1. How else would you tax business revenue though?
As you said, taxing revenue doesn't make sense, because business with low profit margins are taxed disproportionately higher. That exact same flaw is present with people. If two people have the exact same income, but one lives in a higher cost of living area, then taxing them based on revenue is unequal for the exact same reasons as taxing two businesses with equal revenue but unequal expenses. More commonly, the tax is relatively higher on the poor, as a greater percentage of their income goes to basic expenses of
running a business
I'll start out by pointing out that you didn't actually answer the question. How would you do this differently?
I totally get the analogy you are making. A business with higher relative operating expenses is like a person living in a higher cost of living area. It sounds more like you're trying to make an argument that people should be able to deduct cost of living from their taxes just as businesses can deduct business expenses though, rather than the other way around. Which is a whole different argument.
The idea is that we want to encourage spending as an investment and not as a direct benefit to the spender. Business expenses have to be something that is a legitimate expense relating to the business. There's some wiggle room, and certainly some abuse, but you can't just buy yourself a nice home stereo system and deduct it from your taxes. If you did this sort of thing for personal income taxes, what's to prevent someone from spending every dime they earn on "stuff", so as to eliminate their tax burden? At a bare minimum, I'm better off buying myself something than putting that money into an IRA, since the former will not be taxed.
Which seems backwards, right? I get the relative cost of living thing, but when you try to apply this, it just doesn't work. I suppose we could talk just about food and housing and transportation costs (and whatever other "necessities" we might come up with), but there's nothing to stop me from renting in a more expensive neighborhood, or buying a more expensive car, or buying steak instead of chicken, right? I'd be incentivized to waste money under such a system.
2. I've posted at length in the past why there's a very good reason to tax capital gains at a separate/lower rate than direct income.
And you're wrong, because there is no difference between the two.
a) If I invest $1 million to start my business, make a profit of $500,000, compensate myself as an employee for $500,000, and then sell my business for $1 million to someone else, the $500,000 I earned is taxed as wages.
b) If I invest $1 million to start my business, make a profit of $500,000, leave the money in the company, and then sell my business for $1.5 million to someone else, the $500,00 I earned is taxed as capital gains.
I have done the exact same activity, with the exact same effect on the economy, but received a different tax rate based on superficial labeling of my income.
It doesn't work that way though. At least not most of the time. What you're ignoring is risk and time. In case one, if I make $500k in profit and pay it to myself, I get $500k. Immediately. Directly into my pocket, as each dollar of profit is earned. Assuming I take zero pay for the period of time in question (or at least, not the $500k we're talking about), then I have to do something with that money. If I just put it into a bank account, then I have to pay that as profit, which is taxed. Then, when I sell the business, I'm taxed *again* on that as a capital gain (total assets are increased by the amount in the account, right?). If I spend it on the business in some way (presumably this is expenses beyond what is actually required to simply operate the business, or it wouldn't be money I could have just paid to me as salary or put into an account and not touched), then this is some form of expansion of the business. And that includes risk. Just as there's no guarantee that the first million I invested would generate a profit in the first place, there's also no guarantee that after investing the entire $500k profit into expanding the business will do so either. It's certainly no guarantee that after having spent that money, a person buying the business from me will pay exactly an additional $500k for the business than if I hadn't.
That's the entire point behind capital gains being taxed lower. You are taking money you already have and choosing to risk it rather than just put it in your pocket. If you put it in your pocket today, you get taxed at the full income tax rate. If you invest it in some way, and then wait at least a full year, then I can sell it for whatever it's worth and pay a smaller rate on the increase in value.
Your argument works perfectly if we assume that every single investment returns a gain, every single time. They don't though. Especially in the example you gave.
The far more common case of capital gains comes in the form of investments in various forms of stock though. And that's not something you can equate to "I could have earned this money as income instead" cases. In that case, there's a strong argument that even our lower capital gains rates aren't low enough
. We still see far far too much profit taking and "gambling" in the market versus traditional long term investment. The problem with the short term stuff is that it's not pro-growth. You're not interested in putting money into a company that you think will grow and thrive, allowing market forces to cause money to gravitate towards "good" businesses. You're instead just riding trends in the market. Buying low, and selling high, not really caring what you're buying and selling, or whether those things represent something that is of actual value to others.
I think there's value in rewarding longer term investments. Again, I'm not claiming this is the only or even the best way to do this. But simply saying "it's unfair" without presenting an alternative, isn't terribly useful.
The entire reason capital gains exists is because that's how the wealthiest people with the most control over the system make their greatest percentage of income, so they have controlled the laws to give them a special, lower, tax rate. This is the government picking winners and losers, which I thought conservatives were against.
I'd argue that we want "the wealthiest people" to "make their greatest percentage of income" that way. That's the whole point. To get those people to invest in longer term things, requiring that those things actually increase in value rather than just "playing the market". When 10 people walk to a poker table and gamble, the exact same amount of dollars leave the table as entered. While the money may move hands, the total value didn't increase. We want a market which creates growth in the things that "the wealthy" spend their money on, right? That only happens via actual capital gain. That's what a capital gain is. We want to encourage the "invest in growth" mentality more than the "poker table" mentality.
And, as I pointed out earlier, it also encourages those same wealthy people to invest in shared owernship rather than private ownership (via publicly traded corporations). Which means that you and I, and everyone else who is not already rich enough to own their own business, can participate. And, at least in the arena where capital gains are involved, your investment earns exactly the same percentage of gain and will be taxed at exactly the same rate, as the money invested by the wealthy.
That's not about picking winners and losers. It's about allowing more people to play the game. If we taxed capital gains at the same rate as income, it would not benefit you or I at all. It would marginally hurt "the rich", but what we'd see is a return to the 19th century robber baron style of business model, with the rich directly owning all big businesses, and living off the profits, with little or no chance for anyone else to ever get a crumb.
Again. It's not perfect, but it's better than every other method we've tried.
3. I'm not sure what your point on this is at all. Kinda have to have some kind of time period we're going to measure to calculate taxes. How would you do this differently?
This goes back to capital gains, but exists in other elements of the tax system.
If I buy stock on January 1, 2009 and sell it on December 31, 2009, I pay normal income tax rates on it. If I buy stock on January 1, 2009 and sell it on January 1, 2010, I pay a lower rate for it being a long term capital gain. It's an arbitrary and abrupt cutoff. Taxation shouldn't' be a piece-wise function. It should be analytical.
Ok. Would any other length of time be less arbitrary? Again. How would you do this differently? I've already explained at length (and I'm sure you believe me when I say I could explain at greater length too!) why there are good reasons to reward long(er) term investments with a lower tax rate. You're free to disagree with those points, but as you say, one follows from the other. Having decided that there's a value to encouraging people to put money into investments and leave it there for a period of time rather than selling at the first moment a profit is realized, then offering a lower tax rate after that period of time is a good way to do this. At that point, the only question is about how long that period should be. One year is certainly arbitrary, but so would any other length of time we might choose.
This is the government again picking winners and losers.
You keep saying this, but I don't think you know what it means.
Ok. Joke aside, I don't really understand that you think this means when you keep saying it. Picking winners and losers is when you create some economic effect that directly benefits a set of people or businesses based on a non-market based criteria. Setting broad rules (like capital gains) that applies to everyone is not remotely similar. If you buy some stocks and later sell them, you get the same benefit of capital gains taxes that everyone else gets. I'm not sure why you seem to think there's some magic barrier that makes this only help out "the rich".
The only barrier isn't something the government does, but the basic fact that the wealthier you are, the more you can afford to spend beyond the amount needed for subsistence. And if you're looking purely at this from the angle of "OMG! That lower tax rate totally benefits people more who have more money", then you are only seeing half the picture. They'd have that money anyway. The question is about what they do with it. Isn't it better to encourage that money to be invested in things that grow over time, rather than simply spent directly for the benefit of the individual?
Go back to your earlier example. If there was no tax consideration, I'd have no reason *not* to just pocket the $500k and spend it on myself, right? But because there's a tax benefit to me not even just keeping that money in a bank account in the business (cause that would be taxed as a business profit as I mentioned earlier), but actually expanding it, so as to increase the total value of the company to a prospective buyer, then I'm more likely to do that. And by doing that, I'm more likely, along the way, to employ more people, produce more goods, provide more value to others, and a host of other positive economic effects.
That's why the capital gains tax exists. And yeah, I happen to think it's a very good thing. It's about creating an incentive for "the rich" to use their money in positive ways. And yeah, as with any incentive, that means it's a benefit to them. But what's the alternative? Not doing this? How will that be better?