Someone just happened to link to this: I think it's a strange article. You could flip the whole thing by noting that an income tax applies the same rate regardless of when you receive the income. There's this built-in assumption that neutrality with regard to consumption is a relevant tax principle, but that's not clear at all. It's much more clear to me that neutrality with regard to income is important.
Also, you make an accounting mistake by ignoring the paradox of thrift. People choosing to save less does not reduce total savings. Though if you taxed the savings of households and not companies, that would shift savings towards companies of course. More consumption also means a higher return on investment, leading to more investment instead of less. I'm sure you could construct some complex argument that goes against this, but it's not at all as straightforward as you put it.
In my view, this is a fairly standard neoclassical critique of the capital gains tax. It is not temporally neutral; it imposes a tax penalty on future consumption relative to present consumption. Consequently, we would expect this to generate behavioral distortions. The only underlying assumption here is that people respond to prices in this context, which I think is pretty reasonable.
You might argue that these distortions are neither meaningful nor significant, and I’m open to that perspective.
My current understanding of financial markets suggests that a lower tax burden on investment would encourage more people to invest. This, in turn, would increase the demand for investment assets, driving up their prices, lowering the cost of capital, and marginally boosting capital formation. I think this view is compatible with credit creation theory, which is what I find to be the most plausible account of how banking works.
Of course, as you note, a low cost of capital alone is insufficient. It must be accompanied by strong demand growth. The ideal conditions for economic growth combine cheap capital with robustly expanding demand.
I understand this, which is why I don't think my argument here falls prey to the paradox of thrift. I’m not advocating for a negative aggregate demand shock where widespread saving with no monetary policy offset. That probably would be anti-growth.
What I advocate for is reduced taxes on investment paired with an effective monetary policy that keeps demand growth steady and robust. In practice, this tax change would just mean a bit of consumer spending would be traded for a lower cost of capital. If you think the propensity to invest new savings is low, the sacrifice in consumer spending would be paltry.
If you're ever down, I would love to chat over VC about your economic views. I would like to understand it better, and I think a lot of my followers would find it intriguing.
Someone just happened to link to this: I think it's a strange article. You could flip the whole thing by noting that an income tax applies the same rate regardless of when you receive the income. There's this built-in assumption that neutrality with regard to consumption is a relevant tax principle, but that's not clear at all. It's much more clear to me that neutrality with regard to income is important.
Also, you make an accounting mistake by ignoring the paradox of thrift. People choosing to save less does not reduce total savings. Though if you taxed the savings of households and not companies, that would shift savings towards companies of course. More consumption also means a higher return on investment, leading to more investment instead of less. I'm sure you could construct some complex argument that goes against this, but it's not at all as straightforward as you put it.
Thank you for your comment.
Here is my perspective:
In my view, this is a fairly standard neoclassical critique of the capital gains tax. It is not temporally neutral; it imposes a tax penalty on future consumption relative to present consumption. Consequently, we would expect this to generate behavioral distortions. The only underlying assumption here is that people respond to prices in this context, which I think is pretty reasonable.
You might argue that these distortions are neither meaningful nor significant, and I’m open to that perspective.
My current understanding of financial markets suggests that a lower tax burden on investment would encourage more people to invest. This, in turn, would increase the demand for investment assets, driving up their prices, lowering the cost of capital, and marginally boosting capital formation. I think this view is compatible with credit creation theory, which is what I find to be the most plausible account of how banking works.
Of course, as you note, a low cost of capital alone is insufficient. It must be accompanied by strong demand growth. The ideal conditions for economic growth combine cheap capital with robustly expanding demand.
I understand this, which is why I don't think my argument here falls prey to the paradox of thrift. I’m not advocating for a negative aggregate demand shock where widespread saving with no monetary policy offset. That probably would be anti-growth.
What I advocate for is reduced taxes on investment paired with an effective monetary policy that keeps demand growth steady and robust. In practice, this tax change would just mean a bit of consumer spending would be traded for a lower cost of capital. If you think the propensity to invest new savings is low, the sacrifice in consumer spending would be paltry.
If you're ever down, I would love to chat over VC about your economic views. I would like to understand it better, and I think a lot of my followers would find it intriguing.