Tax Schmaxes: Why Tax Rates Don’t Affect Investment

Tax Basics

Tax Schmaxes: Why Tax Rates Don’t Affect Investment

You might think that people who work for a living should pay a lower tax rate than people who sit around drinking strawberry daiquiris and making money off their investments, but Republican politicians disagree with you, and they’ve succeeded in shaping our tax code to their liking.

The top capital gains tax rate, what people pay on investment income, is significantly lower than the top income tax rate (for further explanation of this ridiculous rule and how it contributes to inequality in America, check out our explanation here). This makes investing much more lucrative than actually working for the same amount of money.

Now, politicians argue that this lower rate for capital gains is necessary to encourage investment in our economy, that people (particularly the rich people who are the primary beneficiaries of the capital gains tax rate) need financial incentives to invest their money. That is total nonsense.

Think about it. If you have a million dollars and you’re deciding what to do, you could:

  1. Keep your million dollars in cash. At the end of the year, you’d still have a million dollars, and you would owe no taxes at all.
  2. Invest your million dollars, and make more money (whatever the tax rate is). Even taking taxes and the volatility of the market into consideration, you’re still extremely likely to make a significant amount of money from your investment. A higher tax rate may mean you don’t make quite as much, but it’s still better than making nothing!

The obvious choice is B, unless you’re so morally opposed to paying taxes that you’d rather earn less money overall just to spite the government. We certainly don’t want to discourage people from investing, but rich people are going to invest their money regardless of tax rate. They are not going to keep their money in cash under their beds.

 

 

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