[anonymous5133]

Yup, exactly which is why the rates for capital gains are reduced. If you make the capital gains high enough the reward you get for taking the risk won't be high enough.

I think it has a bigger deterrence effect with non-capital gains income. Once you start getting in the higher income tax brackets, it isn't really worth it to put in more hours for additional income when 50% of it is taken in income tax off the top. That's how I look at it at least.

[perfunctory]

I am paying 52% income tax rate in the upper bracket. I doesn't stop me from trying to increase my income.

Clarification - I am not making any claims as to whether I support this tax level or not. I am just saying it doesn't discourage me from trying to get ahead.

[sokoloff]

For my own account, I pay a similar marginal rate (my state tax is slightly lower than yours, but all in I’m at 50-ish percent).

That distorts my willingness to employ lower skilled help. I change my own brakes because the $250 in labor/markup that I might have to pay costs me $500 to earn. If I don’t have a productive way to earn more than $500 in exchange for the small time savings, my family is better off with my changing brakes than working on something else and a mechanic doesn’t get 2.5 hours of pay and some shop loses out on their cut. Same story for lawn care and other tasks that could easily help support employment of some workers.

[conanbatt]

In economic modeling of course it does, and in terms of individual experience, which can vary from that , Im willing to challenge it as well.

If they told you that if you volunteered for government on saturdays, they would exempt you from income tax altogether, would you do it?

[TACIXAT]

I would, that's a great deal.

[conanbatt]

Im pretty sure most people would: its working more time, for paying less taxes. An intuitive example of how taxation does affect the amount of time worked, at any income level.

[perfunctory]

> reward you get for taking the risk won't be high enough.

Also, as long as the tax rate is less than 100%, the reward will be higher than 0, which is what you get if you don't invest at all.

[SaintGhurka]

That reasoning is correct if the investment is risk-free.

But what if you are investing in stocks or corporate bonds or a broadway play or a promising health technology company like Theranos? There is a non-trivial chance that your reward will be less than 0 - and it could even be a complete wipeout. The low capital gains rate is meant to encourage people to put money at risk rather than sit on it.

[perfunctory]

We are talking about risk-adjusted return. That's right. So as I long as expected risk-adjusted return is positive, a rational investor is supposed to invest regardless of the tax rate. I would think.

[socketnaut]

It's not that simple because taxes modify gains but not losses.

Imagine we bet $1 on a coin toss. The expected value for either of us is $0. Now imagine the winner is required to pay 10% tax on his proceeds. The expected value becomes (-$1.00 + $.90)/2 = -$0.05.

[perfunctory]

Very good example. Let's look at it. Note that the new expected value will be negative regardless of the tax rate. No matter how low it is. Even if the tax is 0%, the expected value is still, as you pointed out, $0. So a rational investor would not bet on this coin toss regardless.

Also, as brorfred pointed out, capital losses are deductible, afaik.

[brorfred]

But aren't business losses tax deductible?

[SamReidHughes]

Capital gains tax is calculated from nominal gains instead of inflation-adjusted gains. That's one reason it's lower.