I think we can clearly say that capital gains are not earned.
Someone who lays bricks, "earns" their income; someone who's wealth increases as a bricklaying company's value increases, does not.
In this sense, it is indeed impossible to "earn" a billion dollars...
So if I'm a brick layer and I decide to innovate and build a machine that can lay bricks faster and cheaper, and I hire people to help me do that, suddenly I've not actually earned anything? If I'm a farmer and I use a horse and a plow to plow my field instead of with my bare hands then I've not earned anything? Putting your capital towards these things is absolutely "earning" and the modern economy is just a generalization of that which enables capital and need to find each other more readily.
We should all go back to being hunter-gatherers? Or how do you propose this is going to work?
You gave examples of creating and inventing things and employing and leading people. Those are value creation.
I don't think I fully agree with it, but OPs point wasn't about any of that and instead said capital gains (and clarified further - fungible, uninvolved capital without any other contribution). That's really different. If you want to attack that maybe use an example of passive index investors or pension funds allocating capital to a vc.
Capital doesn't just magically increase for no reason. It increases to the degree the business produces more value for its customers. Most business fail to do this, which is why most companies fail. Other succeed, and attract investors who want to put more capital into the business to help it grow more.
Starting a company that becomes worth $1M by creating $1M in value is a literally a capital gain of $1M for whoever owns that business.
Maybe the person who started that business wants to sell. 10 people buy $100k each in shares. Now they own the business. They hire a manager to grow the business and expand and create more value. Now the business is worth $2M. Those new investors created another $1M in value by hiring the right manager and making good decisions. This is another capital gain.
None of this is accidental or magical. Businesses that do well produce capital gains, and most businesses fail, and produce no capital gians.
Clearly my example didn't resonate but in my mind there is no difference between me using my capital in my business and me using my capital in other people's business. A passive index investment is me using my capital in the broader economy. So I am a bricklayer. I take my capital. I give it someone to design a brick laying machine. Or I am a bricklayer. I take my capital. I invest in the S&P 500. When I have the brick laying design I go to someone with more money and negotiate them funding my brick laying machine company. Those are all capital gains. Where is that imaginary line? pg specifically talked about startup founders.
Capitalism isn't perfect but it's the best system we have. We need to educate people better about how it works and we need to regulate it so it's not abused. But capital gains, or interest, are "earned". They are also taxed, and when those taxes are used for the right goals by the government, result in improving things for everyone.
> capital gains, or interest, are "earned"
According to the IRS, "unearned income" is money received from sources other than employment, such as interest, dividends, rental income, and pensions.
We tax it at a vastly lower rate than ordinary income, and we tax it not at all for the purposes of exponential compounding, which is the application in which it is most problematic. What fraction of Elon's capital gains do you think have ever been realized?
I am almost certain (not sure how we can check) that Elon is paying a lot more taxes than the average person. He doesn't get more services for that money. The top 1% income earners pay something like 50% of the total individual's taxes + their companies pay a lot of taxes. He's basically subsidizing any service you're getting from the government.
We tax capital gains less because we want people to invest their money in companies. As I said, we can debate the tax rates, some might argue we should lower the tax on capital gains (double taxation?) some might argue we should raise it. We should absolutely have an evidence based rational discussion on these topics.
Elon has about 10 million times the wealth of the median American, with expected passive income well over a million times that of the median American. He'll pay tax on almost none of it, as a fraction. But probably more than 1/1,000,000th, so it's ok? That's your argument?
Why should someone richer pay more tax? We all get the same services from the state. So in practice he's probably paying x100 the median but you're saying he should pay x10,000,000. If you include the taxes his companies are paying then it's probably more like x5,000. It's not a given at all why he should be paying that much in the first place. And in fact, it didn't even used to be like that. Capital gains tax is a relatively new concept and even income tax isn't that old.
There's a good podcast about the evolution of US income tax: https://99percentinvisible.org/episode/624-tax/
EDIT: So supposedly in 2021 Musk paid $12B in taxes (which was an anomaly) and in most years he pays around 455 million federal taxes. There was one year where he took no income and paid no taxes. So the average American probably pays ~10K I would imagine.
> We all get the same services from the state.
I agree with your intuition, but this is often contested based on the idea that one of the state's services is protecting property, which scales up in cost in some way with the amount of property.
For example, if you have a 10-story building, the cost of protecting it against fire is greater than the cost of protecting a small shack against fire (the kinds of fires it can be involved in and the means of accessing it to fight them are greater).
Or, if you have valuable jewels, the cost of protecting them against theft is greater than the cost of protecting a few items of clothing (more sophisticated attackers like organized crime and otherwise professional criminals may try to steal them using more sophisticated means and resources).
Or, if you own corporations, the cost of protecting your ownership interest against fraudulent transfers may be greater than the cost of protecting someone's ownership interest in a house against such fraud, again because of more sophisticated attackers and also because the rules permitting transfers of the corporate ownership interest may be more complex to formulate and apply.
However, it's likely that the cost of protecting most kinds of property scales sublinearly with the economic value of the property rather than superlinearly, so if people were merely being charged for the increased cost of actually providing them state services that they use or directly benefit from, this would still not justify tax rates increasing with wealth or with income.
$0.5B in taxes on $200B/yr in capital gains, for a tax rate of 0.25%
I wish I could pay taxes at a rate of 0.25%! What tax rate did you pay last year?
I didn't pay any capital gains on stock I did not sell.
You paid a lot more than 0.25% in tax. As did I.
>Someone who lays bricks, "earns" their income; someone who's wealth increases as a bricklaying company's value increases, does not.
How does this follow? Is the management effort in organising a brick laying company not count as work? Does the RND effort of a bricklaying company not count as work?
I would have used housing speculation as my example tbh.
The parent post is not talking about managers, they receive a salary and are taxed at regular income rates. It's taking about shareholders. Someone who makes money by owning a stock should be taxed more aggressively that someone earning a salary, IMO.
But a company director is usually both? And often forgoes salary for ownership.
The parent post is not saying that some forms of shareholding do not earn, but they are excluding any form of owning a bricklaying firm is definitively not earning. So any arrangement that involves owning a bricklaying firm is within scope. Sole Trader or Partnership for instance.
also, the bricks ARE capital.
Wrong.
The house is the capital. Bricks are an intermediate good.
Yes, in a house, they form only part of the house. But before that, someone has to own the land and equipment that gets those bricks out of the ground, and the kiln that fires them, etc. And the materials for the kiln have to be sourced and built.
The point is, the bricks do not materialize out of thin air. The act of laying the bricks is not the only labor or capital involved in laying bricks.
> I think we can clearly say that capital gains are not earned.
No, we can't say that at all, because most businesses are small businesses, owned by the people who run them, and capital gains are the owners' income from running the business.
The money startup founders make, from building something as PG describes, is also capital gains. So again, no, we can't say at all that capital gains are unearned.
That's simply not true. No CEO is going to accept zero salary, just because the value of his stocks will increase - especially not with small companies which aren't publicly traded.
In fact, in some countries not paying yourself a fair-market-value salary is illegal!
> No CEO is going to accept zero salary, just because the value of his stocks will increase
Maybe not zero, but PG's "ramen profitable" basically means the only "salary" the founders take is enough to cover their living expenses, which are kept minimal. So the vast majority of the money they make (remember we're talking about a billion dollars here) is capital gains, not salary.
Of course CEOs of large established companies (not startups) take large salaries--and then usually get stock options and own a considerable amount of company stock, so they get compensated three different ways. Which arguably gets into "unearned" territory--but at that point the company is way past being a startup.
> especially not with small companies which aren't publicly traded
Privately owned companies can still be sold, and the profits from the sale are capital gains. But I agree that in this case that's not the primary way the owners of, say, a mom and pop restaurant get compensation. I should have been more specific that I was talking about startups.
> no, we can't say at all that capital gains are unearned.
Yes, we can say this. The IRS classifies capital gains as unearned income.
The way the IRS uses technical terms has nothing to do with the ordinary lay person's concept of what is earned and what is not. (The main function of the IRS definition of "unearned income" is to define what kinds of income don't have to have payroll tax withheld.)
What happens to the person who earns their income laying bricks when an automatic bricklaying machine is built? Is it unethical for them to earn that income because they are operating the machine? What about the person who finds them people who need bricks laid because the person who lays bricks finds it hard to get good clients who aren't a pain?
I really wish people weren't so easily seduced by the labor theory of value.
I think you are arguing against a strawman. I've never heard someone suggest that the machine operator shouldn't be paid. Same for the other example who would clearly be doing labor.
No, we can’t clearly say that. If we could, they wouldn’t be taxable.
Yes, we can clearly say that capital gains is unearned. Unearned income can also be taxable.
All production requires labor AND capital.
Your labor alone without materials, without tools, or a farm, or a factory, is just you flailing your arms in the air and producing nothing. Capital is as valuable an input to production as labor. You cannot have one without the other.
It's so funny to see people on HN who have clearly overdosed on Marx but have never read Das Kapital, where even the man himself acknowledges the critical role capital plays in production.
Typical ownership heavy replies, which want to equate other people's effort to their own...
100%
A lot of comments seem to not assume that ownership is equivalent to 'earning'. Why does capital need to pretend their wealth growth is equivalent to the effort of labour.
Effort is irrelevant. If it takes me ten years to grow one apple, should I get paid the same as someone who can produce 1M apples? Productivity is what matters, not effort.
People are more productive when they have tractors and seed and fertilizer and all the other requisite capital inputs for growing apples. In fact, one can hardly think of anything productive one can do with zero capital inputs.
You do not live on an island. There is trillions of dollars worth of both capital and labor at work underneath your every waking moment that supports your life. Your level of effort means nothing to anybody.
That's half my point. Because what you said might be true, and yet, the argument by Capital is often that they are working HARDER THAN EVERYONE else to get their wealth and everyone else is lazy. Which is a) both irrelevant as you state, and b) a sign they need the validation that they are putting in effort / more effort to justify what they are extracting from everyone else.