If the capital returns 4% and is taxed at a 30% rate, you will have the same effect as if the capital is taxed at a rate of 1.15%.
I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor.
Someone who earns $100'000 from labor and $50'000 from return on capital should be taxed at the same rate as someone who earns 150'000 from labor.
> I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor.
Almost there. One step further and you’ll realize the root injustice is that rent is taxed less than either returns to capital or labor.
Compensation for labor and returns to productive risk bearing or entrepreneurship should not be taxed. Rent seeking, where profit is guaranteed disproportionate to investment of labor or capital should be taxed out of existence.
Before income tax, nobody had any idea about who was making what. Fast forward 100 years and we still have no idea about who holds how much capital. Even if you disagree on a universal wealth tax (just like we have for income) there is an argument to be made that it is important information to policymakers.
Other than that Piketty argues that larger wealth means larger returns (per unit capital) and that is a very strong argument against a flat capital gains tax.
Moreover I think wealth can be used in ways which don't necessarily produce an income: for influence, as collateral...
>>Before income tax, nobody had any idea about who was making what.
That's precisely why the income tax is socially harmful. It forces people to divulge intimate personal information to the state, under pain of imprisonment. It's nothing less than warrantless mass surveillance.
The government having this much information on people creates an information asymmetry in society that makes the state incomparably powerful relative to private citizens. This manifests as trends like the suburbs of Washington, DC being the wealthiest in the US, and seeing the most income growth in the US over the last 40 years.
> The government having this much information on people creates an information asymmetry in society that makes the state incomparably powerful relative to private citizens.
Government, in a democratic society, is simply the citizens wielding their power collectively. It cannot possibly be more powerful than the citizens it serves.
A democratic system of rules doesn't mean a democratic distribution of power. Rules rarely have their intended effect 100%.
In all democracies, elites form, which wield far more political power, and derive far more benefit from government, than voters.
Even in a perfectly democratic society, giving the majority, acting collectively through their government, so much power over individuals would be dangerous, because it would create enormous rent-seeking opportunities for those who wield the most influence over public opinion and because it would endanger persecuted minorities.
> Other than that Piketty argues that larger wealth means larger returns (per unit capital) and that is a very strong argument against a flat capital gains tax.
But someone who earns more will also have a higher marginal tax rate.
There is probably better risk tolerance once you have a net worth above e few months of expenses. But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.
> But someone who earns more will also have a higher marginal tax rate.
Not currently on capital
> But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.
That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.
There are economies of scale involved here, both in diversification and in management. Moreover some markets are not even available to investors who are not larger than a certain threshold.
I said in my comment that return on capital should be taxed the same as labor income.
> That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.
Do they really outperform a basic index fund strategy? Any data on this?
There isn't a market that offers better risk adjusted returns than than what is available with affordable index funds.
The only exception are probably the index funds of Dimensional Fund Advisors. They are only available to investors that have an approved financial advisor.
> Do they really outperform a basic index fund strategy? Any data on this?
Yeah, Piketty's book. But of course the Norwegian government and Harvard administrators are just a bunch of idiots, they have billions of dollars to invest and didn't think of a basic index fund! Now they can save a lot of money firing whoever was managing it for them!
Most fund managers are very intelligent people, yet most of them fail to outperform a basic index fund.
The Harvard endowement underperformed the sp500 by more than 3% annually for the last 10 years. So instead of a plus of 220% it produced a plus of about 130% over the same period.
There is lots of data that shows that passive strategies outperform hedge fund and these university funds.
It might be sound strategy for an endowment to give up upside in the most raging of bull markets that we’ve ever seen in exchange for lower drawdown in down markets. A low beta portfolio underperformed (by definition) in 2009-2019.
I’m a staunch proponent of passive index investing so I suspect we largely agree on philosophy, but the mere fact that someone underperformed in the somewhat historically anomalous market we’ve enjoyed for the last decade is not conclusive that they clowned it, IMO. If they outperformed 2005-2008 or outperform in the next bear market, that would be evidence again full clown performance.
That article states they outperformed when measured over a 10, 15, 20, and 25 year period and underperformed over a 5 year period. (See the table. The longer periods include the more recent periods meaning they had strong outperformance early that more than made up for the recent under.)
Is that evidence that they’re dramatically underperforming? It seems the story is mixed and you could argue either way depending on whether you think the last 5 years are more important than the prior 20 or not. (It might be, if you argue that something fundamental changed. That would fall into the “this time it’s different” which is generally falsified eventually.)
The endowements averaged the market over the last 25 years. There will always be some funds that will outperform the market. In the majority of the cases this will be luck. (Except for exposure to known risk factors like size or value)
Harvard is optimizing for a different objective than retail investors or even smaller endowments. It can afford to take less risk and get less return.
Lots of small colleges with 100MM endowments using a passive strategy will fail to survive the next deep recession. They need those returns to survive, so they have no choice but to accept the associated risk. But one deep down market without an associated counter cyclical uptick in enrollment numbers and they are dead. Ask any small private college CFO and they'll agree.
On the other hand, the public markets could lose all their value and Harvard would still be able to cover its operating expenses.
Harvard's goal is to survive for centuries. The goal of a college with a 100MM endowment is to make payroll during the next few school years.
Taxing capital incentivizes putting it to work. If you only tax gains then people can endlessly horde wealth. Taxing the wealth itself makes hording unappealing... I think.
> But hoarding wealth isn't a problem for inequality.
It absolutely can be, especially for wealth that is finite. (Like land for housing)
> Inflation is the process that incentivizes capital to be put to work.
Does it though? Inflation mostly just punishes labor alone, labor feels the effects of inflation far more severely than anyone else.
With enough capital (the amount anyone 'hoarding wealth' already has), the capital automatically buys itself out of any problem of inflation, because the returns to sit on that cash are routinely higher than inflation itself is.
Inflation can't currently incentivize capital to be put to work, because capital just sitting doing nothing already far out-earns any loss from inflation. And for inflation to be strong enough to actually incentivize capital to be used, you'd have to bump it to astronomical heights (like say, 15-25%), at which point you've completely obliterated all wage-earning people's lives.
This is why many well-respected people advocate for a wealth tax. In a perfect world, inflation would be exactly 0, and a strong punitive wealth tax would discourage greedy people from hoarding wealth.
The market already has a mechanism for incentivizing putting capital to work, though. If something is held off the market ("hoarded", in your terminology), it reduces supply, and the returns in that area go up, making it more attractive to do something with it.
For money-wealth, the outlook is even better. If Scrooge McDuck, puts all his money into his basement so he can swim in them, he has removed those from the supply and increases the value of everyone else's money while he holds it off the market.
I'm not an expert, but what you describe as "capital sitting doing nothing" is, presumably, capital invested in some kind of market index? In which case it's by definition not "sitting doing nothing", right?
Unless you were referring to capital in the sense of owned non-market property that appreciates with time? Land/property values are a major topic of discussion throughout this thread for sure.
Just trying to make sure I'm following the thread of the argument here.
> With enough capital (the amount anyone 'hoarding wealth' already has), the capital automatically buys itself out of any problem of inflation, because the returns to sit on that cash are routinely higher than inflation itself is.
I remember the late 1970s, when inflation was 14%, and sitting on cash paid 5%. There have been times when your "just sit on cash" approach meant losing your shirt.
But taxing capital is not possible and probably a bad idea. This will require you to list everything you own to the government who will then evaluate the worth of it. I really can't think of much else that's a worse violation of privacy. It will also make owning something expensive a bad idea, because you'll have to pay to own it. In fact, can you even say that you own it at that point? Aren't you basically renting it from the government instead? Thinking more about it, I'm surprised that totalitarian systems didn't have a wealth tax.
Why does it matter how it is taxed?
If the capital returns 4% and is taxed at a 30% rate, you will have the same effect as if the capital is taxed at a rate of 1.15%.
I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor. Someone who earns $100'000 from labor and $50'000 from return on capital should be taxed at the same rate as someone who earns 150'000 from labor.