Taxes, Capitalism and Labor

January 27, 2012 by Scott.

I have been listening to the Republican debates and reading all about the Presidents plans for Tax reform and the Millionaires tax.  I have some savings but do not consider myself ‘Rich’ by any definition.  I work hard, save and try to spend wisely.  The Millionaires tax would most likely not have any affect on my tax bill so why do I care?

I care because I have been thinking a lot lately about the relative values of Capital and Labor.  It has troubled me for a very long time that there seems to be such a great divide in thes country between those that believe in placing a higher value on Capital then on Labor.  A long time ago I was a student of Economics and Finance and learned all about the premises of Capitalism, Socialism, Communism and all the other ‘isms’ used to describe different socioeconomic arrangements for society.

 Yes, it is important to understand that Capital has a value.  That is why when we go to the bank we expect to earn some interest on our savings.  Conversely if we borrow money we expect to pay interest.  The price of that Capital, the interest rate is supposed to be a mathematical representation of the value of money.  The price of Money if you will.  And the value of that Capital should fluctuate based on a number of things such as the supply of Capital, the Demand for it and the chances of it getting repaid (Risk).  That is all well and good but there is also a price for Labor, it is called a wage.  So the price of Capital is called the interest rate and the price of Labor is called the wage rate.

Now for taxes.  We pay our government taxes to provide various services and that is all well and good I suppose.  It is a system that works I guess.  Taxes are levied on two things.  Income derived from Capital and Income derived from Labor.  I know there are other distinctions like Dividends and Commissions but for the sake of this piece I believe all income can be grouped as income from Capital (earned interest, Capital gains, Dividends etc.) and income from Labor (Salary, Bonus, Commissions, etc.).

As it turns out, our government taxes Income from Capital and Income from Labor differently.  Why?  Could not tell you.  So if I earn say $100,000 by dragging my sorry you know what out of bed every morning for a year and going to a job and busting that same you know what for 8 hours a day 5 days a week I pay the government a percentage of my wages as tax.  If on the other hand I earn the same $100,000 because I had Capital invested, I might pay a lower rate.  If I had say $5,000,000 invested at 2% (nice and safe) I could do that.  But I would not have to drag my sorry you know what out of bed and go to work.  In fact the hardest thing I might do is get up every morning and see if my check arrived.  I could spend the rest of my day sleeping or playing tennis or even traveling.

Does that seem fair to you?  Does not to me.  Should income from Capital be treated differently then income from Labor?  Should one be more valuable then another as it relates to taxes?  Actually I think that income from Labor should be considered more valuable then income from Capital and people should be encouraged to work.  Our system of taxes actually disincentivises people to work because wages are taxed more than similar income from Capital.  This is a fundamental flaw in our tax system and it needs to be corrected.

This is an economic discussion, not a political one.  I do not think that politics should come into play here.  People work they should get paid and pay taxes.  People invest and make money on those investments they should pay taxes.  A dollar is a dollar and I do not think it matters how it is made.  It should be taxed at the same rate.  Now if I had a lot of Capital, I might be a little greedy and want to pay less taxes.  Of course with money comes power and over the years those with power in this country have been able to skew the tax laws in their favor.  Yes the rich do get richer.  When you control the game, you generally win the game.

This is an issue of fairness not politics.  The arguments go on and on and many will argue that without Capital we can not have investments and build things like factories and explore for new energy sources.  But let’s be real.  That Capital is deployed to pay the people who do the work (Labor) to build the factories or the machines used to do the exploring.  Labor and Capital go hand in hand, and they should be treated equally under our tax code.  Otherwise those that have Capital have an advantage.  An advantage no doubt they would like to keep.

Something to think about!

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