Improving capital gains taxes

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.

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).

So complexity shouldn't be added unless (more) complexity is also removed.

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.

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 $\frac{1}{1-taxrate}$ times more.

Yeah, that's the hope.

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

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.

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.

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 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.)

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.

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).

)

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.