The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate.<p>Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral tax model. Moreover, it's a socially dangerous one - the idea that there is one set of rules for the rich and another for everyone else is already stressing our nation. Stop actually proving the point, lest you want a revolution to deal with it when society lacks the nerve.<p>Corporate income tax is no big loss. For one thing, it's an increasingly shrinking part of our tax base. For another, it's riddled with loopholes and borderline graft, much more so than individual taxes. This kind of stuff is biased against entrepreneurship, in favor of cozy relationships with politicians. Being connected is more important than being hardworking or imaginative.<p>Tax capital gains as ordinary income. It's simple and fair.
What is the modern argument for preferential tax treatment of capital gains?<p>Arguments against it seem compelling to me:<p>1. The American dream is achievement through hard work. But taxation of capital gains privileges ownership over labor. That's just un-American.<p>2. This preferential taxation creates an anti-productive industry dedicated to re-casting ordinary income as capital gains, leading to misallocation of resources.<p>3. Many states including California tax capital gains at the same rate as ordinary income; CA is not exactly suffering from lack of investment income.<p>4. Optics are terrible: I and many other ordinary Americans pay a higher average tax rate than the very wealthy, including ex-presidential candidate Mitt Romney and in all likelihood President Trump.
Taxation of carried interest as capital gains makes absolutely no sense - I can't think of a better example really to illustrate "one set of rules for the rich and another for everyone else.'
FWIW, here is the simple counter argument:<p>Alice & Bob form a partnership to invest some money. Between the two of them they invest $100. After 5 years they sell their investment for $200. As far as the government is concerned, that's a long term gain of $100 and should be taxed as such. How Alice & Bob decide to split the gains is between them and not a tax question.<p>I don't necessarily buy this argument, but it's a valid way to look at things.
(Disclosure: I'm a VC in California, which is one of the states proposing this tax.)<p>For what it's worth, the tax rates being proposed on carried interest in these states are very high. E.g. California is proposing 17% while Maryland is proposing 19%. The result is that these carry taxes combined with a capital gains tax can be significantly <i>higher</i> than regular income taxes. I think imposing taxes of this size at the state level is foolish because I suspect many VCs would move to other states and commute. I already know LA VCs who fly to SF for 1-2 days every week, and the flight from Nevada or Portland would be approximately the same. Plus housing is much, much cheaper in those areas. It would be even easier to do this in Maryland, since Washington DC is so close.
New Jersey's new governor campaigned on multiple radical changes, including a "wealth tax". The governor is now trying to push this through Trenton. However, the Senate leader of NJ (Sweeney), although a Democrat, was recently reelected in what was one of the most expensive NJ Senate elections in history. Sweeney could not have succeeded at this game without the financial support of those who are most exposed to such a wealth tax. Naturally, Sweeney is sensitive to their tax exposure and has consequently opposed Murphy's plans.<p>I don't see NJ taxing capital gains in an administration that has many other bold plans requiring party support.
Taxation of carried interest really made no sense to me. Sure, get the capital gains benefit off of your investment, but why should one get the capital gains for doing one’s job?
Here's how I think it should work:<p>You can get capital gains treatment on returns on investments in a given year which don't exceed 20% a year compounded annually. This would apply whether or not the taxpayer has realized the gain (though I'd be fine with an exception for startups to give them, say, 5 years to pay since liquidity events don't always align properly).<p>This solves the situations that enrage people, namely:<p>* Carried interest<p>* People that luck into huge gains on flyer investments (i.e. bitcoin or whatever<p>* Startup founders who get capital gains treatment because of the $100 (or whatever) that they put into the company initially<p>In each of these cases, these are really speculations, not investments. There's nothing wrong with that, but I don't see why it should get preferential tax treatment.
The real problem is that finance has got itself included inside the production barrier when really, a lot of what it does is charge outsize fees (e.g. vc and pe) and should really be considered rent-seeking.
We can argue rules, technicalities and definitions, but here's the overriding one: Everyone needs to pull their weight, pay their share. Nobody is more important than anyone else.<p>Pulling your weight means equal sacrifice. It might be hard to calculate the equal sacrifice of someone making $20,000 and someone making $20,000,000, but I can tell you that $1,000 (EDIT: or 20% of income) is a heck of a lot more sacrifice for the former than the latter.<p>I'm sick of people complaining about pulling their weight or saying they are too important to do so. Should taxes (and other laws) now be contingent on the government's judgment of your importance? I suppose the unimportant poor should cover the share of these extra-important wealthy.<p>Personally, I'm kind of proud to pay my taxes and contribute to the enterprise of my democracy.
This is a law that powerful people made for themselves. This is my only hope for a favorable crypto tax treatment: if only enough rich people own these, then the tax regime will be palpable to develop it.
Counterpoint from Matt Ocko (DCVC):<p><a href="https://twitter.com/mattocko/status/1005367508910596096" rel="nofollow">https://twitter.com/mattocko/status/1005367508910596096</a><p>1/ TL; dr:
“Having gotten immensely rich in part due to a tax break, I now solemnly opine that it should be denied to others... with no consequence to me...”<p>This is “pulling up the rope ladder behavior” - here’s why:<p>2/ Fred’s stance screws over underrepresented VCs the most...<p>They are most likely to have smaller funds that - when they win (& I hope they do) - they have big carry events. They are then disproportionately taxed vs old white dudes living on big fees w/ cunning tax structures;<p>3/ and, every dollar coerced by the state from emerging women & PoC VCs for largely noise-level financial impact (vs killing Prop 13) and only really for political posturing means less $ to anchor their next fund’s GP commit, putting them at a fundraising disadvantage; and...<p>4/ ...smaller funds mean smaller mgmt fee, fewer women and PoC hired by those funds, and less reward for everyone from the partners on down - where a carry centric bonus/win for an associate might be hugely meaningful for their family.
Capital gain tax or income gain tax are designed to make the wealthy wealthier.
Don't tax "gain", tax the "wealth".
This will make it harder and harder to hoard wealth as you gain wealth.
Every other "tax" can then be removed.<p>So with the "wealth" taxt, every year you sum all your possessions and you give X% (20%?) to the government.<p>This look simple enough to me, did any country try that?
The carried interest exemption is shockingly unfair. I think the only reason hedge fund managers can pay 15% on a $100m income while say a nurse may pay 40% on a modest income is the fund managers are able to pay lobbyists to effectively bribe the politicians to let them pay less. It's only in the USA - I'm in the UK where we have a huge finance industry without this nonsense. It should go.
Capital gains is wage theft. If you have money, you are taxed at a lower rate than people who have to earn it. Carried interest is just a follow-through of this principle that is apparent at every level of American government. Those with money steal from those who must earn it.
I get annoyed when smart, wealthy people say that tax laws need to change while at the same time take advantage of the tax break becuase it’s ‘the government’s job to fix.’<p>Either pay the additional amount you think is fair and complain about it or take the tax break and don’t. But please don’t complain about it while simultaneously benefitting from the that which you say is wrong.