## Wednesday, June 6, 2012

### The proper tax rate on capital income is zero

To see why this is so, consider twin brothers who each make $100,000 in wage income. Most people would regard these two people as equally well off, even if one freely chose to consume his income now, while the other chose to consume later. But not advocates of the income tax. They insist the more patient twin brother is “richer” and deserves to be taxed at a higher income tax rate. For instance, compare a 40% wage tax with a 40% income tax. Under the wage tax (sometimes called a “payroll tax”) the spendthrift brother is able to consume$60,000, which is 40% less than in a no-tax economy. Now assume the thrifty brother invests the after-tax wage income for 20 years, and sees the money double to $120,000. Then he can consume$120,000 20 years in the future, which is also 40% less than the no- tax consumption level. This sort of tax is neutral with respect to saving and investment; it’s essentially a flat rate tax on consumption, whenever it occurs.
I'd counter that the higher $200,000 post-investment income should be taxed at a higher rate than the$100,000 pre-investment income.

In general I'm in favor of inflation adjusted capital gains, even after this article.  However, I feel it's more important to tax wealth transferred between generations (inheritance tax).  Treat inheritance the same as gifts or prizes, and tax all of them along the lines of: $0-$10,000 exempt; $10,000-$100,000 @ 10%; $100,000-$1,000,000 @ 50%; 1,000,000+ @ 80%.