Getting it Wrong
An encounter with a Landsburg . The New Yorker arrived today, leading off with this letter to the editor about income tax rates: …The very rich pay at significantly lower rates, because most of their income consists not of compensation for services but of capital gains and dividends, which are capped at a fifteen per cent rate. This is wrong, wrong, wrong, wrong, wrong, wrong, wrong, and you can’t begin to think clearly about tax policy if you don’t understand why. Even if capital gains taxes were capped at one percent, income subject to those taxes would be taxed at a higher rate than straight compensation. That’s because capital gains taxes (like all other taxes on capital income) are surtaxes, assessed over and above the tax on compensation. It always pays to think through stylized examples. Alice and Bob each work a day and earn a dollar. Alice spends her dollar right away. Bob invests his dollar, waits for it to double, and then spends the resulting two dollars. Let’s see how the ...