I live in Switzerland. It's an excellent example of a place without a capital gains tax, because it doesn't have one. I didn't say it doesn't have other taxes!
The type of tax matters a lot. The reason capital gains taxes are bad is that they discourage investment, but investment is how you create wealth. "Creating wealth" is ultimately a synonym for creating material progress. Voters like progress, and so this is a very simple and direct argument, which is why most countries that have capital gains tax it at a lower rate than income. Wealth taxes have different incidence and change incentives in different ways. Basically, they discourage having wealth rather than creating it.
It can create its own problems. Switzerland has had big problems in the past with the wealth tax discouraging the creation of tech startups. The reason is that if you create a company then sell some equity in it to investors, that creates a valuation of your company which is then considered wealth, even though it's theoretical wealth and not liquid. In other words, doing a big VC raise can land the company founders with an unpayably massive tax bill: they literally don't have the money to send the government because it's only paper wealth.
To fix that the Swiss tax authorities had to introduce a new rule that says if you have ownership of a startup, this doesn't count towards the wealth tax. What exactly is a "startup" and what differentiates it from other kinds of business? Whether it is "innovative". What counts as innovative? The taxman decides. That means creating a startup in Switzerland is quite risky as if some random bureaucrat decides your product isn't truly innovative and you do a big VC raise you could be personally bankrupted (or you have to use some of the investors money to pay yourself out each year, which is then taxed as income too pushing you into a much higher tax bracket, etc). There are lots of other practical problems with the wealth tax.
Tax incidence is complicated!
In practice the Swiss approach works because:
- The wealth tax is quite low
- This "innovative startup" hack seems to work out in practice even if it's concerning in theory (tech startups aren't the only way to create a lot of wealth)
- Wealth taxes discourage all kinds of wealth equally, so the effects are diffuse and they don't specifically discourage e.g. getting promoted over company formation over inheritances, which is a distortion a lot of other approaches do create.
mike_hearn: Switzerland has no capital gains taxes and it's great.
triceratops: Ok but it still taxes capital.
mike_hearn: I live in Switzerland. No capital gains taxes are great and everywhere other than Switzerland has a lower tax rate for them than income because we want more capital gains. Also wealth taxes can cause startup founders to be taxed heavily.
There's a bit of a disconnect here. You're arguing against multiple strawmen IMO.
Outside Switzerland the current situation is: regular people pay high income taxes while they work, then somewhat lower capital gains taxes in retirement. Ultrawealthy people pay far less of both because they have ways to avoid them (keep employment income low, borrow against wealth instead of selling it).
In Switzerland, since the wealth is straight up taxed, even if at a lower rate (I ran the Swiss wealth tax numbers myself a while ago and you're right it really is a very small amount. I pay way more in capital gains taxes) there are fewer games. Everyone pays taxes on what they make or own.
The startup wealth tax problem has another solution: allow payment in non-voting startup shares, instead of liquid cash. The shares go into a sovereign wealth fund. The government either reaps a windfall eventually alongside the founder, or it misses out on tax revenue it shouldn't have collected anyway (if you look at it from the fairness point of view).
You're right, the origin of this thread was making an argument about all taxes on capital, not just capital gains. I missed that, I guess because nobody mentioned wealth taxes specifically and it's fairly rare for taxes on capital to mean anything other than capital gains tax. Mea culpa.
> The startup wealth tax problem has another solution: allow payment in non-voting startup shares, instead of liquid cash
This is an excellent idea! Did you come up with this yourself or have you heard of others proposing it?
I came up with it myself. It's possible there's prior art but nothing that I've read personally.
I don't think it's a particularly revolutionary idea because sovereign wealth funds already exist. Improving productivity means using less labor which means lower income tax revenues as time goes on (and that's what you want - higher productivity, fewer labor inputs).
And yet, the government needs revenue. What's growing? Wealth. Liquidating wealth to pay taxes is problematic. Hence the sovereign wealth fund. You can apply this to most forms of wealth - even publicly traded stock, real estate, crypto, and artwork.
I've proposed it on this site several times in the past.
Why does it matter whether the value of the shares is observable every day, like a public stock? The value of the shares is quite defined at the time the tax is due. We know this because the government has a specific number in mind for valuation for tax purposes.
The shares are illiquid and that poses a problem for the taxpayer because the government only accepts cash. If instead they could sign over an equivalent number of shares then morally (and arithmetically), they've paid what they owed.
The government may subsequently choose to dispose of the shares on a secondary market, if one is available. Or it may hold on to the shares until there's a liquid, public market for them. Or it may never sell. It all depends on how the sovereign wealth fund is managed and structured. Way smarter and more knowledgeable people than me would have to design how the fund actually works and prevent market manipulation and insider trading.
Sure, but that doesn't stop them being taxed under whatever their most recent valuation was under a wealth tax. Just not taxing non-liquid assets would also be an improvement.
Investment is not how you "create wealth". An actual worker somewhere performing their job is what creates wealth. Yet when that worker is paid for the wealth actually produce, we tax that heavily. So if you want to encourage productivity, regular income ought to be taxed higher than passive investment.
The argument for low capital tax is that if it's high, the people with the capital - who, crucially, need someone else to use it to make money from it - will just hoard it. For one thing, the obvious glaring issue with it is that however high the capital gains tax is, so long as the owner of capital in question still gets to pocket some of the wealth produced using it, they still have an incentive to continue - something is better than nothing. The actual, real world threat is that some other jurisdiction sets the tax rate lower than you will, and capital will then move there. But this same threat applies to many other taxes, capital gains aren't special in that regard.
This is the kind of semantic argument about words that makes anything other than flat personal taxation an endless rabbit hole.
When people talk about wealth creation they mean the creation of new wealth. Filling potholes isn't normally described as wealth creation because it's sustaining activity. You can choose to define wealth creation differently, that's fine, but it makes the term useless because it'd become synonymous with any kind of work.
Additionally, there's no real world difference between investors and workers. The idea you can separate capital as a class of people from workers is a Marxist concept that doesn't make any sense outside that broken ideological framework. The classical example: if someone owns a food stall, are they capital or a worker? If they pick up that stall and cart it to a bigger town down the road, is the act of them hauling their cart along the road work or an investment? You could argue equally well both ways, which makes the distinction just a distraction.
> however high the capital gains tax is so long as the owner of capital in question still gets to pocket some of the wealth produced using it, they still have an incentive to continue
Not at all! This is the kind of weird prediction that false distinctions between capitalists vs workers causes. It's why Marxist economies always fail. Investment is work and it also requires taking a lot of risk. If you confiscate 99% of someone's ROI nobody is going to say oh well, at least I got 1%. They're going to give up investing at all because the act of making the investment not only took effort, but also meant they could have lost the whole shebang.
People aren't clearly separatable into "owners of capital" vs "workers", you're right, but they don't have to be. You just need to recognize that the role that they play at any given moment can be so categorized. And sometimes they play many roles at once - for example, a company owner who is also its CEO is both a capitalist and a worker, and fair wages that he receives as the latter (fair here meaning that an equally capable manager hired from the side would ask for this much on average) is not a problem.
If there was no difference between capital and labor, then capital gains and labor income would be taxed at the same rate. That's just the empirical argument. The theoretical is left as an exercise to the reader.
I feel like you have only a cursory understanding of finance, economics, and taxation. If you didn't, you would't ask questions such as
if someone owns a food stall, are they capital or a worker?
It reads like you're trying to find evidence that reinforces your priors while dismissing whole swaths of empirical and theoretical work that would immediately challenge it.
For context, I spent a decade as an M&A banker, so as far from a Marxist as one can be.
> If there was no difference between capital and labor, then capital gains and labor income would be taxed at the same rate.
There's a distinction between capital and labor when the terms are used in an accounting sense but when "capital" is used as a shorthand for a class of people, there isn't. Once someone starts talking about "actual workers" vs "owners of capital" they're drawing that distinction.
Isn't a wealth tax just an expanded capital gains tax?
If last year I had wealth X and this year I have wealth X+Y, I have to pay a wealth tax on the gains, in addition to the the tax on the amount I had previously.
- Wealth tax is much lower, think a percent of your wealth or less vs 20% of your gains.
- You can avoid wealth tax by spending. If you sell a bunch of shares to earn $100k then take a year off to see the world, you pay no tax on that (other than sales taxes etc).
- In practice a lot of things aren't covered by wealth tax. If you spend on a fancy new TV it's not measured. Only the big ticket items are wealth taxed (houses, financial assets, art, cash piles, etc).
The type of tax matters a lot. The reason capital gains taxes are bad is that they discourage investment, but investment is how you create wealth. "Creating wealth" is ultimately a synonym for creating material progress. Voters like progress, and so this is a very simple and direct argument, which is why most countries that have capital gains tax it at a lower rate than income. Wealth taxes have different incidence and change incentives in different ways. Basically, they discourage having wealth rather than creating it.
It can create its own problems. Switzerland has had big problems in the past with the wealth tax discouraging the creation of tech startups. The reason is that if you create a company then sell some equity in it to investors, that creates a valuation of your company which is then considered wealth, even though it's theoretical wealth and not liquid. In other words, doing a big VC raise can land the company founders with an unpayably massive tax bill: they literally don't have the money to send the government because it's only paper wealth.
To fix that the Swiss tax authorities had to introduce a new rule that says if you have ownership of a startup, this doesn't count towards the wealth tax. What exactly is a "startup" and what differentiates it from other kinds of business? Whether it is "innovative". What counts as innovative? The taxman decides. That means creating a startup in Switzerland is quite risky as if some random bureaucrat decides your product isn't truly innovative and you do a big VC raise you could be personally bankrupted (or you have to use some of the investors money to pay yourself out each year, which is then taxed as income too pushing you into a much higher tax bracket, etc). There are lots of other practical problems with the wealth tax.
Tax incidence is complicated!
In practice the Swiss approach works because:
- The wealth tax is quite low
- This "innovative startup" hack seems to work out in practice even if it's concerning in theory (tech startups aren't the only way to create a lot of wealth)
- Wealth taxes discourage all kinds of wealth equally, so the effects are diffuse and they don't specifically discourage e.g. getting promoted over company formation over inheritances, which is a distortion a lot of other approaches do create.