creators.com opinion web
Liberal Opinion Conservative Opinion
Thomas Sowell
Thomas Sowell
21 Oct 2014
Predatory Journalism

The New York Times is again on the warpath against what it calls "predatory lending." Just what is predatory lending?… Read More.

14 Oct 2014
Local or National Elections?

Speaker of the House Tip O'Neill once said, "All politics is local." That may have been true in Tip O'Neill's day,… Read More.

14 Oct 2014
Irresponsible 'Education'

Goddard College's recent decision to have its students addressed from prison by a convicted cop killer is … Read More.

Capital Gains Taxes

Comment

One of the many false talking points of the Obama administration is that a rich man like Warren Buffett should not be paying a lower tax rate than his secretary. But anyone whose earnings come from capital gains usually pays a lower tax rate.

How are capital gains different from ordinary income?

Ordinary income is usually guaranteed. If you work a certain amount of time, you are legally entitled to the pay that you were offered when you took the job. Capital gains involve risk. They are not guaranteed. You can invest your money and lose it all. Moreover, the year when you receive capital gains may not be the same as the years when they were earned.

Suppose I spend ten years writing a book, making not one cent from it in all that time. Then, in the tenth year, when the book is finished, I may sell it to a publisher who pays me $100,000 in advance royalties.

Am I the same as someone who has a salary of $100,000 that year? Or am I earning $10,000 a year for ten years' work?

It so happens that the government will tax me the same as someone who earns $100,000 that year, because my decade of work on the book cannot be documented. But the point here is that it is really a capital gain, and it illustrates the difference between a capital gain and ordinary income.

Then there is the risk factor. There is no guarantee to me that a publisher will actually accept the book that I have worked on for ten years — and there is no guarantee to the publisher that the public will buy enough copies of the book to repay whatever I might be paid when the contract is signed.

Even the $10,000 a year — which is less than anyone can earn on an entry level job — is not guaranteed. If my years of work produced an unpublished manuscript, I would not even have been among the first thousand writers who met this fate.

Very similar principles apply to businesses. We pay attention to businesses after they have succeeded. But most new businesses do not succeed. Even those businesses that eventually turn out to be enormously successful may go through years of losing money before they have their first year of earning a profit.

Amazon.com spent years losing money before turning a profit for the first time in 2001.

McDonald's teetered on the edge of bankruptcy more than once in its early years. Desperate expedients were resorted to by the people who ran McDonald's, in order to just keep their noses above the water, while hoping for better days.

At one time, you could have bought half interest in McDonald's for $25,000 — and there were no takers. Anyone who would have risked $25,000 at that time would be a billionaire today. But there was no guarantee at the time that they wouldn't be just throwing 25 grand down a rat hole.

Where a capital gain can be documented — when a builder spends ten years creating a housing development, for example — then whatever that builder earns in the tenth year is a capital gain, not ordinary income. There is no guarantee in advance that the builder will ever recover his expenses, much less make a profit.

There are whole industries where no one can expect to make a profit the first year — publishing a newspaper for example. Virtually every major American airline has lost money in some years, and some of the biggest and most famous airlines have ended up going bankrupt.

If a country wants investors to invest, it cannot tax their resulting capital gains the same as the incomes of people whose incomes were guaranteed in advance when they took the job.

It is not just a question of "fairness" to investors. Ultimately, it is investors who guarantee other people's incomes in a market economy, even though the investors' own incomes are by no means guaranteed. Reducing investors' incentives to take risks is reducing the jobs their investments are likely to create.

Business income is different from employees' income in another way. The profit that a business makes is first taxed as profit and the remainder is then taxed again as the incomes of people who receive dividends.

The biggest losers from politicians who jack up tax rates are likely to be people who are looking for jobs that will not be there, because investments will not be there to create the jobs.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

COPYRIGHT 2012 CREATORS.COM



Comments

3 Comments | Post Comment
Thomas, if you more people read your articles, they woulden't fall for Obamas phony talking points. There are actually people out there who think businesses should not be allowed to make profits or even be forced to take losses. That kind of crazy thinking flys in the face of whats been proven to work.
Comment: #1
Posted by: Chris McCoy
Mon Oct 1, 2012 11:31 AM
You forgot to mention that capital gains on a 10,000 investment over a 10 year period, lost value due to inflation and that at 3% inflation a 10,000 investment that returns 13,000 after 10 years lost real value and would be taxed for a $3000 return. In real terms you lost value and were taxed on top of it.
C Moellers
Comment: #2
Posted by: C Moellers
Tue Oct 2, 2012 7:45 AM
I truly appreciate your COMMON SENSE approach to your topics. And especially regarding business and politics. It is MOST UNFORTUNATE that so many people do not have access to your columns--and if they do--that they do not read them. Thanks for your views .
Comment: #3
Posted by: Ann H Kelly
Sun Oct 7, 2012 4:17 AM
Already have an account? Log in.
New Account  
Your Name:
Your E-mail:
Your Password:
Confirm Your Password:

Please allow a few minutes for your comment to be posted.

Enter the numbers to the right:  
Creators.com comments policy
More
Thomas Sowell
Oct. `14
Su Mo Tu We Th Fr Sa
28 29 30 1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 31 1
About the author About the author
Write the author Write the author
Printer friendly format Printer friendly format
Email to friend Email to friend
View by Month
Authorís Podcast
Marc Dion
Marc DionUpdated 27 Oct 2014
Deb Saunders
Debra J. SaundersUpdated 26 Oct 2014
Steve Chapman
Steve ChapmanUpdated 26 Oct 2014

29 Apr 2008 An Old Newness

28 Jul 2009 Disaster in the Making

19 Sep 2012 The Fallacy of Redistribution