate:          66%
>Real return on investment:        2%

interesting example, but that is *savings* and *interest income*
not capital gains income.

how is this example:
   company A buys $10Mil worth of capital equip. 
in 5 years it is worth $0.  they have no capital gains and 
lots of jobs are involved in making that equip.
> 
> 
>Trading in the short term can easily result in tax rates exceeding 100%.
how is that?  do you assume that inflation is > 1/tax rate??

>What does this do to investment? Investors are intelligent, rational
>beings; they're not going to invest their money for a loss. WHat happens
>is that the tax structure pushes capital into government securities,
>underground, or overseas.

people with cash have two choices: 1) stocks/savings or 2) direct capital
investments.  (1) provides money needed by businesses equally.  there
should be no special break for stocks vs. savings/bonds.  2) will usually
only result in real gains if it is a non-productive investiment: gold,
race-horses, antiques, baseball cards,....  Any cap gains rate deduction 
takes money from (1) and puts it into (2).  That hurts business=jobs=
national economy, but is dandy for folks with lots of cash/gold/racehorses/
antiques/baseball cards/....

> 
>The flight of capital to Mexico has far less to do with labor costs- much
>of which are balanced by training costs, lower production, transportation
>and so forth- than by the tax on capital. It's interesting to note that many
>European countries that are far more paternalistic and socialist than the
>US- Germany is a good example- don't have this hostility to business.
>Consequently they have low or negligible capital gains taxes and profitied
>well from that policy.
how does this hurt business?  it only hurts when somebody wants to cash in
on a business.  why shouldn't they pay taxes on that????
> 
>Everytime capital gains taxes have been cut in this country there has been
>an *increase* in tax revenue as properties changed hands and profits were
>taken. This is to be expected, as investors have learned from experience
and weapons production goes up during wartime.  
>thta such tax cuts are often temporary and balanced by other increases. A
>permanant elimination of capital gains taxes would bring a lot more capital
>back to US shores.
wrong, there is plenty of capital coming here, but it is all getting sucked
up by the Feds who keep giving tax breaks.  businesses are helped by 
cheap money (low interest rates), not by economy distorting tax breaks.  
Xref: sparky talk.politics.misc:39249 ca.politics:6705