1) Buying capital is much, much riskier than earning wages. If we suppose people who are good at being capitalists are also approximately as good at earning money, the economic equilibrium will tend toward capital being then much more profitable. Us being "awash" in capital is a red herring; in your garden variety market equilibrium model it's the incentives that matter. The returns are exponential, which just makes things more unequal when your actors are risk-averse.
2) The current tax treatment of capital gains rewards what I call "super-capitalists", people who get one tax-sheltered blob of capital and grow it and grow it. It's a compromise between the need to tax income and the need to not tax capital, but the downside is you get all these Mitt Romneys that only pay 15% taxes.
#2 is why there's bipartisan support among economists for progressive consumption taxes, not income taxes, but you don't hear much about it since it's currently in the "pipe dream" category of economic policy.
Sorry - progressive consumption tax - the more you spend the greater the % of sales tax? So buying a toy boat hits me for 8% but a 200ft yacht gets 80% added on.
Surely, that will really really encourage tax jurisdiction shopping
I still prefer focusing taxation on companies - if you want to base yourself in cayman islands that great. You just can never ever do business in any of these western countries...
In theory it'll work like this: all investments and savings are tax-deductible, all withdrawals are taxed at the ordinary rate. The practical implementation would probably to designate tax-protected accounts, similar to how IRAs work nowdays. The top tax rate would probably need to be increased.
There will need to be tax treatments for potential loopholes, like shifting consumption under a business you own or own in part, or time-shifting withdrawals, but overall economists think this would be far more elegant and simple than income taxation.
I'd even be fine with a flat consumption tax, with a personal exemption of $50k or so. Generally the investments made by the rich have more social benefit than their consumption, so it's ok that a billionaire only spends 30% of his annual income, while a well-paid engineer might spend 80%.
Maybe combine it with a wealth tax, particularly on non-productive assets. Raising the cost of certain kinds of goods should actually make them MORE coveted by the rich (Veblen goods) -- a tax on owning or acquiring conspicuous luxury items could then benefit everyone.
Investments made by the rich have less social benefit than consumption. Consumption is, after all, the point of it all. Taxing utility and not non-utility is a great way to have a society where assets are employed in the least useful way possible.
Consumption is central because it is information. It is how capitalism works: the choices made by consumers tell capital what to invest in. Unfortunately, inequality causes that relationship to break down and the economy starts making things that maximize utility of those with money instead of general utility. Combine that with the effectiveness of rent-seeking, and you get the current mess where finance trumps everything because it provides the most value to capital, rather than because it contributes the most value.
Tax regimes that most benefit economic growth shore up market failures: externalities, public goods, investment in education, infrastructure and the like. That's not controversial except in the libertarian fringes. However, I believe they also serve equality, so that we can get a little closer to maximizing utility instead of profit (which is, by definition, a sign of a poorly functioning market.)
Consumption has less external benefit than investment. Due to scale effects and diminishing marginal utility, consumption by the poor wins over consumption by the rich, and investment by the poor (i.e. a founder investing $10k into his own company) is more useful than investment by the rich (taking Apple's market cap from $500b to $500000010000). There are sound economic arguments for each.
I don't know if there's an economic argument for consumption by the poor being more economically efficient than investment by the rich, or for consumption > investment in general.
Investment is planning for future consumption. Taxing one affects the other. In tax incidence, there's no free lunch.
The point is to tax in a way that's most useful. There's no point in progressively and compound-ly taxing people for having large investments. There is a point to progressively taxing people who consume many times more than average.
1) Buying capital is much, much riskier than earning wages.
Not really. I hate this argument.
A person with $20 million who puts $500,000 into a new business is not taking that much risk. He's putting 2.5% of his net worth into it; if it tanks, he'll have other opportunities to do it again.
A person who puts 2000 of his ~3000 effective working hours per year into a job is taking on a lot more risk. He's putting about 67% of his working time in, and if that job tanks (company goes out of business, he gets fired) he can be seriously screwed.
Both deserve to be rewarded, for sure, but this mentality in which monetary investors deserve prima facie higher status than time investors is utterly fucking sickening. It reminds me that some people haven't got that we stopped having royalty more than 2 centuries ago.
You are having two different people evaluating different situations. Having the same person evaluate the situations would make for a different picture.
Put $500000 in to a new business: This may make lots of money, or you may lose it all. That part stays the same whether or not you are rich or have to beg, borrow and steal the money.
Put 2000 hours in to a job: You are almost certain to be able to collect the money from the hours you put in to the job, no matter if the company goes bankrupt or not. Your expect value may come out lower than starting a new business, but your worst case scenario is much better. Even in the case of the employer leaving town and a locked door when you go to collect your paycheck, most governments have some kind of program to pay employees when there employer does not and to chase down and punish the employer for not paying.
It's impossible for me to fully evaluate the two risks, but I agree with conventional wisdom that having a job is the less risky path for an average individual to take. For the investor, perhaps things are different.
I don't think it has anything to do with higher status, though.
Employees never have 2000 hours worth of labor at risk; they (usually) get paid twice a month, so they only ever have about 80-100 hours worth of wages at risk at any given moment.
If their employment ends, they no longer have the income they used to, but they have 40 more hours a week to use. Most will try to find another employer that will give them money for their time, some will start their own business, and others will retire and use the extra time for leisure.
Investing your time in earning wages is one of the least risky investments you can make; on the other hand, returns on investment tend to be inversely correlated with risk.
What? It's a fact that capital is riskier than earning wages. If you can earn $X working, and have a neutral choice between the two, you will want an expected value of >>$X to be a capitalist. Economists have found this holds across income strata. Don't compare capitalist millionaires to your average laborer; that doesn't tell you anything about the risk-return of capital ceteris paribus.
Anyway, I was just trying to answer the original poster's question. I'm sorry that you are "sickened". To be honest, what often sickens me is people who think their sense of moral superiority entitles them to ignore the way the world is.
1) Buying capital is much, much riskier than earning wages. If we suppose people who are good at being capitalists are also approximately as good at earning money, the economic equilibrium will tend toward capital being then much more profitable. Us being "awash" in capital is a red herring; in your garden variety market equilibrium model it's the incentives that matter. The returns are exponential, which just makes things more unequal when your actors are risk-averse.
2) The current tax treatment of capital gains rewards what I call "super-capitalists", people who get one tax-sheltered blob of capital and grow it and grow it. It's a compromise between the need to tax income and the need to not tax capital, but the downside is you get all these Mitt Romneys that only pay 15% taxes.
#2 is why there's bipartisan support among economists for progressive consumption taxes, not income taxes, but you don't hear much about it since it's currently in the "pipe dream" category of economic policy.