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I assume that investing is more useful than consuming for society as a whole, at least in the long run. But then why isn't the government taxing consumption more and investment less? This would create market pressure for people to invest more. Is it because it would increase inequality, and increasing marginal tax on consumption would be too difficult to implement (much more difficult than for taxes on income)?

ETA: by taxing investment I mean taxing dividends and capital gains

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  • $\begingroup$ Could you explain what exactly you mean by taxing investment? Seems to me that the government is taxing gains from investment, or sale of certain goods that may be used for investment. $\endgroup$ – Giskard Mar 23 at 6:48
  • $\begingroup$ I mean taxing dividends and capital gains $\endgroup$ – Mati Roy Mar 23 at 17:26
  • $\begingroup$ Do you take taxing dividends for taxing investment? $\endgroup$ – Luís Henrique Mar 25 at 1:05
  • $\begingroup$ I was, but now I just read your answer, so I retract that. Part of my questioning was making wrong assumptions. Thank you for catching that! $\endgroup$ – Mati Roy Mar 28 at 17:58
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On your assumption "I assume that investing is more useful than consuming for society as a whole, at least in the long run." This is not necessarily true.

Imagine if all factories were geared towards investment. There would be a lot of heavy industry, to pour concrete, cast steel and make intricate machinery but all of it would go to build new factories. There would be a bare minimum of textiles for people to wear, as building additional textile factories would mean we could build less factories that create more resources to invest. The same goes for other goods: no consumer electronics, no playing cards, no fancy foods, etc. However, investment would grow very quickly, as we built more and more factories. Yet perhaps you agree that this is not "more useful [...] for society" than also having some consumption at the expense of investment.

For a more formal model, see the Solow growth model.

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  • $\begingroup$ I don't know about investing to create more factories, I was more thinking about investing to create new things (that will be valuable in the future) and to automate (or other reduce the cost of) production. I will look into Solow growth model. Thanks. $\endgroup$ – Mati Roy Mar 23 at 17:30
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There is something called productive consumption. The coal and the iron a steelmill consumes are productive consumption, as steel cannot be produced without consumption of coal and iron.

Plus, the bread and cloth workers for the steelmill consume are also productive consumption, as the workers would not be able to work without eating and dressing.

Consequently, taxing the consumption of coal, iron, cloth, and bread, is to tax investment - the investment the steelmill makes in buying iron and coal, and in paying wages to its workers.

Evidently, not all products have such characteristic. But the products the consumption of which is not productive consumption are those more likely to be bought with dividends. As such, dividends are not investment (though obviously they can be invested once they have been distributed). On the contrary, they are divestment: money taken away from the company's productive processes.

I am not sure of what you mean by "I mean taxing dividends and capital gains". If this means you are equating "dividends and capital gains" with "investment", then it seems to me you are mistaken; low taxes on dividends favour lazy behaviour of capitalists, low rates of investment, and even lower rates of innovation. If you mean the opposite, ie, that government should tax dividends instead of the money that is invested in the company, then yes, the functioning of a capitalist economy would benefit from such a policy - up to the point when it is already at full employment; at that point, it would probably provoke overinvestment, multiplication of bottlenecks, increase of inefficiency, and, at the limit, political unrest and upper class opposition to the policy itself.

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  • $\begingroup$ oh wow, that's a very enlightening answer! this fills a gap I had in my understanding of investment. although I still need to think about the implications of that. thank you, I appreciate! $\endgroup$ – Mati Roy Mar 28 at 17:51

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