On Divers Topics

Tips, Capital Gains, and Deficiencies of English Grammar

Tipping, Norms, and Taxes

Trump has proposed making tip  income tax exempt and a Democratic congressman, Rep. Steven Horsford from Nevada, has picked up the idea and introduced a bill to Congress. Giving out goodies is naturally popular in an election year, but why this one in particular?

The first answer that occurred to me was that tips are hard to tax since, unlike wages, they leave no record. If you mostly can’t collect a tax there is not much point to trying, and announcing that you won’t try is a cheap way of buying votes.

Then I realized that I was out of date. I used to tip by leaving cash on the table but nowadays I give the waiter my credit card, he comes back with the bill which has a line for me to put in a tip, another line for the sum of tip and bill. I fill it out and sign it. The amount of the tip is now a record in the restaurant’s computer.

Apparently the IRS has noticed the change; they have introduced  for comment a new tip reporting mechanism for businesses.

The proposed SITCA program is designed to take advantage of advancements in point-of-sale, time and attendance systems, and electronic payment settlement methods to improve tip reporting compliance.

Waiters, and other people it is customary to tip, used to get much of their income effectively tax free but perhaps not for much longer.

That suggests a possible motive for Trump’s proposal. People value something they have more than the same thing they don’t have, object to losing something more than to not getting it — the endowment effect.¹ Trump can buy more gratitude — and votes — by promising to prevent a tax from being imposed than he could by promising to remove a tax people are used to paying.

Tipping is enforced by norms not laws, at least when the customer does not expect to be interacting with the same person in the future — almost always the case for tipping a taxi driver, sometimes for a waiter. Suppose Trump loses the election or wins and renegs on his promise to stop the IRS from taxing tips. Further suppose that many people disapprove, believe that since tips were not in practice taxed in the past it is unfair to take advantage of “advancements in point-of-sale, time and attendance systems, and electronic payment settlement methods” to start taxing them now. There is a simple norm-based solution, a way in which any customer who feels that way can unilaterally make his tips untaxable.

Pay them in cash.

Taxing Unrealized Capital Gains: An Argument and a Question

Kamala Harris has proposed taxing unrealized capital gains — limited, at least initially, to people with assets of more than a hundred million dollars. Her obvious incentive, as suggested by the limit, it to get a little money and the reputation of soaking the rich. But there is actually an argument for the idea that I have not seen made by Harris or anyone else.

Suppose I am very good at figuring what companies to invest in. Having invested in some, I now have ten million dollars worth of appreciated stock with a basis of only one million, the price I bought it at. I don’t expect those stocks to go up much more but I have spotted some new ones that I think will. I would like to sell the old stocks and buy the new but if I do, under current law, I will have to pay tax on nine million dollars of capital gains. If I have to pay at the maximum rate of 20% and live in a state, such as California, with its own capital gains tax, that could come to over two million dollars. If I give the stock to my favorite charity, on the other hand, the recipient never pays capital gains tax on it. I don’t plan to give ten million dollars away this year — but over the next forty years I might. If, when I die, some of it is left, my heirs get to reset the basis to the value of the stock when they inherited it.

It follows that the present rules on capital gains taxes give successful investors an incentive to hold appreciated stocks instead of selling them and using the money for new investments. Taxing appreciation as it happens would remove that incentive, making it a little easier for money to move to where it is most useful. Of course, eliminating the taxation of capital gains would also remove it, and eliminating the rule resetting the basis on inheritance would at least reduce it.

There are other arguments for and against the idea, but that is one I have not seen.

Is the Proposed Rule Retroactive?

Suppose Kamala gets elected and imposes her proposed rule next year. Most of the current assets of Musk, Bezos and Bill Gates probably originated as capital gains, increases in the stock of companies that they owned. Is it all treated as income to be taxed now or only future increases?

My guess is that it would only apply to future increases; when, under Trump, tax law was changed to limit the deductibility of state and local taxes that didn't result in the IRS billing taxpayers for all the taxes they had avoided in the past. Could it have, or would the courts regard a retroactive change as barred by the Constitution? I am not an expert on American law, let alone tax and constitutional law, but it feels as though it should be.

Misnumbering

One solution sometime employed for the lack of a gender indefinite pronoun in English is to substitute the plural, “they” instead of “he” or “she,” for a subject who might be male or female: “Examine the patient. If they are …” . It has more recently come into use for a subject who either refuses to identify as a specific gender (“gender fluid”) or identifies as a gender different from what the speaker considers to be the subject’s sex, an issue I discussed in a recent post.

This solution, like most solutions, raises its own problems. “They” takes a plural verb, so you end up using a plural verb with a subject that is actually singular, grammatically plural, which sounds wrong to my ear.

One question this raises is what the function is of gendered pronouns — not all languages have them. One answer is that they slightly reduce linguistic ambiguity by telling you which person is being referred to. This is useful when writing textbook examples, since having introduced your two characters as Anne and Bill you can now use “he” and “she” to specify which one you are referring to, and may occasionally be useful outside of textbooks. Substituting “they” for both “he” and “she” not only eliminates that option, it also introduces a new ambiguity — whether the pronoun refers to the most recent singular subject or the most recent plural subject. One could solve that problem by combining “they” with a singular verb when the subject is singular, but “they is” offends my ear even more than “they are” for a singular subject.

There used to be a linguist at the University of Chicago, James McCawley, who had a party every year to celebrate the invention of the Korean alphabet, the best alphabet in the world, so well designed that someone who spoke the language could learn to read it in a few days. If only the inventor had applied his talents to English grammar … .

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1. The classic article is Kahneman, Daniel; Knetsch, Jack L.; Thaler, Richard H. (1990). "Experimental Tests of the Endowment Effect and the Coase Theorem". Journal of Political Economy. 98 (6): 1325–1348.