I need some economics tutoring

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From: Dave Long (dl@silcom.com)
Date: Fri Oct 13 2000 - 18:09:44 PDT

> ... Because capital gains taxation is so economically inefficient--because
> of its punitive effect on entrepreneurship, thrift, and investment--that the
> optimal economic policy for the United States would be to abolish the tax
> entirely-- ...

OK, I understand the usual argument about why capital gains taxation
is bad -- discourages investment, etc. However, what if I bought a
business in 1981, and for earnings of $1M/yr at 14% interest rates
was able to pay around $7M for the concern. Now, after two decades
of sitting on my duff and not even keeping up with inflation, I find
a buyer (at 5% interest rates) for $20M. $13M in gains, for a very
lousy sample of entrepreneurial innovation.

From that scenario, I have to wonder why we bother trying to color
dollars -- isn't calling some income income, and other income capital
gains, just as bad as calling some income usury, and other income
return for forex risk? (as practiced by medieval accountant ninjas)

Why wouldn't uniform taxation let the market decide which risky
investments were worth making? Isn't the current system just a
legislatively imposed bias? (in which case the optimal economic
policy for the United States would be to abolish the tax category

> ... The U.S. Treasury, using entirely different data, tracked 14,351
> households from 1979 to 1988. Over this nine-year period, the survey found
> that 86% of those in the lowest income bracket moved up, two-thirds into the
> middle class and almost 15% into that piggy top quintile. Statistics aside,
> I came into this country in the bottom quintile during the Reagan years, and
> now am in the top quintile.

Can immigration really have that much effect on the distribution as
a whole? At under a million per year, into a country of 270 million,
it seems unlikely that immigrants account for 20-30% of the entire
population having no significant net worth. (has this changed in
the last 7 years? anyone know where I can find more recent data?)

Now, I happen to believe property is a more reliable measure of how
free a society is likely to be, but since income seems to be a more
popular metric:

Does anybody ever account for age in these quintile things? As far
as I can tell, looking at the census data, it pays to be old, and
overall, the effect is as strong as education (handwaving, a factor
of three or so either way). Shouldn't we be measuring income
mobility relative to age cohorts, rather than averaged over the
population as a whole?

After all, if many people on FoRK are around my age and share my
vocational interests, we would have been in school during the Reagan
years, hence probably in the bottom quintile, and then recently,
working in technology, likely to be in the top. From what I have
seen of lawyers, the old ones get the benefits of the hours which
the young ones bill. Life cycle effects seem too strong to be able
to make uncorrected statements about income mobility.

So where am I completely off base?


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