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I'm not sure what taxes on capital means exactly. Which makes it difficult to determine if these should be raised or lowered. My personal philosophy is that all income should be treated the same regardless of source. The starting rate for this on new nations seems low (around 2%) since the USA taxes capital gains much higher than 2%. I last heard it was around 25% which is too high IMO. So what I need to know is how this rate will affect investment. I want it to be fair, but not so high as to discourage investment. If it is simply a rate for asset income, I'm thinking 10%, but if its an additional tax on top of the taxes that would already be paid on this income, then I would just reduce it to zero and let it be taxed through the normal income taxes. Could someone advise me on what this really implies and if a 10% rate is too high based on game mechanics. I don't want to do something stupid and end up crippling my economy.

23.08.2013 03:45
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Post: #2

Capital is not income, nor is it money.

Capital can assume the form of money, but it changes shape. It can become commodities, which are then sold and by the act of selling become money, thus converting capital from commodity to money to commodity (C-M-C). Thus, money is merely a medium for capital to flow through, rather than capital itself.

Now, Capital is value in motion. If it ceases to move, it ceases to be capital. Thus, a hoard is not capital, though it can be money or it can be a commodity. It is only by the act of buying and selling that capital is produced.

Capital gains refer to surplus value, the additional value that arises from exploiting laborers in return for money. If a capitalist invests in a factory, he buys two things. He buys labor power, sold to him by the laborer. He also buys means of production, being the factory and the equipment inside, which the laborer uses to produce commodities. If the capitalist gives the laborer the fair market value for his labor and purchases/maintains the means of production at fair market value, he generates no profit. There is no point in investing three dollars if the stuff you get at the end can only be sold for three dollars. Instead, you have to extract surplus value, or profit from a) the means of production, which means you buy cheap shoddy equipment or overuse it so you extract maximum value out of it as quickly as you can before you discard and replace b) the laborer, by extracting 8 hours of labor and paying him for 4 c) the consumer, by selling the commodity for more than it's worth. Inevitably, you have to screw somebody, whether it's the tool-and-dye maker, the laborer, or the customer. Otherwise, you cannot profit.

A capital gains tax taxes surplus value. This is not the same thing as taxing income, as income is derived from labor, and profit is derived from somebody else's labor or trade (usually both).

If the volume of trade gets too high, you have bubbles. A bubble is when the price of a commodity rapidly inflates, until it far exceeds its value. When a thing is overvalued, the bubble eventually pops, that is, people decide they will not pay such an outrageous price for something worth so little. Look at the housing bubble as an example. People were at first enthusiastically buying and then reselling homes for a profit, which drove the price of homes so high that they far exceeded their worth. Eventually, the prices so exceeded the value of the homes being traded, that buyers simply refused to pay that much for a home. The people who took out mortgages to buy homes they intended to resell for a profit were screwed. They now had homes they overpaid for and nobody wanted to buy. The market was saturated, and the bubble collapsed.

You can slow the volume of trade through a capital gains tax, a tax on profits. This disincentivizes trade and deflates a bubble before it reaches the breaking point, that is to say, it stops the price of a commodity from too far exceeding its value. a Capital Gains tax is a brake on the economy, intended to slow it down before you drive it over a cliff.

Again, capital is not money. A capital tax is not a tax on money, nor is it a tax on income. Income is derived from wages, not trade. A Capital Gains tax is a tool for slowing down an overheating economy.

Now, if the Capital Gains tax is too high, you will generate Capital Flight, which is when investors decide that there is no way to derive surplus value in your country, so they're just going to invest someplace else. So, you have a balancing act- you must raise the Capital Gains tax to a level which slows trade down to prevent bubbles (lest you wind up like Allan Greenspan and destroy your economy), but not so high that you scare away investors. I recommend 5% as a baseline. However, if you find your economy is in deep recession, lower that figure until it picks up again, then restore it to 5%. If economic growth becomes superlative, increase it further until things reach a more rational pace.

Further, your Capital Gains tax will affect your GINI score, which is a measure of economic equitability. If your Capital Gains tax is too low, your GINI score will become very high. If i is too high, it will become very low. GINI measures how fair your economy is. A high GINI means the worker is screwed and the capitalist is screwing them. A low GINI means the capitalist is screwed and the worker is screwing him.

Once more to underscore the point: A Capital Gains Tax is not a tax on income. Capital is not income. Capital is not money. Capital is an abstraction, it is value in motion. Once trade stops, capital ceases to exist. When trade is superlative, you get a bubble. Bubbles = bad. A Capital Gains tax is a tool for deflating bubbles. No capital = bad. So don't overuse the Capital Gains tax or you'll snuff your economy.

23.08.2013 04:07
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