Our Immoral Capital Gains Tax Loophole

... Our separate-and-unequal tax system for those who don't work...

By

An Upset Plumber

In this one person's opinion, the capital gains tax loophole is immoral. Let me tell you why, and ask you to help me fix it.

Some Self Evident Truths

I will try to start on common ground with some basic, unarguable, permanent concepts that may shine some light through the idiotic or evil mind-fog that seems so common nowadays.

1) Government has Some duties: for highways, schools, and police at least. Would you rather not have those? It won't hurt to prove the point:

Universal Fact: If there is a way to make money by screwing others, some sociopath will think it's their job to do it -- because they get Paid for doing their Job.

The Universal Fact is permanent. It is true by definition. Measure out some opportunity, stir in some sociopath, shake it, pour it over ice, you'll find yourself holding a brand new cup, this recipe for poison simply works, and it will be there, forever, for as long as people include sociopaths and sociopaths think about opportunities. And maybe everybody is a little sociopathic some of the time, and we should help each other make sure we don't go off the deep end. The Universal Fact is not going to become irrelevant tomorrow when your party wins an election. It will ALWAYS be true.

Therefore the generally trusting and good Rest Of Us, must ALWAYS be vigilant and ready to step up against and strike down the sociopaths, or at least, curtail their behavior. Maybe we can come together informally as a group to hang them on a tree, or, if they were raised in and are emotionally bound to tight social constraints maybe just give them the squint eye, which might be enough for most (if not for some of the sociopaths I see in the news lately), or maybe we can establish town sheriffs and impartial judges and taxpayer-paid-for prisons with adequately-compensated jailkeepers to keep the temptations of corruption away from ourselves as well. You can see which way I lean (toward the third option, of course, hello).

In short, the Universal Fact plus mob-justice-prevention plus a cosmopolitan society implies the necessity of Government. See?

Okay so, Government is Necessary. Next:

2) Since those benefits must be paid for, Government requires income to pay for them: Taxes.

3) Taxation thus being a necessary evil, although it is somewhat evil (in the view of the exclusively self-interested taxpayer), it is also necessary.

4) Therefore one should and does wonder, How to minimize the evil, how to make taxation the least burden on society's labors and conscience: to Minimize the Effort required and Maximize the Fairness.

Fairness and Effort

Let's talk about fairness first, then effort.

Do we care that it be fair? Listen to me, please. I'm about to raise the temperature. Which doesn't mean I'm being unreasonable, or wrong. Just listen for a second.

The word we use for the people who get away without paying their fair share is cheaters. Isn't it? Or did I miss something in elementary school?

Now, if certain cheaters happen to be rich, does that mean they are not cheaters? No, cheaters are cheaters. Rich ones are big time scum bag cheaters, because they ought to be the upstanding respectable people that a respectful and good society deserves to have in its places of prominence. Or are we not trying to have a respectful and good society here? Sorry, I thought we were. Where do you stand?

Now, if cheaters have conspired together to jointly change the law to make the tax system unfair, they are still cheaters. They are just a bunch of cheaters.

So let's not pretend they're not a bunch of scum bag cheaters just because there are so many of them and just because our democracy makes it easy for them to conspire together to make things sweet for themselves and screw the rest who have to actually pay for everything. (See the Universal Fact in action here? Exactly.) They are still just a bunch of scum bag cheaters.

Okay? Have I said anything controversial here? Okay, great, thank you, so far so good.

So, second question: What's fair?

Fair is, of course, first, that if you earn more you should pay more. Duh.

Footnote: You might not know that good proportion of Republicans, perhaps a third or a half, think that a single dollar bill is equally as valuable to a poor single mother as it is to a millionaire. Unbelievable. It takes a stupid or evil person to deny the Law of Diminishing Returns. Yes, apparently there are plenty of those out there.
So fair means anti-regressive: the first dollar you make should be taxed at a lower rate than the millionth dollar that you make. Because the single mother's first dollar of earnings that she commuted to work for and feeds her kids with does a lot more good and took a lot more effort than the millionaire's millionth dollar that just goes into his bank account with a million other dollars.

And fair means that small and special categories of people shouldn't have special tax exemptions because they think they're special, or can hire enough legislators. For example, the two percent of the richest people aren't special, entitled to special taxation, just because they have lots of wealth and income. The tax system should spread the burden out, so that everyone pulling together won't have to pull so hard individually.

So let's talk about effort.

A wise society that wants to reduce the effort required for everyone will provide ways for at least some people to make lots of money with less and less effort, and then it will tax that easy money at a higher rate. So both sides are needed: make it as easy as possible to get rich, and tax the easily-acquired incomes more. Then the total effort exerted by all the people together to pay a certain amount of government taxes is reduced to as little as possible: The Least Burden.

In a society that arranges things so that some money is really easy to make (for example, your hundredth million dollars) while other money is quite difficult to make (for example, your first $50,000), a most-fair and least-burdening return to such a society, for arranging things this way, is that the easy money should be taxed at a higher Rate than the difficult money.

You already know about this in terms of anti-regressive taxation, or so-called progressive taxation, the first dollar pays a smaller percentage as compared with the millionth dollar.

Side note: Current US earned income tax rates are at historical lows, the top rates used to be 55% under Republican administrations like Eisenhower's, and while recently Mitt Romney paid only 13% of his declared income in taxes, and Donald Trump, perhaps zero. They probably had rules like that under Genghis Khan, but we're trying to run a civilization here, not a Mongol horde. (No disrespect to Genghis, read about his life in recent biographies and you may be surprised.) But it's no wonder the government is broke: the general tax level needs to get back to normal. Let's go back just to Reagan level taxes, how about that, okay? Jesus.
A non-regressive Earned Income Tax is something I and most agree with, but that is not what I'm aiming at here. I'm talking about the Capital Gains Tax.
I think you know what I mean. It's when you don't even work for the money, you just put some money in a kind of a box for a while, and it makes more money by itself, and that's it: capital gains.

Please don't lose me here. What is actually fair?

We have a society makes it super easy for some people to make lots of money in certain very easy ways. The first 44,000 dollars that you made AFTER your second million dollars that year, was super easy for you to make, as compared with the entire 44,000 dollars that the average American household earned in a whole year last year, I think. Am I right? Is there anyone in the back row that isn't getting it? It's just an example, you get the idea.

It's smart for a society to make it easy to make lots of money. Have great infrastructure so people and stuff can move around super easily, great schools so it'll be super easy to find and hire lots of enthusiastic and competent (ie productive, ie profitable) employees, well-defined laws so you can make reliable plans to make lots of money, a high degree of democracy in society so that generally everyone is on board with what's going on instead of hating and obstructing you and your legal plan, low corruption so that more business plans can be profitable, high safety regs so your people can stay uninjured and working profitably for you for entire careers, all this stuff makes it easy for lots of people to make lots of money, while opposite choices make it harder, just look at countries and states that make those opposite choices, like Pakistan and North Korea.

Yes, it's a great choice, for wealth creation to be a simple assembly line, like it is here in America, easy squeezy, bang there's another billion dollars, bang there's another, whereas Pakistan can hardly find a billion dollars in its entire banking system. Other choices are possible, and the concentration of all wealth in the feudal and industrialist families of Pakistan is another choice a society could make, which we've been moving towards nowadays indeed.

Least Burden

I'm going to find a few different ways to say the same thing here. I hope you can find something that resonates with you. And I encourage you to find something that resonates with others and use it. Here:

Easy Money + Easy Money Taxation = Least Burden

Least Burden means it takes the least effort for everyone together to pay all the taxes, which is something that happens when a lot of taxes are paid on a lot of easy money instead of more taxes being taken out of money that was harder to make. Then it was easiest for everyone.

A smart society can benefit from choosing to make wealth creation easy and taking in its necessary taxes a greater share from the easy money -- money that society has helped make it so easy for certain people to make.

Reduced Burden is the Benefit.

Income taxes should be anti-regressive not just with respect to big money, but also with respect to easy money.

The higher dollars should be taxed at a higher rate, and the easier dollars should be taxed at a higher rate.

Wise taxation means not just higher rates for higher income, but higher rates for easier income. (Instead of the reverse. Did I really need to say that? Apparently I did, because our world isn't this way, yet, so we all have to wake up and notice it and step up and fix it.)

A simple way to say it is this: A society should try to minimize the total effort expended to make the money that is paid as taxes. That's a way of saying that government should try to minimize the burden it imposes on the people. And you achieve that when the easiest money is taxed at the highest rate. Not the other way around.

So it's a trade: if your society makes it easy for you to make lots of money, then you should be willing to pay more taxes to operate within that society, because you are benefitting by making more with less effort. If you wanted to work harder to make less, you should move to North Korea where they don't care if you work yourself to death while starving. Instead, why don't you stay in a sweet country, that makes life super easy for you while you make piles of money, and just pay some more taxes on the easier parts of the money that you make. You make more, with less effort, and your society benefits more. Everyone wins in a society that generates wealth easily, if things are made Fair, with the Least Burden.

So.

Fair means equal taxation on equal effort. I shouldn't have to work harder to pay my taxes while you don't work at all to pay yours, because that's not fair to me and because it sure looks like you aren't paying your fair share.

If you could actually measure how much effort each person had to put out to make their year's income, for however much they happened to make, it would be the ultimate and fairest taxation system to demand from each person as taxes that particular amount of income from that particular person that cost them the same amount of effort as everyone else had to put out to pay their share. Hours of work might be one measure, but that's not perfect since some work harder in their hours at work than others. I'm not going to split hairs here. I'm just saying, let the unearned income, which is by definition easy money, be taxed at a rate that is NOT LESS than the earned income, which people had to actually work for and therefore required more effort than money people didn't have to work for. Should it be equal, or more, and according to what formula, we could argue about. But it's obvious that at least unearned income should not be taxed less than earned income, because that makes an Increased, not a Reduced, tax burden on society.
If a dollar is super easy to earn then then more of it should be taxed. This principle reduces the total burden on society, and it's a fair exchange between a society that makes wealth-creation easy and those members of that society who benefit the most because that society has made it so easy for them to create a lot of wealth.

Least Burden vs Capital Gains

This is why the capital gains tax loophole is immoral.

Money made when you didn't even have to work to make it, is the easiest easy money there is, super easy money. Effort = Zero.

You put it into an investment vehicle, if you were smart into a broad-based index fund, which itself just follows the money to make the most return possible without inside information. That wasn't so hard. (And on average it does better than people who think they're smart in picking investments, do your homework). It went into a box, you didn't do any further work, and it grew, by itself.
Fair is, the tax on a dollar you didn't have to work for should be Equal or Higher than the tax on a dollar that you had to work your ail off for.

Did you hear me? I just said that tax on capital gains should be higher than tax on earned income. Capital gain income, by definition, is un-earned: you didn't do any work to make that income. Now I have been working as a plumber, went through the apprenticeship starting at 45 years old, learned the trade, started my company, and I work my tail off, sweating and concentrating, body at risk, high liability for mistakes, bringing real value to real properties, to make a decent honorable dollar, pay my bills and my mortgage, and I am happy to pay my fair share of taxes for this beautiful country and all its sweet facilities and protections that I personally appreciate.

Now you, trust fund baby, hedge fund manipulator, sleep in your silk pajamas and make the same dollar, and get half off on your taxes, because you didn't work for it?

That's Unfair, Offensive, and Immoral. I am Outraged.

But we have an unfair and immoral tax code. It gives a half-off discount tax loophole for this money, the super easiest of all easy money: the money you didn't even work for.

Yes, it's called the (Long-Term) Capital Gains Tax. The rate is about 15% in America today and that's what you pay if you didn't have to work for that dollar. You put it in an investment, you sleep in your silk pajamas, and you wake up to find it is more. You have a gain in your capital investment. It is a capital gain.

Did you work for that dollar? Heck no, you were sleeping in your silk pajamas.

But in America, do you pay even an equal amount of taxes on that dollar as if you had actually worked for it? Heck no! You pay Less! You get half off, if you did nothing! You have discovered the Slacker Loophole known as Capital Gains. Actually all the rich people know about it already. If you're poor, I'm pretty sure you have never heard of it. If you're middle class, the odds are still pretty strongly against you having ever heard of it. But if you're rich, you probably know this rule by heart, and you're careful to read every article exploring Donald Trump's proposed adjustments to it in the Wall Street Journal.

It sounds to me like, does it sound to you? like a bunch of scum bag cheaters have been at work together making our tax code unfair, so as to fatten their own wallets. And screw the rest of us. Hmm, do you think that could ever happen? Do you think this might be an example of the Universal Fact in action, that people who can get paid by screwing other people will consider it their job to get paid? That's why the editorial pages and the corporate media are so full of people doing their job, making sure we don't notice the Slacker Loophole and focussing all our thinking and struggle onto our own Earned Income Tax rate. They support the system that keeps the rich from having to pay more taxes, by which the rich get paid so it's their job, so they get paid, and they do their job.

And again, in case of brain fog, let me reiterate that when since Universal Fact is always in action, the Rest of Us have to be always vigilant and we have to notice and step up and strike down or curtail the behavior of those sociopaths who have been screwing people to get paid. Yes, you and me, by any means necessary. Otherwise what will happen? People have to get paid, so they are going to get fricking paid.

Incidentally, it is remarkable that the earliest laws of Rome, from which all modern systems of law are derived, more or less directly, included the law that if a man had nothing more than an intention to become King of Rome (because Rome was a Democracy), then it would be perfectly legal for any other citizen of Rome to kill him, without trial or even evidence for anything more than a plan. Now that's called stepping up for democracy. And hey, that's democracy stepping up for its defenders, too. Look it up. (Google "Publicola tyrannicide", which leads to p264 of The Anatomy of Society by James Augustus St. John, with fascinating detail.) I raise this not to advocate political violence, but to point out that democracy has stood in need of an extreme degree of strenuous and active defense since the very beginning. No less today, are we called to (get me please, nonviolent!, but strenuous) action.
In conclusion, I hope that you, dear reader, will consider all this, and maybe write a kindly letter to one (or all!) of your political representatives, from the President to your local city councilperson, and share some polite if firm outrage about the scum bag cheaters with all or nearly all the wealth and income of America in their hands, who have been influencing their predecessors in office to do the wrong thing and corrupt the system. Encourage them, ever so sweetly, please, to put things right again. (And ask your local newspaper editors why they aren't screaming about this, or is it the Universal Fact again, maybe their scum bag rich newspaper owners don't want to hear this?)

Because capital gains should have an equal or higher tax rate than income that you worked for. It's not just outrageous, it's stupid. Because easy money should pay for the privilege that our beautiful sweet wealth-generating society gives to those who are able to use it to make money as easily as some do, by not even having to work for it.

And really, the folks that have to work for their money should really be paying less than the folks who don't even have to work for it, instead of the other way around, as an entire generation of scum bag cheaters have conspired to make happen.

A Definite Proposal

Capital Gains tax rates should be greater than or equal to earned income tax rates, but not less, as our immoral tax code has it now.
If you can't roll with me here so far as to make it higher than (I say make it double!) the earned income tax, (and you can rebalance the earned income tax rates lower, to make everyone happy), at least don't let it be lower than the earned income tax. Because that is just backwards, and increases the total tax burden on society. If you don't buy the fairness and morality arguments, you still can't disagree with the Total Burden argument.
Easy Money should Never be taxed Less!
You may disagree with me when I call it Immoral, but you can't get around the fact that it is Stupid.

This is the imbalance of our tax system! It happened when those scumbag cheaters in the Democratic party, a.k.a. (Bill) Clinton's "New Democrats" who sold out the store, and rolled with the next scumbag cheater Republican President to cut the capital gains (and dividends) tax rate to half, to like 15%. It's a whole new way for the wealthy to not pay their share. Wow. When non-workers get a lower tax rate than the people who actually work, that's an f'ed up society.

Tax rates should motivate work, not slacking!
When the rich stop paying, one leg collapses and the stool falls over. Suddenly all the contractors and tradespeople are really pissed that the burden is all on them, but then they get mad about the (Earned!) Income Tax, because they are too stupid or poor or struggling to look up and notice that the rich stopped paying because of their slacker loophole. All the low-earners can see is their own Earned Income Tax rate and when they scream to to reduce their own pain, they aren't even getting it that rich people who don't work for their money aren't paying their share. With this misdirection of fools succeeding, we now live in Angry Taxpayer Hell, with mobs who want to cut the other leg off too. But why? Because those MFs cut the slacker rich out of their responsibilities. It's Horsesh*t and we need to make it right again.

Enough.

And if that wasn't enough...

1) No wealth tax?! A wealth tax is a Good Idea. It's what the Founders started with. Then some scum bag cheaters early on said, Only real estate should get a property tax, and let that bit mainly just pay for our local schools so we in our rich neighborhoods don't have to pay for the schools of the poor. WTF. Yes, we need to roll that BS back. Because the benefits of our society need to be paid for, most certainly and especially by those who benefit the most: the ones with all the wealth.

2) How can a billionaire pay no taxes? They get the greatest benefit from our sweet society with our innumerable skyscraper penthouses and tony downtowns and fabulous markets for luxury goods, but they only pay on their percentage-wise small, annual, incrementations of wealth (i.e. their income) which even that they mostly shelter in depreciating (fakely tax-deducting) real estate assets or other schemes, and which bump up when left to their children as though there never was any income or increase. So they can own billions and grow their wealth by billions, without paying any tax on their wealth, and no tax on the increase either if they just transfer by inheritance. Did you notice that if you own penthouses in Manhattan and San Francisco, you can spend half the year in each and call your whole life a business expense, because you're travelling to inspect and manage your real estate. Did you notice that? So all that rental income gets to go to zero on your tax form, and poof, no taxes. Is this Truth? Is this Justice? Is this the American Way? F No. (We may have to fight about it: It's not MY America.)

3) Now suppose you're a hard-working parent who made some millions and left it in trust funds for your kids and grandkids. Would you want your trust fund babies to not pay their way, to not pay their fair share, to just be value-sucking parasites on society? Is that your moral vision of a happy society for them to live in, and a happy well-balanced bunch of descendants? (I'm being sarcastic, because those qualities would make your descendants worse, less balanced, more self-absorbed, entitled, and parasitic, more repulsive and disconnected in their isolated insulated enclaves of wealth where their servant class sucks up to them and nobody lives in the real world. Believe me, I've seen it.) So, no, I don't think so. Everyone knows the second generation falls back to zero, and the third generation is like Caligula, Nero, or Commodus. The moral and upstanding original matriarchs and patriarchs that I know are actually extremely concerned and eager for their descendants to be positive contributors to society, to know the value of a dollar, to have the character to take on real work. These progenitors just don't know how to do it; they weren't raised rich like their kids. We, the rest of us, have to help them, actually, by connecting their wobbling descendants to reality, to society, to responsibility. Believe you me, Grandpa Warbucks did not strive and struggle and achieve in order to have, does not want, a bunch of slacker descendants. And even if there were such a wierd and lopsided duck up at the top of one or some few family trees, it's not a respectable position, we have no call to listen to it.

Now some of those cheating scumbags, that we may call Republicans, or New Democrats, or their puppet tools in the media, might counter this and argue that trust fund babies should be allowed to pay less than working people because that's what their hardworking ancestors worked to achieve. We should make it easier to achieve that particular dream. This is what on the farm we politely refer to as horsesh*t. Did you get it? If not please re-read the previous paragraph. Now, can you explain it to others? I hope so.

Please do, because if reasonable people don't start speaking up, we're all going to look like an angry mob of redneck guntoting reactionary nativist ignorance-worshipping suckers for a Florida real estate developer sales pitch. No, we can't let shysters run the show any more.

4) Lately I've heard this one: Reduce tax on investors to increase employment. God no. These self-interested fakes, and well-paid mouthpieces of the wealthy, are out busy arguing that investments should be taxed at a lower rate because investments can potentially create employment. More hogwash. Here's what actually happens. Senator George Mitchell (a Democrat!) retires and goes on a speaking tour under his Senators Get Money LLC, pays himself a little salary (<10%) for the rigorous labors of his larynx at the podium, and receives millions as "capital gains" because his LLC was such a great, wise, sparkling Investment and it miraculously just made So Much Money. George: Hey, all I did was put in a few hundred bucks for LLC formation documents to create this amazing investment, and now look what it's suddenly worth, I've been such a great entrepreneur and so wisely directed the labors of my employee George Mitchell.

This is called corruption. This is not an investment that created employment. If Georgie wants to take it as a capital gain, I would care less if only it doesn't get taxed at half off because he said he didn't work for it. BS.

(I read in a Google search in a 1992 LA times article report George Mitchell, the supposedly leftist leader of the left, talking about Democrat willingness to accept capital gains tax cuts in *1992*, a decade earlier! Wow, the New Democrats are Tools of the wealthy too! If we can't get control of one party or another, we're done for.)

If you want to give a tax benefit to employers for employing more people, then please make it a payroll reduction. The benefit should follow the performance. So I say, tax them double instead of half based on the passiveness of their income (double because it's certainly at least twice as easy for an employer to make the money that that employer works for to make as to make the money the employer doesn't work for), in the spirit of easy money taxation. And then turn around and give the employer back a partial credit of up to 7.6% against the additional payroll they pay (that covers for the company's contributions to Social Security and Medicare). Listen, your point is that paying employees should cost companies less, not that companies should be able to be parasites with or without employees. George Mitchell's LLC is a parasite company, and does not justify a tax loophole for those who don't work. But a company that puts lots of people to work, okay that's worth something. Just do it in a way where you aren't making trust fund babies into slackers. Okay? Because we want a better world here, not a worse one. Did I make any sense here?

Now that's really enough.

 

Copyright © 2012-2017, Thomas C. Veatch. All rights reserved.
Modified: October 8, 2012; November 5, 2017