# Improving capital gains taxes

post by paulfchristiano · 2021-07-09T05:20:05.294Z · LW · GW · 38 comments

## Contents

  The policy
Justifications
1. Why have a higher tax rate?
2. Why pay investors back when they lose money?
3. Why adjust the initial investment using the risk-free rate?
None


As I’ve mentioned, I think the tax code could be improved. In a departure from my usual style, this post fleshes out some fairness-based arguments for one of my favorite changes.

(I think that this proposal, and many of the arguments in favor, is old. Wikipedia quotes Joseph Stieglitz making the basic point in Economics of the Public Sector.)

## The policy

I’m advocating a package with 3 parts:

1. We should significantly increase capital gains taxes by taxing it at the same rate as ordinary income.
2. If an investor makes money one year then loses it later, we should give them their taxes back.
3. We should only tax excess returns above what you get by putting your money in a savings account.

## Justifications

### 1. Why have a higher tax rate?

The simple answer is “most Americans think rich people should pay higher capital gains taxes.” It looks unfair for Warren Buffet to pay a lower marginal rate on income than a working class family. But there are other great reasons.

One is that it can be really hard to distinguish “income” from “investment income,” and many rich people misclassify income to pay fewer taxes. Some of these egregious loopholes lose a lot of tax revenue. But if we tax capital gains at the same rate as other income then these loopholes disappear and the whole system gets simpler.

Another is that rich people do a good job of identifying profitable investment opportunities; normal people can’t participate effectively in those opportunities, and so the rich get richer faster. That feels like a fact of life, but it’s actually pretty easy to change. A capital gains tax effectively lets everyone benefit from every investment opportunity.

### 2. Why pay investors back when they lose money?

When an investor makes money they pay taxes. But when they lose money they never get a check back. The government effectively participates in the returns but not the risk.

(Investors do get tax deductions they can use once they’ve recouped all their losses, but much of the reason people are afraid to lose money is that they might never make it back.)

This discourages investors from taking on risk and encourages them to push the risk onto other people. Combined with the proposed increase in capital gains rates, it seriously discourages uncertain long-term investments and probably reduces growth.

In addition to sounding a lot like “Heads I win, tails you lose,” I think this policy probably loses the government money.

Why? The risk of going broke pushes investors to be more conservative and causes them to have much less taxable income—which is bad for both them and the government. But because very few investors actually end up going broke, the government doesn’t save much money at all. We’ve managed to get the worst of all worlds.

(That’s coming from a pretty rough BOTEC. If the intuitive case actually depends on that calculation, I should check more carefully.)

The new alternative effectively makes the government a non-voting partner in every investment, sharing in both risk and returns. That make the system more fair, puts us all on the same team with aligned incentives, and makes everyone richer. Instead of discouraging rich people from finding opportunities, it motivates them to make bigger bets so that they can give everyone a share.

### 3. Why adjust the initial investment using the risk-free rate?

When I put $1,000 in a savings account, I get$2,000 in 30 years because “money now” is worth twice as much as “money later.” Everyone—rich and poor, household or government—can make the substitution at that same rate. We should only tax your savings account if we specifically want you to spend your money immediately rather than later.

It’s actually worse than that: over the last few decades all of my “earnings” from a savings account are just keeping up with inflation, so I’m paying taxes without getting any richer at all. The market expects this to keep happening for the next 30 years, so this isn’t a weird corner case.

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.

The best argument for taxing savings is that rich people save a higher percentage of their income and we want to spread the wealth. But if that’s our goal then we can just raise income taxes on the richest people—we don’t need to take a convoluted approach. Justifications about “keeping the money moving” are based on a misunderstanding—when I “save” money I’m lending it to someone else who will use it immediately.

comment by Gunnar_Zarncke · 2021-07-09T17:44:34.047Z · LW(p) · GW(p)

For me, AstralCodexTen book review of Progress and Poverty made a convincing case that we should increase (or introduce where not present) land value tax. Every other tax just adds different types of dead weight loss.

comment by Stanisław Barzowski (sbarzowski) · 2021-07-10T02:17:28.768Z · LW(p) · GW(p)
1. We should significantly increase capital gains taxes by taxing it at the same rate as ordinary income.
2. If an investor makes money one year then loses it later, we should give them their taxes back.

I wonder how progression would interact with the giving back. I.e. if you had gains while being a high-maginal-rate taxpayer and then losses at a lower rate or vice versa.

Replies from: paulfchristiano
comment by paulfchristiano · 2021-07-10T02:24:23.339Z · LW(p) · GW(p)

This does seem like a kind of basic problem and maybe hard to resolve without making the proposal more complicated. In particular, the year you have losses you are presumably in a very low bracket indeed. And using a rate from your past would be even more complicated than carrying deductions forward.

comment by ChristianKl · 2021-07-09T20:17:08.057Z · LW(p) · GW(p)

I think any proposal to change in taxation laws that doesn't consider changes in regulatory burden is ill-thought out.

In 2016 for example the tax compliance costs in the US were 400 billion dollar for a total of 3300 billion dollar raised. It's crazy to have a tax system where more then 10% of the costs that are inposed are compliance costs and not money flowing into government coffers.

From your points the first one of making income and capital gains taxed the same way likely decreases compliance costs as it makes the system simpler.

The other two however sound that they add a lot of complexity and proposal to add complexity to the tax code because of wage thoughts about fairness are what brought us the mess that we have right now. Any additional increases in complexity should come with a justification of why the increase in complexity is necessary.

Replies from: paulfchristiano, Pattern
comment by paulfchristiano · 2021-07-10T00:05:22.811Z · LW(p) · GW(p)

The other two however sound that they add a lot of complexity and proposal to add complexity to the tax code because of wage thoughts about fairness are what brought us the mess that we have right now. Any additional increases in complexity should come with a justification of why the increase in complexity is necessary.

Why do they sound that way?

1. Carrying deductions forward is quite complicated in my experience, and there are a ton of rules about what can be deducted from what. Paying people back when they have a negative tax bill is not complicated (and already done for many Americans who overpay throughout the year).
2. When you report taxes you already say what your basis was and when you bought the thing. Adjusting your basis by the risk-free rate amounts to looking up a single number and then multiplying it by the basis. But this change makes the investor neutral about when taxes get paid, so you could just remove the comically complicated list of rules that currently exist to control when gains are realized.
3. (I'm not sure if you've ever actually dealt with changes, but the cognitive savings would be huge under this regime.)
4. I think both of those are net simplifications. But the additional complexity from each of them is also completely trivial compared to the classification of types of income.

It's possible that you can't realize any of those simplifications (e.g. that you'd still need to classify all your kinds of income even if they are taxed at the same rate, and that we'd still maintain wash sale rules and so on) because the code is sufficiently ossified that pointless and irrelevant complexities will remain in there forever. But even in the very worst case, I think you are probably misunderstanding where the complexity and compliance costs of the tax code comes from, I don't think this is a noticeable increase (and in $value it would be totally swamped by savings for tax planning even if you weren't able to simplify the code in all the natural ways). comment by Pattern · 2021-07-09T22:15:39.693Z · LW(p) · GW(p) So complexity shouldn't be added unless (more) complexity is also removed. Replies from: ChristianKl comment by ChristianKl · 2021-07-09T23:02:42.421Z · LW(p) · GW(p) Either more complexity is removed or you have a really good reason. If you have a really good reason you should do the cost benefit analysis that the reason is worth the cost. A post like the OP that does advocate a policy that increases complexity shouldn't do that without explicitely justifying the increased complexity. Replies from: paulfchristiano comment by paulfchristiano · 2021-07-10T00:07:45.255Z · LW(p) · GW(p) I think the case for efficiency improvements is fairly strong, but you can evaluate it as you will. This post is unusual for my blog in that it gives fairness arguments instead of efficiency arguments, but I've discussed the efficiency arguments before (including in the linked FB comment, and implicitly here). comment by Dagon · 2021-07-09T19:46:17.613Z · LW(p) · GW(p) What's the next-best option? I'm trying to understand why you want to improve this part of income taxation, rather than a more radical change to taxation mechanisms. If major changes are possible, we should drop income taxation entirely, in favor of consumption taxes (value-added tax has some VERY nice features in terms of simplicity and spread of distortion), pigouvean taxes (for things where we seek distortion), and transfer taxes (for gifts and inheritance, any non-arms-length transaction). Replies from: paulfchristiano comment by paulfchristiano · 2021-07-10T00:08:43.968Z · LW(p) · GW(p) I think this policy is essentially equivalent to progressive consumption taxes, and I'm suggesting it because it appears to require relatively technical changes (allowing rebates + a small adjustment to cost basis) whereas progressive consumption taxes are a bit complex. Replies from: Dagon comment by Dagon · 2021-07-10T15:18:03.264Z · LW(p) · GW(p) Oh, I should note that progressive taxation is something I very much dislike. The accounting needs of tracking everything to figure out marginal rates is horrific. Linear consumption taxes are way simpler, and progressiveness (if needed, I'd argue it's not) should be done by rebates or payments, not by tax rate differential. Replies from: paulfchristiano comment by paulfchristiano · 2021-07-10T17:56:21.830Z · LW(p) · GW(p) I do agree it's somewhat annoying accounting, but it's like 1% of the annoyance of the current tax code. I think the case for progressive taxes is reasonably good: • From behind the veil of ignorance I'd prefer more redistribution than I can get from an efficient flat tax. • Also see the minimizing-distortion argument in this post. That said, I'd also be reasonably happy with something like a flat 50% tax +$20k UBI which I guess is the kind of thing you have in mind?

A progressive consumption tax doesn't seem like too much trouble:

• Income goes into your savings account. You make investments in that account.
• You can't consume anything from your savings account. You have to first move the money to a personal checking account.
• The only number you report on your tax return is "How much money did I move into my personal checking account?"

To me this seems like quite plausibly less accounting burden than everyone who makes anything charging a VAT.

comment by Stanisław Barzowski (sbarzowski) · 2021-07-10T02:08:10.443Z · LW(p) · GW(p)

If an investor makes money one year then loses it later, we should give them their taxes back.

If we don't allow carrying forward losses this puts people who are just starting to invest at a serious disadvantage.

If you can immediately offset all your losses such tax basically feels like the government de-levereging you (taking a percentage of all gains and losses). I.e. you can get the same outcome as without the tax by investing  times more.

If, on the other hand you lose before you have gains (and we don't allow carry-forward) you lose 100% of what you lost.

Replies from: paulfchristiano, paulfchristiano
comment by paulfchristiano · 2021-07-10T02:23:03.987Z · LW(p) · GW(p)

If you can immediately offset all your losses such tax basically feels like the government de-levereging you (taking a percentage of all gains and losses). I.e. you can get the same outcome as without the tax by investing  times more.

Yeah, that's the hope.

comment by paulfchristiano · 2021-07-10T02:22:41.266Z · LW(p) · GW(p)

I'm imagining everyone gets the money back. In order to lose money you have to made it, right?

Replies from: sbarzowski
comment by Stanisław Barzowski (sbarzowski) · 2021-07-10T02:48:36.501Z · LW(p) · GW(p)

Hmmm... yeah, but you could have made it in other ways, which might or might not be possible to offset, e.g.:

• Employment income
• Having some money after moving from another country

I previously assumed that you can only offset capital losses against past capital gains.

BTW if you allow offsetting against any kind of income then you get another issue – all of the people who are really bad at investing consistently decrease their tax bills by their capital gains losses. Not sure how big a deal is that. Or perhaps that's a feature?

comment by benjaminikuta · 2021-07-09T07:37:54.260Z · LW(p) · GW(p)

What about the argument that increased capital gains tax reduces investment?

Replies from: paulfchristiano, Ericf
comment by paulfchristiano · 2021-07-09T15:21:47.000Z · LW(p) · GW(p)

I don't think that's the case for this proposal.

Suppose that I would have invested $X in the absence of taxes, but I am now subject to a 50% tax rate. For simplicity assume the risk-free rate is 0 (it doesn't change the calculation). Instead of investing$X, I will now invest $2X (potentially taking out a 0-interest loan to do it). If$X would have earned $Y of investment income/loss, then my$2X investment will earn $2Y of income/loss. I pay 50% of this as taxes. So my take-home income is$Y---exactly the same as if there had been no taxes.

This does discourage me from spending time finding good investments if they aren't scalable---but only in exactly the same way as it discourages all other labor, so in this case it's fixing a bug in the current tax code. In fact, I claim that any non-scalable investment was actually totally reasonable to tax, and we're discouraging exactly the right set of stuff.

Replies from: dave-orr
comment by Dave Orr (dave-orr) · 2021-07-09T20:22:21.111Z · LW(p) · GW(p)

Is there enough money in the world for all investments to lever up 100%? There's certainly not enough that the borrowing costs would be trivial, if debt demand were suddenly so high.

Also, 100% leverage doubles the risk for the same return (by hypothesis) which probably needs some more support before it's clear that that is socially better compared to status quo. Note that many investment strategies get totally wiped out (due to gambler's ruin) if risk gets too high for the same return.

A better model is that investment capital seeks the best risk adjusted return. Right now there's a balance between opportunities in debt, equities, real assets, etc. If you increase taxes and therefore decrease return on equities, enough capital will move out to other asset classes until the risk adjusted returns are roughly equal.

Maybe that new equilibrium is better or maybe it's worse, but denying that it will change I think makes your analysis hard to accept.

Replies from: paulfchristiano
comment by paulfchristiano · 2021-07-10T00:13:40.459Z · LW(p) · GW(p)

Is there enough money in the world for all investments to lever up 100%?

Yes :) But in some sense this is just equivalent to the worry that interest rates will go up.

There's certainly not enough that the borrowing costs would be trivial, if debt demand were suddenly so high.

It's possible that short-term interest rates would go up. This is basically the government financing large investments to match private returns, and the extra borrowing can drive up the interest rate.

Also, 100% leverage doubles the risk for the same return (by hypothesis) which probably needs some more support before it's clear that that is socially better compared to status quo.

This proposal introduces some additional variance in tax revenue (it doesn't increase variance for the taxpayer, since they are just giving a slice of the profits or losses to the government while keeping the same $---and the same variance---for themselves). I agree it's complicated whether you are actually coming out ahead though I think you probably are by a fairly large margin, similar to a sovereign wealth fund. Certainly if people think that the excess returns to capital are an undesirable source of inequality, they should definitely want to do something like this. A better model is that investment capital seeks the best risk adjusted return. Right now there's a balance between opportunities in debt, equities, real assets, etc. If you increase taxes and therefore decrease return on equities, enough capital will move out to other asset classes until the risk adjusted returns are roughly equal. Maybe that new equilibrium is better or maybe it's worse, but denying that it will change I think makes your analysis hard to accept. I think the thing that needs analysis is what this does to the government's balance sheet, and especially the impact of the extra variance in tax revenues. (The returns to equities will tend to fall because the government is effectively running a giant sovereign wealth fund, matching all investment from the private sector. They won't fall because of taxes reducing the returns though, at least not if investors are profit-maximizing.) Replies from: dave-orr comment by Dave Orr (dave-orr) · 2021-07-12T15:30:42.179Z · LW(p) · GW(p) Investors are not profit-maximizing. Investors are (arguably) risk-adjusted profit-maximizing. Replies from: paulfchristiano comment by paulfchristiano · 2021-07-12T15:56:17.317Z · LW(p) · GW(p) Sure, sorry for the shorthand. Replies from: dave-orr comment by Dave Orr (dave-orr) · 2021-07-12T21:00:21.998Z · LW(p) · GW(p) I guess I'm just dense here, but I still don't see how it can be that the risk adjusted return on capital is unaffected by taxes. Borrowing money (i.e. leverage) adds risk so that can't be it (or there's an additional mechanism that comes into play). Later you say that the government is a partner but they aren't reducing your risk, they're just taking half your profits. Probably not worth the back-and-forth more here but to me the "taxes don't affect returns" position is just obviously wrong and nothing you've said shows a mechanism that would change that. Replies from: paulfchristiano comment by paulfchristiano · 2021-07-13T00:45:14.713Z · LW(p) · GW(p) Let's say the risk-free rate is 0 and the tax rate is 50%. Then 2x leverage doubles your profit and doubles your losses---that's the sense in which it increases risk. But then taxes cut your profit and losses by the same 50%. So consider an investment that doubles your money with probability 60%. Without taxes you wanted to invest$X, and have a 60% of making $X and a 40% chance of losing$X. But with a 50% tax rate, you want to invest $2X. Then you have a 60% chance of making$2X, paying half in taxes, and ending up with $X in profit; and a 40% chance of losing$2X, getting half back as a tax rebate, and ending up with $X in losses. So the outcome is identical to the pre-tax world. Getting back the money immediately, without FUD about whether you'll ever be able to use the tax rebate, is pretty important to meaningfully reducing your risk. (You also are going to need that rebate in order to pay off the margin loan, and someone is willing to lend it to you precisely because they know that you can use your tax rebate to make them whole if you get wiped out. One reason this may not work in practice is that the person making the margin loan may be concerned about seniority of their debt if they can't directly claim your tax rebate in the same way a margin lender would traditionally liquidate your assets.) If the risk-free rate is not zero then the exact same analysis applies---2x leverage multiplies (your return - the risk free rate) by 2, and then a 50% tax rate reduces (your return - the risk free rate) by 2. comment by Ericf · 2021-07-09T14:55:01.020Z · LW(p) · GW(p) tl;dr; - we (the economy) currently spend too much labor finding marginal investments because that activity is under-taxed. So less investment would be a good thing. If I have$100,000 in a savings account, someone could spend X hours to invest that money and over a time t double it to $200,000. That value needs to be divided among: The government (as taxes), The X hours of work, The time t of capital use (which also compensates capital for the risk). The key fulcrum there is$/X - people won't spend time finding good investments unless they can make enough \$ from that to justify not spending the time doing something else.

If it is easy for people to find things to invest in, they will pay more for capital, and returns for t go up. If it is hard (or there is just too much capital) then returns to t go down.

When taxes go up, that reduces the pool available for X (and paying for t). Which would make marginal investments not happen. Which reduces the demand for capital, so first the return on capital will reduce to zero profit (after adjusting for inflation and risk), and then marginal investments won't be discovered and funded.

Now, note how this interacts with the proposed policy:

1. Taxes on capital over time are set at 0. We are only taxing the excess returns above "safe" and refunding for losses as we go, so there is no tax collected on the portion of the profit allocated to capital
2. The tax rate on the portion allocated to labor is set equal to that on other labor. Currently, spending time to find investment opportunities has a lower tax rate than spending time working as a dental hygienist. That is a distortion that is causing people to spend more time setting up tax shelters / analyzing stocks instead of doing other things that would also be productive. Plus doing things like shifting payments to executives and investment managers to the form of capital gains as a pure tax dodge.
comment by Jiro · 2021-07-15T21:48:55.227Z · LW(p) · GW(p)

The simple answer is “most Americans think rich people should pay higher capital gains taxes.”

And how's that a reason? Most Americans couldn't articulate any of the reasons as to why they may be low to begin with, let alone articulate a coherent set of principles which would lead to raising them but not to other things they wouldn't support. If they can't comprehend something, we shouldn't pay attention to their feelings about it.

comment by Celer · 2021-07-20T15:12:16.707Z · LW(p) · GW(p)

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).

Replies from: paulfchristiano, Ericf
comment by paulfchristiano · 2021-07-20T16:43:38.635Z · LW(p) · GW(p)

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).

comment by Ericf · 2021-07-20T15:28:49.333Z · LW(p) · GW(p)

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)

comment by ADifferentAnonymous · 2021-07-10T22:09:38.045Z · LW(p) · GW(p)

Do you have thoughts on pros and cons of this relative to progressive consumption tax? (I agree they're mostly equivalent and both good).

I think consumption tax has an advantage in terms of perceived fairness in that it (almost) guarantees you won't get years where e.g. Jeff Bezos pays literally zero taxes, which look pretty bad. Whereas these reforms could give you years where his taxes are highly negative, which would look worse.

comment by jmh · 2021-07-10T21:06:46.839Z · LW(p) · GW(p)

I would be a bit concerned about the disincentive towards investing in that approach. I also think the pay back if loses in the following year just adds some complexity and opportunities for both confusion and gaming activities.

At the same time it does seem to fit with my view that one's taxes should be proportional to the benefit derived by participating in the society and economy.

To the extent the concern is the (apparent?) imbalance between what the rich pay and what the bottom rungs pay I think I might try a different approach. What if:

1. W2 income were not taxed for revenue but each of us was still on the hook for FICA (all of it).
2. Income taxes were levied on business activity -- net revenue
3. Dividend and Capital gains remain a bit as they are now.

I would keep capital gains taxes lower than income taxes for incentive reasons. Just where we put dividends, I suppose a case could be made they are very similar to business income so taxed at the same rate as the net business revenue.

I think two things fall out of that. First, taxing real people's income is a bit like taxing their contribution to society and the economy and not the benefit they get by being part of society/the economy. Yes, I know it could be put in the same category as all other economic activity but really has a different feel to me -- and I think others. So for those only collecting a paycheck their taxes are zero or near that. The perception that somehow the rich are getting over on the poor worker is now gone in terms of tax burdens and policies.

Second, I think that simplify both the over all cost of collecting and auditing taxes. Business no longer have to worry about employee related taxes (though that might be something they keep doing for a number of reasons), businesses already have tax experts where as individuals generally don't. Even with fairly low cost tax services and software there are still a lot of things your average Joe/Jane misses keeping around or recording over the year. The IRS probably is smaller and I would guess that estimating government revenue would be easier as well.

There is also the whole shell type game with the funds going on. The employer pays the workers at a rate that allows the worker to pay the taxes that are collected on their income. Then the employee has to mess around with the income tax filing and account for some final adjustments. Seems like taking the employee out of the shell game eliminates pretty much all the questions about just how much tax is due so could be correctly paid on the defined quarterly schedules.

comment by tomconerly · 2021-07-10T18:56:53.962Z · LW(p) · GW(p)

What do you think about paying capital gains tax on donated stock? Currently there's no capital gains tax paid on donated stock in the US. That ends up incentivizing some silly investment strategies. See scheme #5 on https://putanumonit.com/2017/12/23/not-a-tax-lawyer/

Replies from: paulfchristiano
comment by paulfchristiano · 2021-07-10T21:16:53.685Z · LW(p) · GW(p)

I don't think the current system really makes any sense whatsoever. I think it would make sense to (i) allow donors to value assets at either basis or market price (regardless of long-term or short-term holdings, none of this absurd nonsense in the status quo), (ii) charge capital gains taxes on any assets being valued at market price when donated, (iii) allow deductions for up to 100% of income instead of the crazy complicated set of limits currently imposed.

(You could also just value everything at cost and then have people sell assets if they want to value their donation at market value. Either way seems fine.)

comment by PetrusNonius · 2021-07-09T12:47:12.495Z · LW(p) · GW(p)

I guarantee this would reduce tax revenues.

Replies from: habryka4, Pattern, paulfchristiano
comment by habryka (habryka4) · 2021-07-09T20:12:03.665Z · LW(p) · GW(p)

Mod note: For critiques like this, please give more context or background. Disagreement and critiques are really useful, but they are very hard to engage with when they give this little context. In my experience, comments like this can cause quite a bit of stress for both readers and authors, and I would really like to avoid that on LessWrong, so try to outline at least a basic argument for why you believe something when you disagree, or alternatively add a meta-comment of the form "I don't have time to write up my reasons for believing this, but I am overall pretty confident that this would reduce tax revenue. Sorry that I don't have time to write up the arguments for this, but I think that's a major obstacle to this being a good idea, and it seemed good to voice my take even if I can't give more context", or something like that.

comment by Pattern · 2021-07-09T22:16:33.431Z · LW(p) · GW(p)

This sounds a lot like a bet.

(If I were to guess what the above poster is thinking...people buy lottery tickets. So, we should expect the government to lose money (if possible):

• from people taking on stupid risks
• from people taking on more stupid risks (this amounts to a prediction that the proposed change in the tax code around paying investors back, will leads to antigrowth).

)

Replies from: paulfchristiano
comment by paulfchristiano · 2021-07-10T00:15:52.913Z · LW(p) · GW(p)

people buy lottery tickets. So, we should expect the government to lose money (if possible):

• from people taking on stupid risks

The government loses money if the average investor is losing money. But that's not true, the average investor makes a lot of money. (And once you weight by tax %, it's even more stark.) I guess you could think there are some investors who go bust (losing too large a fraction of their ordinary income to ever collect on the rebate) while others won't change their behavior at all under this policy. But I do think we need to get into some kind of quantitative model of that (and it doesn't look super likely to me).

comment by paulfchristiano · 2021-07-09T15:15:32.834Z · LW(p) · GW(p)

That's not my guess but it seems plausible. Do you have some explanation/argument/calculation/intuition?

ETA: I actually thought that part 2 would increase tax revenues all on its own, though that might be making unrealistic assumptions about investor rationality. Not sure if you are referring to part 2, or to the whole package.