alt Hacker NewsI live in Switzerland. It's an excellent example of a place without a capital gains tax, because it doesn't have one. I didn't say it doesn't have other taxes!
The type of tax matters a lot. The reason capital gains taxes are bad is that they discourage investment, but investment is how you create wealth. "Creating wealth" is ultimately a synonym for creating material progress. Voters like progress, and so this is a very simple and direct argument, which is why most countries that have capital gains tax it at a lower rate than income. Wealth taxes have different incidence and change incentives in different ways. Basically, they discourage having wealth rather than creating it.
It can create its own problems. Switzerland has had big problems in the past with the wealth tax discouraging the creation of tech startups. The reason is that if you create a company then sell some equity in it to investors, that creates a valuation of your company which is then considered wealth, even though it's theoretical wealth and not liquid. In other words, doing a big VC raise can land the company founders with an unpayably massive tax bill: they literally don't have the money to send the government because it's only paper wealth.
To fix that the Swiss tax authorities had to introduce a new rule that says if you have ownership of a startup, this doesn't count towards the wealth tax. What exactly is a "startup" and what differentiates it from other kinds of business? Whether it is "innovative". What counts as innovative? The taxman decides. That means creating a startup in Switzerland is quite risky as if some random bureaucrat decides your product isn't truly innovative and you do a big VC raise you could be personally bankrupted (or you have to use some of the investors money to pay yourself out each year, which is then taxed as income too pushing you into a much higher tax bracket, etc). There are lots of other practical problems with the wealth tax.
Tax incidence is complicated!
In practice the Swiss approach works because:
- The wealth tax is quite low
- This "innovative startup" hack seems to work out in practice even if it's concerning in theory (tech startups aren't the only way to create a lot of wealth)
- Wealth taxes discourage all kinds of wealth equally, so the effects are diffuse and they don't specifically discourage e.g. getting promoted over company formation over inheritances, which is a distortion a lot of other approaches do create.
Replies
Investment is not how you "create wealth". An actual worker somewhere performing their job is what creates wealth. Yet when that worker is paid for the wealth actually produce, we tax that heavily. So if you want to encourage productivity, regular income ought to be taxed higher than passive investment.
The argument for low capital tax is that if it's high, the people with the capital - who, crucially, need someone else to use it to make money from it - will just hoard it. For one thing, the obvious glaring issue with it is that however high the capital gains tax is, so long as the owner of capital in question still gets to pocket some of the wealth produced using it, they still have an incentive to continue - something is better than nothing. The actual, real world threat is that some other jurisdiction sets the tax rate lower than you will, and capital will then move there. But this same threat applies to many other taxes, capital gains aren't special in that regard.
Isn't a wealth tax just an expanded capital gains tax?
If last year I had wealth X and this year I have wealth X+Y, I have to pay a wealth tax on the gains, in addition to the the tax on the amount I had previously.
So my gains are still taxed.
Let's summarize:
airstrike: zero taxes on capital are a bad idea
mike_hearn: Switzerland has no capital gains taxes and it's great.
triceratops: Ok but it still taxes capital.
mike_hearn: I live in Switzerland. No capital gains taxes are great and everywhere other than Switzerland has a lower tax rate for them than income because we want more capital gains. Also wealth taxes can cause startup founders to be taxed heavily.
There's a bit of a disconnect here. You're arguing against multiple strawmen IMO.
Outside Switzerland the current situation is: regular people pay high income taxes while they work, then somewhat lower capital gains taxes in retirement. Ultrawealthy people pay far less of both because they have ways to avoid them (keep employment income low, borrow against wealth instead of selling it).
In Switzerland, since the wealth is straight up taxed, even if at a lower rate (I ran the Swiss wealth tax numbers myself a while ago and you're right it really is a very small amount. I pay way more in capital gains taxes) there are fewer games. Everyone pays taxes on what they make or own.
The startup wealth tax problem has another solution: allow payment in non-voting startup shares, instead of liquid cash. The shares go into a sovereign wealth fund. The government either reaps a windfall eventually alongside the founder, or it misses out on tax revenue it shouldn't have collected anyway (if you look at it from the fairness point of view).