Instead, we should tax the difference between what you earned and what anyone could have made by just putting the same amount of money in a savings account. That is, we should tax the stuff that is actually income, i.e. when you are actually doing work, taking risks, or exploiting connections.
I think that “savings account” is an underdefined term here, which I think causes serious problems. “doing work” and “taking risks” seem like income, and I see the argument for taxing them accordingly. Does “taking risks” mean “US Treasury Bonds” (which have a risk of default)? “broad market indices”? “employee stock options”? I think I would say that the market overall doesn’t count as income in a meaningful sense, but that is very debatable.
I think an advantage of carry-forward is that someone can’t get paid their marginal income tax rate for losing money. Marginal income tax at the moment caps at 50.3% in California (State+Federal), while long-term capital gains tax is 20%. There are a lot of accounting shenanigans that will make sense at a 45% rebate that would not at 5% rebate (approximating 10% annual returns and loss at halfway through the year, since carry-forward takes at least a year to come into affect assuming it is profits in the subsequent year that are at play, but even 15% vs 45% seems like more than enough room).
I was proposing exempting the short-term risk-free rate, and I was imagining using 30 day treasury yield a the metric. (The post originally said that but it got simplified in the interest of clarity—of course “savings account” is vague since they pay different amounts with different risk, but it seems to communicate basically the same stuff.) That’s also roughly the rate at which you’d borrow if using leverage to offset your tax burden (e.g. it’s roughly the rate embedded in futures or at which investors can borrow on margin).
You are correct here. If this policy were to be actually made into a law, the baseline rate of return would be hotly debated, and would need to be defined in relation to some sort of metric.
It would likely end up being the retrospective 10-year T-bill rate, or some other minimal-risk rate of return (although have multiple independent sources of data that are averaged would be needed to avoid manipulation of the metric—eg if you just take the 10-year T-bill rate, all the big money can avoid that investment, thereby driving up the rate and giving them an huge tax advantage on their bitcoins or foreign bonds or wherever the money actually went)
I think that “savings account” is an underdefined term here, which I think causes serious problems. “doing work” and “taking risks” seem like income, and I see the argument for taxing them accordingly. Does “taking risks” mean “US Treasury Bonds” (which have a risk of default)? “broad market indices”? “employee stock options”? I think I would say that the market overall doesn’t count as income in a meaningful sense, but that is very debatable.
I think an advantage of carry-forward is that someone can’t get paid their marginal income tax rate for losing money. Marginal income tax at the moment caps at 50.3% in California (State+Federal), while long-term capital gains tax is 20%. There are a lot of accounting shenanigans that will make sense at a 45% rebate that would not at 5% rebate (approximating 10% annual returns and loss at halfway through the year, since carry-forward takes at least a year to come into affect assuming it is profits in the subsequent year that are at play, but even 15% vs 45% seems like more than enough room).
I was proposing exempting the short-term risk-free rate, and I was imagining using 30 day treasury yield a the metric. (The post originally said that but it got simplified in the interest of clarity—of course “savings account” is vague since they pay different amounts with different risk, but it seems to communicate basically the same stuff.) That’s also roughly the rate at which you’d borrow if using leverage to offset your tax burden (e.g. it’s roughly the rate embedded in futures or at which investors can borrow on margin).
You are correct here. If this policy were to be actually made into a law, the baseline rate of return would be hotly debated, and would need to be defined in relation to some sort of metric.
It would likely end up being the retrospective 10-year T-bill rate, or some other minimal-risk rate of return (although have multiple independent sources of data that are averaged would be needed to avoid manipulation of the metric—eg if you just take the 10-year T-bill rate, all the big money can avoid that investment, thereby driving up the rate and giving them an huge tax advantage on their bitcoins or foreign bonds or wherever the money actually went)