On April 15th, tax day for millions of Americans, Angry Overeducated Catholic posted some, I believe, common sense observations and recommendations on the tax system. One of our erstwhile Angrymen, Angry New Mexican, budding socialist that he is, commented regarding the capital gains tax.

The problem with understanding capital gains is that it is denominated in the same manner as income, that is to say in dollars. In pre-euro days, Britain used ‘pounds’ as a monetary unit and ‘pounds’ as a unit of weight measure without problem — the context usually resolved the ambiguity. In America, thanks to redistributionists and socialists, the context is sufficiently muddied that otherwise clever and analytical people [ANM] are confused.

Capital gains, while expressed in dollars, are entirely different entities than regular income. Funds placed in investment carry additional properties with them — notably risk, for which the investor must be compensated. One of the best analogies for capital gains I have come accross is that of the farmer (investor) and his apple orchard.

The farmer plants an apple tree (e.g. makes a capital investment). Associated with this investment are risks of adverse weather — droughts killing the tree, storms tearing it down, insects devouring the fruit, and some considerable length of time before his investments bear fruit (sorry). As the tree grows, it comes into its first season and produces several bushels of apples. These are the dividends of the investment and can be sold for income. As the tree grows, it becomes more valuable as it produces more and more fruit. If at some time prior to the natural lifespan of the tree, the farmer elects to sell the tree (or the orchard), the apple tree will be appraised on the basis of its condition and how much fruit it produces. If he spent $10 for the original sapling, and received $100 for the mature fruit bearing tree, he has a capital gain of $90.

Taxing this $90 by 40% is equivalent to pruning off live apple bearing limbs and reducing the value of the tree by $36. In order to preserve and increase the income stream (dividends) you want the tree to grow. You want the farmer to take the entire $90 and plant nine more apple trees. Even if he converts his tree into cash, you want to compensate him for the risk of planting the trees in the first place, tying up his money, and perhaps having to replant several trees after the drought, flood, or tornado rips his orchard apart.

And remember, each tree planted needs workers to cultivate the trees, pick and distribute the apples, and generally grow the economy. And if the orchard grows large and requires mechnical harvesting, then the orchard is helping the manufacturing as well as the labor sectors also. This investment behavior needs to be rewarded not dampened by a punative tax system. So AOC is correct when he proposes a capital gains tax of 0%.

Advertisements