[jjkeddo199]

Reform idea:

Capital gains tax should be split into two categories: Medium term (1+ year) and very long term (7+ years). Very long term tax would be much lower than today's tax, while medium term would be higher. This reform would reduce MBA's plundering company goodwill and trust for short-term quarterly boosts and reward long-term thinking.

[AnthonyMouse]

You're trying to exacerbate an existing problem with the tax code.

If you invest in a company that goes on to become a conglomerate, nearly all of the value is now a capital gain. You can't invest it in something else without inducing a taxable event. Which means that investors prefer to keep their money in existing conglomerates than move it into prospective competitors. It's a huge tax preference to keep money invested in megacorps rather than new challengers.

It may even be the cause rather than the solution here. Because selling shares of a company that had previously been growing has a major tax disadvantage, investors then want those companies to keep growing even though they've saturated their market, so they demand abusive practices which are long-term detrimental to the company in order to keep the short-term growth rate competitive. Meanwhile this deprives potential challengers of capital which makes abusive practices more effective by making markets less competitive.

It could even make it worse. If you've invested in a company 5 years ago, you're stuck holding it for another two years and now you want to goose the stock price so it peaks when you hit the lower tax rate.

We may be better off with the opposite -- allow basis transfers without a taxable event when you're only changing what you're investing in rather than divesting in order to spend the money. Remove the tax preference for abusive conglomerates.

[gen220]

> allow basis transfers without a taxable event when you're only changing what you're investing in rather than divesting in order to spend the money

This is an appealing idea, but it comes at the expense of even further reducing taxes that are typically paid by wealthy people.

How to beneficially tax equity-related transactions is a really tricky problem to solve.

Trying to lay out the balance of an ideal solution:

(1) We want people to invest in equities (2) we do want to [eventually] tax profits (3) We do want investors to adjust allocations from low-growth-expectation assets to high-growth-expectation assets, because high-growth-expectation is a signal of filling a gap in demand.

I think I'd be on board with your suggestion, which essentially trades off 2 for 3.

I think we'd need to bundle it with a serious revision of estate taxes and the various schemes people use to get around them. So you're definitely taxed when you convert your tax-aware capital gains into income, or your heirs are taxed when those capital gains become their inheritance.

Maybe if we bundle two unpopular reforms together, we can get a popular reform. :)

[AnthonyMouse]

> This is an appealing idea, but it comes at the expense of even further reducing taxes that are typically paid by wealthy people.

It is in theory, but in practice it's already avoided in a thousand ways. The first is, of course, by just not selling the shares in whatever you hold right now, which is the perverse incentive we're trying to fix. Then there are the outright avoidance strategies, like foreign holding companies in jurisdictions with different tax laws, and even the fully intentional ones, like tax-deferred retirement accounts.

> I think we'd need to bundle it with a serious revision of estate taxes and the various schemes people use to get around them.

Combining this with the removal of the step up in basis on inheritance would basically do it, and would remove a major justification for keeping that -- it exists in large part to allow the heirs to sell the asset instead of being coerced by tax incentives into investing into whatever their parents did, i.e. the same thing we're trying to fix here.

This way the heirs could sell the asset and buy another one without a taxable event, but don't get a basis reset. So if they want to spend the money, they have to pay the tax.

Of course, the even simpler version of this is to just eliminate income taxes in general and use a consumption tax, then make it progressive by adding a UBI. But maybe one step at a time.

[AlphaOne1]

Interesting idea. I have recently been reading John C. Bogle's work (of Vanguard fame) and he seems to be of the opinion, from my interpretation, that short term speculation will have disasterious consequences for the Stock Market and that we need a sort of Sin Tax to discourage such behavior. Your idea would track with that.

[no_wizard]

Not just the stock market. The short term thinking person induced by that has knock off issues all over the place, from environmental to healthcare to the physical harm of workers being pushed too hard in the name of short term profit.

[londons_explore]

I think you can get around this by just keeping ownership for 7 years, but promising any profit/loss from 6 of those 7 years to someone else via a private contract-for-differnce.

[SAI_Peregrinus]

Or just make it a function of time, e.g. varying proportional to 1/(time in years).